CLSA 8.2011 Blue Book On China E-Commerce


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CLSA 8.2011 Blue Book On China E-Commerce

  1. 1. Blue Books Experts’ views for expert investorsChinaInternet26 August 2011Elinor Leung, CFAHead of Asia Telecom &Internet 26008632Guest authorProfessor He XiaDeputy Chief Engineer,Institute of Policy andEconomics, China Academy ofTelecommunication Researchof the Ministry of Industryand Information Technology Buying into e-commerce Transforming China into an online marketwww.clsau.comFind CLSA U® products and event listings on or email CLSA U® - Experts’ views for expert investors Prepared for:
  2. 2. Blue Books Straight to the source with CLSA When industry innovations change as quickly as they are created, your ability to respond could mean the difference between success and failure. In this volatile environment, why rely entirely on broker research when you can tap into unfiltered, unbiased primary research? CLSA U® is a value-added executive education programme created to allow you to gain firsthand information and draw your own conclusions and make better informed investment decisions. CLSA U® offers tailored courses on a broad range of macro themes with a special focus on technology and telecoms. The format ensures you learn as we do and obtain firsthand information about prospects and trends in industries and sectors that underline the companies in your portfolio. You will interact and learn from the trailblazers at the centre of today’s fastest moving industries - experts, engineers and scientists who design, implement and shape the new technologies today, which impact the market tomorrow. CLSA U® is not a one-off event. It is an ongoing education programme restricted to CLSA’s top clients. The syllabus will constantly evolve to meet your needs and help you debunk the latest technologies, investment styles and industry trends that affect the markets and sectors you invest in. For more details, please email or log on to Professor He Xia Professor He Xia is Deputy Chief Engineer at the Institute of Policy and Economics in the China Academy of Telecommunication Research of the Ministry of Industry and Information Technology (MIIT). She also serves as Chairman of China Information Economics Society and an expert member on two MIIT committees. She is a guest professor at BUPT School of Economics & Management and Xi’an University of Post & Telecommunications. She graduated from the economics school at Capital University of Economics and Business, and received her Master’s degree from the school of economics at Renmin University of China. She also spent some time studying at the University of Maryland, USA in 1995. Professor He has conducted economics and policy research in telecommunications for 25 years. She has published more than 100 research papers domestically, including Investment and Financing in Information Industry, The development of the Mobile Communications Industry and its social influence, and Telecommunications Regulation of the Internet Age. One of her new works - Information Industry and System Innovation - will be published soon.CLSA U® logo, CLSA U® (word mark) and CLSA University are registered trademarks of CLSA in the USA and elsewhere.2 26 August 2011 Prepared for:
  3. 3. Blue Books Foreword Beijing is a big supporter of e-commerce as the industry can provide solutions for many of the challenges that China now faces. It is the first internet application that the government has determined to be a worthy use of large network investment. The authorities value e-commerce much more than online games and social networking, which are pure entertainment. Successful development of the industry could transform China into the largest e-commerce market in the world. Advancing e-commerce in China is one of the key elements of the 12th Five- Year Plan and will be crucial in developing a domestic-driven economy and migrating up the value chain. It should also help boost the health of small and medium-sized enterprises, which are the backbone of the mainland economy, as well as sustain economic growth. The government aims to develop an IT-driven society to drive the country’s education, productivity and competitiveness. The telecoms regulator studied a national broadband strategy last year but had to put it on hold as it struggled to justify the large investment to support entertainment businesses such as online games. E-commerce is different, however, as it will have profound economic benefits. China also wants to be a leader in new technologies such as ‘internet of things’ - a network of everyday objects that can interact via web services - and cloud computing. It has identified these as key strategic industries in the 12th Five-Year Plan. To accomplish this, the country plans to build one of the best telecom networks in the world. Professor He Xia, Deputy Chief Engineer at the Institute of Policy and Economics in the China Academy of Telecommunication Research of the Ministry of Information Industry Technology, shares her insights on China’s internet policy and how the country is going to build an e-consumption economy. She has more than 20 years of experience in the telecoms and internet industry. Regulatory risk for the internet sector has been overstated. This is obvious given the explosive growth of the industry. The government’s goal is to cooperate with the internet companies to promote growth. There are obvious contradictions with self-censorship and other issues, but China has found a middle road that has allowed the sector to flourish. The internet is one of the most successful private industries and is critical in helping China move up the value chain. Elinor Leung Head of Asia Telecom & Internet Research26 August 2011 3 Prepared for:
