What is impeding growth of Chinese online shopping?

Includes: SINA, SNDA
by: Ezra Marbach

According to both Piper Jaffray and Taobao.com, it's not primitive online payment systems - as many have suggested. While payment systems may be inefficient, the greater challenge to growth in online shopping may lie elsewhere - especially in the near-term.

Let's begin evaluating the source of slow online shopping growth by taking a look at the facts.

In a Taobao.com investor presentation
that is circulating in China, the Chinese online auction company quotes
statistics from iResearch on the growth of Chinese online shopping. The
stats show that 12% of Chinese Internet users shopped online in 2004. That
number is expected to reach 17%, or 35 million online shoppers by

Many analysts have blamed China's primitive online payment systems for the weak growth of online shopping.

Piper Jaffray opposes this view.

According to Piper's Safa Rashtchy, the Chinese are slowly embracing online shopping because of lack of trust in the system. Buyers dont want to pay until they receive product, and sellers don't want to send product until they receive cash. (You can watch the rest of Safa's Marketwatch interview here. But feel free to scroll to the bottom of this post for other points of interest to investors.)

Alibaba's Taobao.com agrees with Piper's assessment.

According to Taobao, conventional wisdom is mistaken. Payment infrastructure is not an obstacle to e-commerce development. Why? Because effective payment systems are already in place. What are consumer payment options?

For one thing:

  • Most banks offer online banking or funds transfer services. Just last week, China Construction Bank, China's third-largest bank
    by assets, announced that its customers had opened over 10 million online bank accounts in 2004. Furthermore transactions grew by nearly 40% over 2003, and transaction amounts increased by 134%.

And second, and more importantly:

  • Taobao runs an effective online payment system that has enjoyed much success, and continues to see increased consumer adoption. The service is called Alipay.

With Alipay, Taobao ensures the safety of online transactions. Alibaba, Taobao's parent company, has partnered with four of China's largest national banks, including China Merchants Bank, China Construction Bank, Agricultural Bank of China, and the Industrial and Commercial Bank of China, to ensure online payment security.

The Alipay system goes out of its way to appease both buyer and seller:

To conduct a transaction using AliPay, a buyer first sends his payment to an AliPay account, where it is held in escrow. Once the buyer indicates that the product has been received, the money is transferred from AliPay to the seller. With Alibaba's full guarantee for each AliPay transaction, buyers and sellers may transact online with confidence. This, combined with Alibaba and Taobao's trust rating systems for members, provides buyers and sellers a comprehensive way to evaluate business partners, build relationships, and transact online.

Alibaba says the payment system provides buyers and sellers with a comprehensive solution that resolves the issue of trust in online transactions while providing an efficient platform for transacting online. As part of the AliPay launch, Alibaba.com also announced that it will guarantee all transactions made through the Alipay escrow system and reimburse any buyer or seller using the system who is found to have been a victim of fraud.

And is Alipay' enjoying any success?

According to Alibaba.com:

  • 1 of every 3 transactions on Taobao is paid for using Alipay.
  • Weekly payment volume is US $3 million and growing at double-digit rates every week.

Conclusion: Primitive online payment systems cannot be the cause of slow growth in online shopping because, as we saw above, services like Alipay are working just fine. And consumers are adopting them more and more.

Furthermore, there have been numerous reports that eBay's Paypal payment service will be launched in China in the next couple of months. This would provide another established payment system to help fuel Chinese online shopping.

But is Paypal up for the challenge of entering a market so different from the one back home?

For that, let's take a look at what was said at eBay's 2005 Analyst Day in late February:

Meg Whitman (eBay President and CEO):

....I'm not going to say a lot more about payments in China. We have obviously been very aware of what's going on there. We've known for a long time they were launching Alipay. We'd been doing UBS8 conversion for the last 12 months.

Unidentified Company Representative:

....I'd also add that we have an escrow service in China with Eachnet and it's getting very nice adoption and so that provides us with some form of payments called capability already is proven recently popular with the community.

(Quotes are from the CCBN StreetEvents transcript.)

So not only has eBay known about Alipay for a long time, they recognize that a variation on PayPal will be required to gain traction in the Chinese market. (Of course, if eBay fails to launch a successful payment service, it could always acquire Alipay. Interestingly, rumors of eBay interest in Alibaba have been floating around for some time.)

Final Conclusion: So where does this leave us? Online payment systems are in place, and gaining users by the day. So why are predictions of online shopping penetration remaining so low? Because the Chinese are just not yet comfortable with making transactions online. As much as Alipay seems to be meeting consumer concerns, and eBay's Paypal may do the same in the future, analysts continue to predict limited growth over the next couple of years. So the lack of consumer trust is the logical choice holding up e-commerce development.

On a separate note, what else did Piper's Safa Rashtchy say of interest in the Marketwatch interview? He believes that Shanda Interactive (ticker: SNDA) will successfully acquire Sina.com (ticker: SINA). He also expects more partnerships between non-Chinese and Chinese companies in the online gaming space.