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O2O (Online to Offline)

The Mobile Web Conquers China


The Mobile Web Conquers China


With the touch of a smartphone screen, the people of China can hail a cab, make a dinner reservation, or invest in stocks. With 500 million mobile Internet users, China's retail giants, real and virtual alike, are scrambling to stake their claim.



The Mobile Web Conquers China

By Elaine Huang
From CommonWealth Magazine (vol. 548 )

Dunhua North Rd., Taipei

Taiwanese fruit stock sells out on line in three days

Hu Yi-chia, the 33 year-old CEO of JKOS, prepares for a flight to Hangzhou at the Runtex company building.

Hu flies almost weekly to the Alibaba campus in Hangzhou, presenting proposals directly to the product manager.

He has spent the past several years shuttling back and forth across the strait, helping Taiwanese merchants from the front lines to arrange everything from exporting to warehousing, tariffs and sales channels.

Naturally, Hu Yi-chia does not want to miss out on China's e-Commerce craze. He opened a store on Tmall, and last year presided over two group purchases on Alibaba on behalf of Taiwanese food producers.

During last December's group purchase alone, Hu sold 96 tons of pineapple custard apples, milk honey dates, and black pearl wax apples in the span of three days, netting nearly NT$25.69 million. Even buyers in the remote reaches of western China received fruit directly from the Taiwan growing region within 10 days.

During the five months' interim between the two group purchases, Hu noticed that the percentage of Chinese online consumers placing their orders via mobile phone units rose from 15 to 50 percent.

"Mobile traffic has gotten quite heavy," the observant Hu Yi-chia notes, having keenly studied unit price variations across Taobao's distribution system from mobile handset sales.

"Whether or not you turn a profit, you need to have a deep understanding of customer habits and platform operation," offers the switched-on Hu.

Chishan, Kaohsiung

Taiwanese goods sold directly to Gansu

On an April day under the hot sun, Eric Kuei, general manager of Fruit Taiwan Corp., sits inside a muggy car as it travels along twisty roads past a vast swath of golden diamond pineapple fields.

Kuei, 54, specializes in sourcing high quality fruit for direct sale to China on a contract basis. At premium supermarkets in Shanghai and Nanjing, like the City Supermarket inside Shanghai's Jiu Guang department store, Eric Kuei is the sole vendor of Taiwanese fruit.

Every Tuesday a shipping container filled with over 600 cases of Taiwanese fruit is loaded at the port in Kaohsiung and delivered to Xiamen via Kinmen. City Supermarket places an order every afternoon, and Eric Kuei ships it directly out of his Shanghai warehouse.

Last year he also set up a virtual shop on Tmall.

Eric Kuei has been selling Taiwanese fruit over the strait for a decade now, selling exclusively to consumers in China's most developed cities. "Now we have people in Gansu getting on the Internet and buying my pomelos through Tmall," he relates. Consumers in China's remote third- and fourth-tier cities can now order fruit from him directly with a touch of their smartphone.

He has noticed that in less than a year sales of Taiwanese fruit over Tmall have grown to account for 20 percent of his annual turnover of 40 to 50 million Taiwan dollars.

A very pleased Kuei asserts, "More people will be able to experience our Taiwanese fruit in the future."

China's Mobile Internet Users Dwarf USA

Eric Kuei and Hu Yi-chia are only feeling the force of this phenomenon's perimeter, as the 500 million Chinese mobile device users at the vortex of the storm comprise a massive mobile community capable of action with the swipe of a finger.

Like many developing countries, entry- and mid-level smart phones have quickly become standard-issue items for members of the Chinese public.

China has the world's largest population of mobile Internet subscribers, accounting for over 80 percent of her approximately 680 million Internet users. Many residents of fourth-, fifth- and even sixth-tier cities leapfrogged straight to mobile Internet and the world of QR Codes without ever having accessed the Internet from a computer.

"It took China eight years to exceed the number of Internet users in the US, but just 24 months to double the number of mobile Internet users in the USA," exclaims David Wei, former Alibaba CEO and founder and CEO of Vision Knight Capital.

The explosive growth of mobile Internet use in China over the past 24 months has grabbed the attention of Europe and America, and helped everyone living in China experience a brave new digital world.

China's sizable population is powering the transition from "Made in China" to "Service in China."

Meanwhile, Taiwan's third-party payment service bill still awaits approval by the Legislative Yuan. Whilst Taiwan's mobile payment system lags behind, China's population props up an experimental "O2O" (online to offline) service network, where many "mobile communities" colored with distinctive Chinese ingenuity have cropped up.

Compared to the computer-based Internet of years past, the major breakthrough of the mobile Internet is that it has formed a "five-point closed loop, consisting of person, machine (mobile phone), place, time, and payment," concludes David Wei.

That five-point force has made the mobile phone the entry portal of life for China's public. Mobile payment is the last piece bringing the O2O experience together.

People must wonder, then, just how much is this mobile economy that connects the flow of people, money and information potentially worth?

Bob Cao, chief analyst at iResearch and president of iResearch Academy, relates that around NT$48.1 trillion in credit card charges is racked up at physical points of sale in China per year. Last year, retail online sales via computers in China reached approximately NT$8.66 trillion.

"If 10 trillion renminbi (around NT$48.1 trillion) in on-site credit card charges is translated to mobile payment, that would amount to around five times the current scale of online retail sales based largely on the computer platform," says Cao, noting the vast potential therein.

"The line between on- and off-line has become blurred. Conventional retailers and consumer service industry merchants have been impacted and are currently undergoing transformation," adds Cao.

