Can China be seen as an ally in the eCommerce landscape instead of a competitor? Professor Cor Molenaar shares his impressions after visiting Chinese heavyweights such as Tencent, Alibaba and JD during his last study trip organized by Shopping Tomorrow & our partner the Ecommerce Foundation.
In September 2018, together with other 40+ ecommerce experts & managers, I took part to the Ecommerce Study Trip to China organized by Shopping Tomorrow and the Ecommerce Foundation. We visited Tech & Marketing Startups, Venture Capitalists, Stores like Alibaba’s Hema and Chinese dragons in Ecommerce, such as Tencent/WeChat and the Alibaba Group.
Below is a wrap-up of everything I learned and noticed during these intensive 7 days around Hong Kong, Shenzhen, Shanghai and Hangzhou.
The Foundation of China
From a European point of view, China has a hard-to-understand culture. Everything is just as different as it seems. By looking at China from a Western perspective, we tend to make wrong assumptions. It’s important to understand that China has a long-term vision for the country, its businesses, and its inhabitants.
Since 1970 China has changed from an agricultural economy to a customer- driven economy.
This gradual change had two main goals as a focus: to become the largest economy in the world by 2025, to have a global reach and prosperity for the Chinese people by 2035. While in the West we often think in years and companies in quarters, Chinese leaders tend to think of the ultimate goal.
China is still centrally controlled, however political adjustments of recent years led to a change of the control model, more freedom for the regions and more individual freedom. The control is still there, often it is not visible, but at the service of the intended goal.
This requires ironclad discipline and exact execution of objectives.
China Systematic Approach
China has developed a three-step plan to achieve its goals:
- Investing in the infrastructure first.
This has been going on for decades: many long and wide roads have been laid and airports have been built. Most airports are too large whilst they are often also a prestige project for a region. The Chinese government anticipates economic development which will require large airports such as these over the coming few years. This focus on infrastructure lays the foundation for the second phase:
- A larger economy, greater economic decisiveness and more prosperity for citizens.
Due to prosperity, demand will increase enabling autonomous economic growth to be achieved.
For years the economy grew by double-digit yet in recent years it has leveled off to a growth of 6 to 7 percent. Younger people were and are stimulated through higher salaries to work in factories and offices. Agricultural land was sacrificed for new construction and industry.
Existing owners were bought out or received an apartment in a newly built apartment block for free. As a result, many older Chinese people living in places that now turned into big cities became millionaires.
The new generation of youngsters made use of this “real estate wealth”, by already consuming the money through loans. After the death of the parents, the money will be released (1-child families!).
This caused a great economic boost due to higher wages and hidden assets. This second phase aims to allocate resources. The consequences are clear: large cities, air pollution, scarcity of housing and therefore quickly rising house prices.
- China is now in this phase of economic development.
The next phase (after 2025) will mainly focus on the efficient use of the resources. Technology and information technology, but especially education, will play an even more important role. The basis has already been laid out in the previous (current phase): the Chinese labor market contains more and more highly educated individuals, abroad or in their own country.
The background knowledge about China’s core identity must be included in the assessment of Chinese business and internet applications.
Sixty percent of the population – 1.6 billion people – are younger than 35 years old. They are young, dynamic, very modern and in touch with their own culture. Insinuating that “they are always online” is not an exaggeration. It is almost strange to see a young person walking on the street without a telephone in his hand. Huawei is China’s home-grown and extremely popular brand.
Mutual communication takes place via the WhatsApp variant WeChat. However, WeChat is much more popular than WhatsApp. Everything is linked to WeChat: from hospital visits to insurance, from transport tickets to payments and government services. WeChat is the central point that keeps track of everything and registers it. This naturally creates an optimal service for the users, but also an unprecedented dependence. This is because everything, including all government contacts such as driving license or passport, are linked to this service.
Tencent, JD and Alibaba
Tencent uses WeChat as the center for all its services. Tencent is a totally integrated platform, a so-called multi-sided platform, where users can share messages, videos and products. Interactivity is supported. Tencent calls itself a social network platform. With a market share of 69 percent it is by far the largest.
According to JD.com, one of the largest sales platforms in China, 60 percent of purchases come through WeChat users.
JD.com owns a total market share of 16.3 percent in online sales, compared with 58.2 percent of Alibaba (July 2018). Of course, all the numbers are – certainly for us – impressive, but I was more interested in the infrastructure that implemented alongside this – the integration of data and the control mechanism that makes it all possible. Customization for each person, in a positive way.
Tencent’s approach is different from Alibaba’s approach. No warehouses, no products, but acting as a facilitator for many companies to sell. Alibaba is more the sales engine for anyone who wants to sell in China; Chinese companies, but also European companies(!)