  4. 4. Blue Books Contents Executive summary ............................................................................ 5 Building an e-consumption economy .................................................. 6 Uncharted territory with hurdles, opportunities ............................... 23 Growth is inevitable ......................................................................... 28 Conclusion........................................................................................ 37 Appendix: Shanghai Provisions ........................................................ 39China moving online4 26 August 2011 Prepared for:
  5. 5. Executive summary Blue Books Buying into e-commerce Shifting to a consumption- The global credit crisis has forced China to re-evaluate its export and investment- driven economy driven model. It was a wake-up call that may have prevented Beijing from pushing the economy from overinvestment into a hard landing. According to the Chinese Academy of Social Science (CASS), economic restructuring with a focus on boosting consumption is needed to sustain growth. Domestic growth, especially consumption, is vital to maintain fast economic expansion over the next 10 years. The stakes are high for Beijing to get this right. E-commerce a key part of E-commerce is a key part of the government’s next five-year plan. The the next five-year plan biggest advantage of developing e-commerce in China is that it is a relatively new industry with a large multiplier effect over the entire economy. It is mainly software driven and leverages on all the hard infrastructure that was invested over the last decade. E-commerce will benefit from strong demand as incomes rise. Over the next five years, the government aims to build an IT-driven society, improve the support system for e-commerce and build it up to help SMEs compete against the big companies. It is also a critical factor in developing the service sector, which will be a key engine for job creation. The government plans to develop B2B and facilitate expansion into B2C. It will enforce light regulation on e-commerce, as it is a payback for all the infrastructure investment. E-commerce faces many However, there are still many hurdles such as privacy issues, user information challenges, but growth protection, implementation of real-name registration, online taxation policy, is inevitable inefficient logistics network and new online-payment and anti-laundering regulations. Nevertheless, Beijing will continue to invest in the infrastructure to support e-commerce growth. China has one of the world’s best telecom networks and the internet industry has been the main beneficiary. It will build on this success and plans to accelerate broadband growth, even in rural areas. With the move to 4G and greater smartphone usage, the internet industry will thrive. The risk is that the government will impose a centralised agency to manage the sector, which could stifle development of internet services by adding more approval processes and imposing strict censorship guidelines. We believe this is unlikely. Internet policies will continue to support growth. E-commerce transactions E-commerce to double in China over next three years to double 25 (Rmbtn) (%) 50 e-commerce transaction value (B2C, C2C & B2C) 47 Growth rate (RHS) 46 20 40 41 41 15 34 30 10 23 20 5 10 2.9 3.6 4.8 6.8 9.5 13.9 20.4 0 0 2008 2009 2010 11F 12F 13F 14F Source: iResearch26 August 2011 5 Prepared for:
  6. 6. Section 1: Building an e-consumption economy Blue Books Building an e-consumption economy Shifting to a consumption- The 2009 credit crisis provided a wake-up call for the Chinese government to driven economy re-evaluate its export and investment-driven model. It prevented Beijing from pushing the economy into an inevitable hard landing. The country had to restructure its policy and focus on boosting consumption to sustain economic growth. Domestic consumption is vital to maintaining rapid economic growth over the next decade. E-commerce easiest There are large structural barriers to boost consumption in China such as high way to lift domestic logistic costs, imbalanced taxation structure and safety scandals that all serve consumption to keep prices high and depress consumption. One of the easiest ways to tear down these barriers is to develop a new industry and infrastructure. This is why e-commerce is important as it is the easiest way for the government to not only boost domestic consumption, but also push China