Even big consumer electronics retailer Suning has changed its name to "Suning Cloud," offering identical prices online and offline. No longer deliberately setting online operations apart, it is making a vigorous attempt to reclaim some of the customers lost previously to

The offline realm is undergoing transformation, whilst the virtual world is fraught with intense competition. China's two leading online retailers are now going after each other hard, fearful of becoming irrelevant and superseded at the flick of the consumer's fingertips.

The "Two Ma's" burn through NT$9.6 billion

Giants scramble to claim mobile realm

Since last year, the "two Ma's," Alibaba's Jack Ma and Tencent's Pony Ma (the two are unrelated), have spent billions of US dollars, making acquisitions and expanding investments to stake their claims in the mobile realm.

In the area of taxi booking software alone, the two big guns have spent NT$9.62 billion over the past three months. Competing for each other's users and forming alliances with payment tool companies – Tencent invested in China cab-hailing app Didi Taxi, and Alibaba picked up Kuaidi Taxi – they have burned through their cash in a race for more drivers and more passengers.

"Spending on that sort of scale is way beyond what Taiwanese businesses are capable of," marvels an executive at a Taiwanese e-Commerce firm, shaking his head.

The two Ma's are taking the battle offline as well, competing to build complete "experience spheres."

Jack Ma purchased a 9.9 percent share of the Intime Retail Group in March. Intime Group CEO, Shen Guojun, also happens to be a major shareholder of Jack Ma's logistics company, Cainiao Network Technology.

Jack Ma was attracted to Intime Group for the vast resources under its sphere, including 36 department stores and shopping malls, a combined 10 million products for sale, and a database of 1.5 million members.

Alibaba chose Hangzhou's Intime City as the site to host its Taobao Mobile Life Festival this past March 8. Using the Taobao app, mobile users reserved movie tickets, restaurant seating, and KTVs in Intime shopping complexes, even paying with Alibaba's mobile payment system, Alipay. "Sales for that day set a new record since our opening, reaching 10 million renminbi (approximately NT$48.1 million), versus a typical volume of 6-7 million renminbi most weekends," relates He Xiangguo, Hangzhou Intime City Management Corporation president.

The experience of being on the front lines in this battle opened He Xiangguo's eyes to the synergistic effects of online and offline sales channels, users and information.

Not content to take a back seat, Tencent teamed up with the big Chinese department retailer Shopin to launch the Shopin/WeChat concept store.

Launched in early May, the complex is located in the Xiasha District, right in Alibaba's stronghold of Hangzhou. Cash registers are conspicuously absent here, and even a wallet is superfluous with a mobile phone in hand. Shoppers need only open up WeChat and scan the product's QR Code, and all the details about the product come up on the screen. If they decide to go ahead with a purchase, they simply pay using WeChat's mobile payment system.

The objective of these major Chinese players in real-world and virtual retail "is to stake out territory on all levels of consumers' lives, and establish mobile community portals," observes Professor Huang Chunyao of National Taiwan University's College of Management from across the strait.

Mobile Communities: Can Taiwan Take Advantage?

For Taiwanese businesses, watching the rapid formation of China's mobile communities evokes a lot of strong feelings.

Jimmy Yiu, CEO of eDynamics with nearly a decade in the online industry, believes that the O2O mobile-end shopping model propelled by the mobile Internet "is an opportunity for Taiwan." His company having been acquired by U-mall last year in a move indicating its commitment to mobile shopping, Yiu has a particularly keen interest in this area.

The rapid development of mobile Internet in China has been made possible by government protectionism, enabling domestic Internet outfits to easily surpass foreign concerns and monopolize the essential infrastructure for building mobile online communities. From mobile platforms and payment apps and to alliances with brick-and-mortar stores, a complete ecosystem is emerging.

However, Taiwan faces practical obstacles.

First, many of Taiwan's online merchants still operate on the Web 1.0 platform, lacking the creative service model integrating the online and offline realms. Further, brick-and-mortar shops have not engaged in sufficient digitalization, unlike many of their counterparts in China that have easily transitioned into O2O via QR Codes and other digital mechanisms.

Most crucial of all is the last mile on the path toward online communities, the gap in payment tools.

Taiwan's regulations governing third-party payment are currently in the draft bill stage, ostensibly freezing progress on O2O development and trans-territorial payments. China, meanwhile, was slow to develop her credit card system, and as a consequence a number of private enterprises illegally developed third-party payment tools, which China has now retroactively legalized. Now Alipay alone has nearly 300 million known registered users.

"Taiwan is truly lagging," admits Cheng You-chin, general manager of Taiwan EasyCard. Given Taiwan's banking, telecommunications and Internet infrastructure, many people look favorably upon her prospects for developing O2O. Naturally, with NT$4 billion in reserves, EasyCard is eager to promote it.

Nevertheless, looking at the fundamental differences distinguishing both sides of the strait, perhaps it is not necessary for Taiwan to copy the Chinese model after all.

Compared to China, whose vast territory can make life inconvenient, prompting her population to eagerly embrace mobile communities, Taiwan is attractively compact. With the world's highest density of convenience stores and ATMs and a solid, comprehensive logistics structure, package pick-up, store-to-store deliveries and cash-on-delivery payment are quick and convenient.

"It's just so convenient already, there's really no need to pay first over the Internet or cell phone, plus this way it eliminates the risks inherent in online transactions," a candid Cheng remarks. Apart from the regulatory area, O2O has progressed slowly in Taiwan precisely because of the lack of urgency for it in people's everyday lives, he explains.

Seen in this regard, Taiwan should adopt a model that puts the advantages of its real-world environment into play. From EasyCard and PChome to local banks, businesses await the finalization of third-party payment regulations while actively moving into position, hoping to hit the ground running and launch related services over the second half of this year.

The O2O world awaits.

Translated from the Chinese by David Toman