A third major provider, besides Tencent and Alibaba, is the platform JD.com with its own products and products from others. JD.com also has a
strong focus on China, with the same growth ambition as other Chinese companies.
Resources: China vs Europe
But there is more: China has a clear competitive advantage to wield, namely the low wages (unskilled labor), but also the increasing prosperity and disposable spending opportunities when it comes to the younger generation.
There are no real large industries that make their own products, but China is actually good at utilizing the resources for simple tasks. Assembly, as with the iPhones and cars, is an example of this. For these technical products, China is becoming an indispensable partner for Western manufacturers. The low wages are especially decisive: allocation of resources.
China applies a clear maxim for the production of its own articles. In most cases, the quality of the products do not have to be 100 percent. Often 80 percent of the top possible quality is sufficient. Because of the low wages they can offer this 80 percent quality for 60 percent of the price.
This makes it almost impossible to compete on price for European companies.
But why should you compete on price? Chinese consumers value European products precisely because of their quality and reliability.
Selling in Europe, in most cases, is not the final goal for most Chinese companies – it is more of secondary importance.
The own home market is developing rapidly and there will be a new elite section of young people with money, as described above, who will set higher standards. European brands are a clear statement of wealth and success. This new elite longs for European brands and can also pay for the privilege. This explains why there are so many Chinese customers at high-end warehouses and outlet centers in Europe. Due to increasing domestic demand, Chinese platforms such as Alibaba and JD.com are preparing to sell these Western products.
Because of this preference, there is a strong focus on attracting European companies to sell via a Chinese platform, especially given the political tensions with America. This also explains the offices of Alibaba in Amsterdam and London (to attract European companies and to help sell their products in China).
Gateway to China
And then the biggest misunderstanding… We often see the Chinese suppliers as a competitor on our market, but not as a gateway to China.
It is so much easier for Chinese suppliers to trade in the Chinese / Asian market than in European countries that have a negative Chinese sentiment, not to mention with America.
In China alone there are 109 cities with a population of more than 2.5 million! There is absolutely no need to enter the difficult European markets, with all the additional regulations, our very far-reaching regulations on privacy, the negative sentiment towards Chinese products and the many languages and cultures.
The potential lies in China and they would like to help sell European products!
What can we learn from China?
During my study trip, I was particularly impressed by:
The mass market, test markets of 100 million, 1 billion users on WeChat, gigantic turnover at all companies, but actually that is just scale.
- The welcoming attitude companies towards foreigners. We were perceived as potential sellers or investors. All focus was on facilitating cooperation, logistics and sales in China.
- The power of platforms (look also at my recent book on this: The power of platforms, bending or bursting). The battle takes place between the platforms and no longer between the individual providers. This is clearly leading China to Europe.
- The focus on the positive. Not on problems, politics, or negative aspects of economic growth. The government’s strategy (phase 2, economic growth) is clearly visible and is carried out in a controversial manner.
The need for money to realize the objectives:
- Stimulate their own economy through the transition from agricultural society to an industrial society: more money is earned at the offices in the big cities than in the countryside. This was made possible in part by the expropriation and the return of new apartments without a mortgage, creating a capital bubble that is issued by young people through loans.
Attract foreign investors through participation in companies (such as Google), or by selling European products with a margin for China.
- Strengthen the current economy through more employment through housing and infrastructure projects. This allows low-skilled individuals to be employed and have disposable income to spend.
- Strong focus on education (domestic and foreign cooperation).
- In addition, the development of their own industries for higher-skilled work.
From made in China to designed in China. It now comes down to strongly stimulating the economy.
Especially with the adoption of the smartphone, the economic development of China has gained momentum. A social revolution has developed on an unprecedented scale: thanks to social media such as WeChat and QQ (Tencent), platforms have grown that stimulate consumption, such as Alibaba and JD.com. The younger generation has become the basis of this change.
China offers enormous possibilities through all these changes. The focus of Chinese companies is not on Europe, given the great potential within their own home market. They need European companies for further growth, the wishes of the young people for high quality (brand) products. We can learn from the platforms, the new competitive relationships, the structure and the marketing.
Perhaps I have seen the future of e-commerce and retail (integration online, offline)!
Do you want to dive into the Chinese ecosystem?
Our partner Ecommerce Foundation organizes every year two C-level trips to China, check it out here!
Interested in learning more?
This April, at Savant eCommerce Amsterdam, Kelly Kowal, MD of Farfetch – Black and White, will host a keynote about “How is the mobile revolution happening in China, and what inspiration can be taken and adapted to the European landscape?”. Check the full program here!