up the value chain. A key part of the next E-commerce is a major focus of China’s five-year plan. The biggest advantage five-year plan of developing e-commerce in China is that it is a relatively new industry with a large multiplier effect over the whole economy. It is mainly software driven and an extension of all the hard infrastructure that was invested over the last decade. E-commerce will benefit from strong demand as incomes rise. China has a large China has two major advantages to build a world-class e-commerce industry: It consumer market and has a huge consumer market, which will likely become the largest in the world, internet user base as well as a massive internet user base that is already the largest globally. Sale of retail consumer goods rose 14.8% YoY in 2010 and CASS expects growth to maintain at an annual rate of 17% for the next five years. CASS expects China to overtake the USA as the biggest market of consumer goods by 2015. Over the next five years, the Chinese government aims to:  Build an IT-driven society.  Improve e-commerce support systems.  Build up e-commerce to help SMEs compete against big corporates. It is also a critical factor in developing the service sector, which will be a key engine for job creation.  Build upon B2B and facilitate expansion into B2C, which will replace C2C.  Enforce light ex-post regulation on e-commerce, as it is a payback for all the infrastructure investment.  Avoid centrally planned e-commerce regulation. World’s largest consumer-goods market China could become the China could become the world’s largest market for consumer goods by 2015 world’s largest market for according to CASS. The country contributed 5% of the world’s consumption of consumer goods by 2015 US$37tn in 2010, from less than 3% a decade ago. China’s private consumption grew 14% to US$2tn in 2010 and will likely continue at a 17% Cagr for next five years. Private consumption contribution to GDP will likely increase 2-3% to 35- 36% by 2015. More than half of China’s private consumption is on consumer goods, compared with about 30% of the USA’s consumption of US$10bn (70% on service). China’s private consumption could reach Rmb4.6bn by 2015, overtaking America as the world’s largest consumer-goods market.6 26 August 2011 Prepared for:
  7. 7. Section 1: Building an e-consumption economy Blue Books Catching up to the world’s China has stepped up its efforts to shift from an export-oriented and investment- rich countries led economy to a consumption-driven one after the 2008 global financial crisis. It is catching up to the world’s rich countries by investing in new manufacturing and retail capacity, improving its banking system and consumer-credit market, adopting modern technology and increasing workers’ productivity.Figure 1 Figure 2China’s private consumption China’s private consumption as a share of GDP 5 (US$tn) 4.6 40 (%) 38 4 17% Cagr 38 36 36 36 3 36 + 2-3% 35 2.0 1.8 2 1.6 34 33 1.3 1.1 0.8 0.9 1 0.6 0.6 0.6 0.7 32 0 30 11CL 12CL 13CL 14CL 15CL 11CL 12CL 13CL 14CL 15CL 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010Source: CEIC, CASS Figure 3 China is the world’s third- China accounts for 5% of the world’s consumption largest consumer market Country Private consumption (US$tn) % of world consumption 1 USA 10.4 28.0 2 Japan 3.2 8.7 3 China 2.0 5.3 4 Germany 1.9 5.1 5 France 1.5 4.1 6 UK 1.5 4.0 7 Brazil 1.3 3.4 8 Italy 1.2 3.3 9 India 1.0 2.6 10 Canada 0.9 2.5 World 37.1 100.0 Source: Euromonitor World’s largest internet market China is the world’s China is the world’s largest internet market. The number of Chinese netizens largest internet market increased by 19% YoY to 457 million in 2010, almost double that of the USA. However, internet penetration remains low at 34%. China’s internet users are likely to double to 800 million with about 60% penetration by 2015, according to MIIT. This will be driven by increased investment in fixed-broadband as well as the rollout of 4G (wireless broadband). At the end of 2010, China had 303 million mobile netizens.26 August 2011 7 Prepared for:
  8. 8. Section 1: Building an e-consumption economy Blue BooksFigure 4 Figure 5Top-10 largest internet markets by users China internet users China 457 900 (m) (%) 70 USA 248 800 Internet users 60 Japan 101 700 Penetration (RHS) Brazil 84 50 600 India 75 500 34 40 Russia 66 29 Germany 66 400 30 22 Nigeria 53 300 16 UK 53 20 200 8 10 France 47 10 100 S Korea 41 111 137 210 298 384 457 800 (m) Mexico 32 0 0 11CL 12CL 13CL 14CL 15CL 2005 2006 2007 2008 2009 2010 0 100 200 300 400 500Source: Euromonitor Source: CNNIC, MIIT E-commerce to double in next three years E-commerce services have E-commerce-driven services are gaining traction and have become the become fastest-growing fastest-growing online business in China. About 92.7% of SMEs have internet online business in China access, and the figure is close to 100% among large companies. About 43% of Chinese companies have their own dedicated websites or online stores on third-party e-commerce platforms like Taobao. E-commerce transaction The overall transaction value of China’s e-commerce market (B2B, C2C