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The Silk Road of E-commerce

China Redefines the Rules

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China Redefines the Rules

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China's Taobao online retail network has higher sales than China's five biggest brick-and-mortar retailers combined. It's a big pie, but access to this new "silk road" means following China's e-commerce standards.

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China Redefines the Rules

By Cindy Hsu
web only

Stop No. 1

Shenzhen – China's e-commerce Center

It's mid-May in Shenzhen. Following days of stifling heat and humidity, repeated thunderstorms batter the city.

Located along Beihuan Avenue, the Futian International E-Commerce Industrial Park has the most advantageous geographical setting of any of Shenzhen's 10-20 e-commerce parks.

Inside the offices of women's bag brand Potono, which was founded by China's "Diving Queen," two-time Olympic gold medalist Gao Min, a musty odor combined with the smell of new bags permeates the air.

Potono's casually dressed CEO Lu Tianyun sits in his carton-cluttered office, smiling while talking to a customer on the phone.

In his late 30s, Lu was voted one of Alibaba.com's top 10 online vendors of the year in 2005. Before the global financial crisis erupted in late 2008, the environmentally friendly bags made by Lu's Richall International Industrial Co., Ltd. drew the attention of many international retail brands, including Walmart, Carrefour and McDonald's.

"It used to be that my customers were Fortune 500 companies. Now I'm involved in B2C, where you have to deal and make friends with all sorts of people," Lu says with a tinge of embarrassment.

Lu founded Potono Limited with Gao in December 2008, and the company now averages about 3 million renminbi (US$471,000) in sales a month. It sells its bags through its own official website and on other Chinese e-commerce platforms, such as Alibaba's B2C portal Tmall.com (formerly Taobao Mall), Jingdong Mall (also known as 360buy.com), and Mbaobao.com, and it expects to add Rakuten Ichiba Taiwan to its network in the future.

Taiwanese Vendors Trying to Get in the Door

Lu is a typical Shenzhen entrepreneur. With a background in online sales, he first used available B2C (business-to-consumer) platforms to sell his products and then, once his brand gained traction, directed customers back to his own official website to generate sales growth.

In recent years, the competitiveness of China's online shopping sites has strengthened to the point that Taiwanese vendors looking for a share of the Chinese market have to play by their rules to do business.

At the end of April, Taiwanese e-commerce platform solutions provider eDynamics announced a partnership with the Taobao network. Third-party payment processor Neweb Technologies Co. Ltd. announced a similar alliance in mid-May with Jingdong Mall. The two partnerships were conceived to provide integrated services that can help Taiwan's small and medium-sized enterprises penetrate China's e-commerce market.

In fact, as early as 2006, eDynamics partnered with China's biggest C2C (consumer-to-consumer) provider, Taobao.com (Taobao Marketplace), to create "Taobao Taiwan Mall."

Several Taiwanese vendors, including fashion brands Mayuki, PGMall, and Go To Buy Online Shop, used this new "silk road" to gain a presence in China's market.

At the press conference announcing Neweb Technologies' tie-up with Jingdong Mall, the Chinese online retailer also disclosed its plans to open an area exclusively dedicated to Taiwanese products.

Neweb Technologies will also serve as an agent in China for Taiwanese vendors angling to gain a foothold in China's second biggest online retail network and help them register trademarks, clear customs, stock inventories, and open payment and collection channels.

"E-commerce's international boundaries are payment flow and logistics. We are helping open the way for Taiwanese companies, and then we will fight together as a team," says Neweb co-founder and president Jerry Chan.

In the future, Taiwanese vendors trying to enter China's virtual market will follow Potono's path, trying first to establish a following on a big B2C platform before branching out.

Back in Shenzhen, the rain has stopped, but the temperature remains above 30 degrees.

Through their many alliances, Taiwanese companies are determined to enter this open city, preparing to place their first bet in this virtual world.

Stop No. 2

Jiaxing – Home to China's Online Bag Leader

The wealthy city of Jiaxing in Zhejiang province has gradually evolved into a new corporate base because of the explosion of online commerce.

During the half-hour ride on the high-speed rail from Shanghai to Jiaxing, the landscape changes from a jungle of titanic buildings and traffic jams to a pastoral array of low-rise houses, their red-brick roofs and white cement walls standing out in northern Zhejiang province's yellow and green fields.

The other end of Jiaxing is home to China's biggest online bag vendor – Mbaobao.com. The company, the brainchild of 36-year-old Ye Haifeng, has sparked a new wave, its products even making inroads into overseas markets.

On May 22, Ye announced on Chinese microblogging site Sina Weibo, "Mbaobao secured its latest round of financing in February. The amount is about the same as the three previous rounds combined." That would mean the company raised about US$50 million.

Walking into Mbaobao's headquarters in the southeastern part of Jiaxing, one immediately notices an electronic map on the wall, with pictures of different bags flashing constantly in Guangzhou, Beijing, Dalian and other cities. Those flashes represent sales, showing the kind of bag sold and where it was purchased. Before 10 a.m. one morning in May, the screen flashed 10 times within two minutes.

In 2011, Mbaobao had sales of 700 million renminbi, 16.5 times higher than two years earlier. Currently, it manages 84 brands, 19 of which are its own, the others being brands it represents or runs together with partners. It has firmly established itself as China's biggest vertically integrated online bag brand.

Mbaobao, with a workforce that averages less than 30 years of age, has developed its own bag testing standards. In the company's lab, every bag is put through more than 10 checks over one or two days to test their hardness, water resistance, durability, and other key characteristics.

