B2C and C2C e-commerce has taken time to gain a foothold in China. However, the combination of new forms of payment systems like Alibaba's Alipay, an increase in credit card use, and an optimistic Chinese youth population willing to borrow against a bright future indicates that e-commerce might have finally found the growth engines needed to take off in the Middle Kingdom.
E-commerce has been slow to develop in China for several reasons including low penetration rates of credit cards, consumer trust issues, and poor logistics and distribution channels. Eager to tap into China's consumer revolution, both Chinese and foreign companies like China Mobile (NYSE:CHL), DHL and UPS (NYSE:UPS) have invested the money and time needed to address these issues. The efforts have paid off. Chinese consumers now flock to online shopping sites like Amazon's (NASDAQ:AMZN) subsidiary Joyo and competitor Dangdang, which recently raised $30 million USD from venture capital firms Doll Capital Management and Walden International. Joyo alone is expanding services from book selling to include electronics and other products and is becoming a de facto online shopping bazaar. The number of goods offered on Joyo's website have increased from 45,000 to 450,000 in the past 2 years.
Joyo's rise mirrors the growth numbers of e-commerce in China. An estimated 2.08 million Chinese bought products and services online in 2001. In 2006, the number of Chinese consumers making orders online will rise to over 20 million according to estimates by the China Market Research Group CMR. This number is still dwarfed by the nearly 125 million internet users in China, but the growth indicates the promise of e-commerce.
Smart retail investors will notice the trends and quick adoption rates of internet savvy Chinese consumers that spend approximately 50% more time online per week than Americans at almost 18 hours. More conservative investors should buy the stocks of multi-national firms that will benefit from China's e-commerce boom. Investors with higher thresholds for galloping stock prices should throw their money behind the best of breed Chinese companies.
From China Merchants Bank to Merchants Shopping with Credit Cards
Aside from the fat fees from China Merchants Bank's upcoming $2 billion USD IPO in Hong Kong that will boost the bottom lines of investment banks UBS AG, China International Capital Corporation, and Merrill Lynch that are bookrunning the deal, the IPO will help fuel China's e-commerce sector. The war chest that China Merchant's will raise will allow them to invest more in marketing their credit cards and build upon their commanding 38% market share over less nimble rivals like stodgy old China Construction Bank and Bank of China.
China Merchants already is popular amongst Chinese youth because of aggressive marketing techniques, like co-branding credit cards with youth oriented companies such as training firm EF Education. As one twenty-something year old entrepreneur recently said to me over a coffee in Starbucks, Get a China Merchants credit card. They have the best customer service. Lines are shorter than those at the large State-Run banks.
Companies generating a significant part of their revenue from e-commerce will benefit from the IPO as more Chinese youth will get their hands on credit cards and thus be able to buy on-line. Over the past few years, it has been difficult for credit card companies like Visa, Mastercard (NYSE:MA), and American Express (NYSE:AXP) to crack the Chinese marketplace because of regulatory issues and because the lack of credit checks make banks more willing to issue debit cards rather than true credit cards American style. However, as Merchants has shown, there is a huge market for credit cards that will continue to grow as the Chinese entire banking system reforms and make it easier for banks to issue cards to consumers.
America: Fast Food Nation? China: A Saving Nation?
Many pundits, economists, and even ethnographers have argued that China ‘s nearly 250 million middle-class folks do not like to borrow money and would not even use credit cards if they had access. Instead, these naysayers argue in the typical unchanging China argument that many academics spouted off until recently, all Chinese like to horde money under their mattresses and would rather pay in cash than use a piece of plastic.
However, the China Market Research Group CMR has conducted extensive interviews with Chinese consumers. The results of these interviews indicate that consumers are now more trusting of banks. Most importantly for marketers, a high savings rate is changing as Chinese are becoming more accustomed to a life of leisure and consumption rather than a hand to mouth existence that plagued many Chinese during the turmoil of the 50s and 60s. Raised in turbulent times, many older Chinese have been conservative with their money because they save for a rainy day. The end of the iron rice bowl as well as the one-child policy have left many older folk unsure where money will come from in the future and who will take care of them, especially in light of spiraling health care and real estate costs. Thus, they saved.
But a booming economy over the past 25 years has made older Chinese less afraid of going hungry. Once the fear of a lack of money is allayed, CMR has found that older Chinese consumers are willing to spend in much higher numbers than previously thought and are willing to use credit cards if given the chance.
Chinese Youth: The Real Drivers of China's Economy
Chinese youth are willing to spend and borrow as much as their counterparts in the US, perhaps dangerously so. Fueled by optimism in China's economy, their career prospects where salaries are regularly doubling on a yearly basis, and influenced by a catching up with the Jones' mentality, Chinese youth are spending almost all of their disposable income on non-basic items that are normally covered by their parents and grandparents. A huge part of Louis Vuitton's or Gucci's revenues in China derive from the sales of $500 USD products to office assistants who make $400 USD a month and live with their parents but who aspire to being seen as rich.
Chinese youth are comfortable spending time online, blogging on portals like Sina or Sohu, playing online games like Blizzard's World of Warcraft, or buying stuff.
Investing in the Investors
E-commerce will undoubtedly continue to grow in China as credit card card other forms of payment like a Paypal gain more widespread use in the China market. The demand is there by Chinese consumers, especially in the youth sector. For the first time, the infrastructure might be in place to satisfy this demand. Smart investors will understand this shift in purchasing habits and invest accordingly.