If companies like Shenzhen's Potono want to sell their products on Mbaobao, their bags must conform to the online retailer's standards.

Spreading Its Tentacles across China

Aside from gaining a dominant position in China, Mbaobao established a subsidiary in Japan last year and then joined with Japanese partners to set up an official website that now sells over 100 bags per day.

"In the future, we will enter even more countries, and promote Chinese bags all around the world," Ye says.

In its early days, Mbaobao was called a "Tao brand," because it immediately thrived on the Taobao network. But now, over 50 percent of its sales are generated on its own official website. Also, through other platforms such as Tmall.com, Jingdong Mall, and buy.qq.com, Mbaobao has extended its tentacles to all corners of China's virtual supermarket.

"On Taobao, they (Mbaobao) can sell its own brand more quickly overseas," says eDynamics CEO Jimmy Yu.

Yu, who has helped hundreds of Taiwanese vendors gain a foothold in China's virtual market, says frankly, "Early on, China's online shopping portals were just getting off the ground, but now, the edge Taiwanese vendors enjoy has grown smaller and smaller."

Mbaobao, for example, has sought to preserve its mantle as China's No. 1 online bag vendor by building new warehouses and logistics centers all around China.

Although the bag vendor is positioned in China as a seller of "fast fashion," it has begun to develop higher-end brands. It hired American designer James Moore to launch a more expensive bag line under the "Jamie Moore" brand that primarily uses imported materials from Italy and sells its products for between 700 and 1,000 renminbi.

"We've noticed that Chinese online shopping is no longer solely defined by low pricing. It's becoming more concerned with capability-to-price ratio," says marketing specialist Irene Han, explaining that today more than ever before Chinese customers are receptive to medium- and high-priced goods of high quality.

Mbaobao's corporate growth model epitomizes that followed by many vertically integrated Chinese B2C websites. The rapid rise of the country's domestic demand has even empowered them, much like Mbaobao, to look to expand overseas.

The Final Stop

Hangzhou – Birthplace of China's e-commerce Standards

West Lake has long been Hangzhou's main attraction and landmark, but with tourist visits to the lake rising every year, it no longer has the mystique once ascribed to it in ancient legends. Hangzhou, however, is creating a more modern legend, emerging as the hub of the e-commerce industry through the efforts of online giant Alibaba.

EDynamics has an office in the city, near West Lake, to handle cross-border transactions between Taobao and Taiwan. The company works both sides of the transaction, helping Taiwanese brands set up online shops on the Taobao network and assisting Taiwanese customers in consolidating the items they buy on the online shopping portal and shipping them to Taiwan together, saving on freight costs.

EDynamics' Yu has noticed that more than 20 percent of the consumers who shop on Chinese websites are actually small Taiwanese vendors buying items for their shops and stands in Taiwan.

"Five years from now, Taobao may have a 20-percent share of Taiwan's overseas online shopping market," Yu estimates.

As these Chinese online Goliaths grow, they are also busy redefining the rules of the game.

At the beginning of this year, Tmall.com, China's biggest B2C platform, established a series of new regulations for vendors selling their products on the site, ranging from qualifications for entering the network, to a seven-day return policy, to issuing official receipts.

"Over time, more of the Chinese who buy goods online will be white-collar workers. They don't have time to sift through products. So retailers will have to play the role of quality guarantors," says Youchi Kuo, the head of Boston Consulting Group's China Center for Consumer Insight. "It's as though there's a growing number of online department stores."

The consulting firm even boldly predicted that by 2015, the revenue growth of China's online B2C companies would be twice that of C2C platforms.

As these large-scale platforms have developed, more highly efficient logistics companies have also emerged.

One of them is Zhejiang ISCS Technology Company Ltd. It handles up to 80,000 items a day through 17 different processes with the help of RFID (radio-frequency identification), which allows updating of product information both in the warehouse and in businesses' hands. Company vice president Hu Lixun says its error rate is a mere 1 in 10,000.

Near Perfection

In 2011, Jingdong Mall boasted revenues of US$4.9 billion, more than those of Taiwan-based Tatung Group or major touch-screen maker TPK Holding Co., Ltd. The company reportedly planned to begin an IPO process last September but then seemingly dropped the plans and adamantly denied in May 2012 that anything was afoot, only for new speculation to pop up about a listing later in the year.

One thing of seemingly little concern to these B2C platform giants is profit margins.

According to one Chinese home shopping channel operator, she decided to lower the price of an LG slider cell phone she was pitching on television in mid-May from 500 renminbi to 438 renminbi, only to find that Jingdong Mall responded by suddenly reducing its price for the same model phone to 299 renminbi, from 399 renminbi just a week earlier. Both companies get their products from the same source, but Jingdong Mall decided to sell its product at cost.

"It can block out people and stick to its own standards, because it is big enough and knows that if the world wants to do business with China, it has to go through its system," says National Taiwan University of Science and Technology School of Management dean Hsi-peng Lu.

According to Boston Consulting Group statistics, online sales account for 14.3 percent of all consumer spending in China. In 2010, the volume of items sold by Taobao Marketplace and Tmall.com surpassed that of China's five biggest brick-and-mortar retailers combined.

Whether it's an online brand like Mbaobao wanting to move into overseas markets or Taiwanese or foreign online brands looking to sell their products in China, they all must rely on these big B2C platforms.

If Taiwanese companies hope to break into the market, they must familiarize themselves with the major players and the rules of survival on this new silk road.

Translated from the Chinese by Luke Sabatier

Keywords:

好友人數