and value will exceed B2C) in 2010 amounted to Rmb4.8tn, up 33.5% YoY. The market is likely to Rmb10tn by 2013 maintain a high growth rate for the next three to five years and exceed Rmb10tn by 2013, according to iResearch. China currently has 25,000 domestic e-commerce (B2C) firms and 1,880 online group-buying companies. Figure 6 Transaction value to Transaction value of China’s e-commerce market double in next three years 25 (Rmbtn) (%) 50 e-commerce transaction value (B2C, C2C & B2C) 47 Growth rate (RHS) 46 20 40 41 41 15 34 30 10 23 20 5 10 2.9 3.6 4.8 6.8 9.5 13.9 20.4 0 0 2008 2009 2010 11F 12F 13F 14F Source: iResearch B2B is China’s largest B2B is the largest e-commerce market in China with a transaction value of e-commerce market Rmb4.2tn in 2010, accounting for 88% of the nation’s total e-commerce business. However, online shopping (C2C and B2C) has grown rapidly. The market expanded at a more than 100% Cagr over 2007-10, more than six times that of retail sales in the same period. About 148 million Chinese people or 30.8% of netizens shopped online last year. Online-shopping8 26 August 2011 Prepared for:
  9. 9. Section 1: Building an e-consumption economy Blue Books transaction value was up about 90% YoY to Rmb498bn in 2010, accounting for 3.2% of total retail sales and is expected by iResearch to exceed 5% by 2012. Traditional companies are beginning to embrace the online business, to offer consumers more choice. Consumers, on the other hand, are becoming increasingly dependent on online shopping given cheaper prices, wider selection and free delivery service. Figure 7 B2B accounts for 36% of China’s e-commerce transaction value breakdown (2010) online transaction value Air ticket & hotel 1.3% Online shopping 10.4% Companies above designated size B2B 35.5% SME B2B 52.8% Source: iResearch Building an IT-driven society China wants to develop China’s ambition is to accomplish an IT-driven industrialisation, marketisation, an IT-driven society urbanisation and internationalisation. This will come with a change in social and economic structures and e-commerce will play a role. Both central and local governments have made the deployment of IT infrastructure, broadband/fibre backbone network, the internet of things and cloud computing applications a top priority. Heavy IT investment continues Government has outlined The government has outlined IT as a strategic emerging industry in its 12th IT as a strategic Five-Year Plan. China will continue to invest heavily on IT and reform traditional emerging industry industry with high-tech and international advanced technology and thus boost the nation’s competitiveness. It will further push broadband and home appliances into the countryside, e-government and public cultural service systems, education levels in rural areas and healthcare informatisation projects. Accelerate broadband and fibre growth Government to accelerate The government has plans to accelerate broadband rollout in the next five broadband rollout years. China could introduce new competition and drive network convergence. It may also launch a national broadband strategy to encourage local governments to subsidise rural rollout. The government expects to provide FTTx broadband connections to 100 million users by 2015. All urban internet users will enjoy a minimum 50-100Mbps broadband service. Meanwhile, wireless broadband 4G will extend China’s internet coverage. Getting ready for 4G China is a strong Beijing is a strong supporter of Time Division-Long Term Evolution (TD-LTE) supporter of TD-LTE technology, the next-generation 4G standard. China Mobile has started TD- LTE trials in 6+1 cities, including Beijing as a showcase, with 83 million26 August 2011 9 Prepared for:
  10. 10. Section 1: Building an e-consumption economy Blue Books people since the beginning of the year. Seven leading domestic and international equipment vendors have participated in the trials, namely Huawei (Shenzhen), Alcatel-Lucent (Shanghai), Nokia Siemens Networks (Hangzhou), ZTE (Guangzhou), Datang (Nanjing), Ericsson (Shenzhen) and Motorola (Xiaman). Motorola has completed Phase 1 of the trials (network plan and optimisation, key technology and network performance) earlier than the original schedule of 3Q11. The next phase will involve networking tests, Inter-RATE reliability tests, e2e services (full voice and data services) and user experience and will be completed by mid-2012. Qualcomm plans to launch a TD-LTE/TD-SCDMA chipset by year-end. Licensing for 4G will not be a problem as soon as the technology is ready. China has charged minimal spectrum fees on 2G and 3G services and 4G will likely be the same. Internet of things - A key new strategic industry Internet of things is a The internet of things (IOT) is a new strategic industry for China. IOT is a new strategic industry network of real-world objects that can interact via web services, using technologies such as radio frequency identification (RFID) and sensors. China’s IOT industry reached close to Rmb200bn in 2010 given the strong push by local and central governments. The market size could reach Rmb750bn by 2015. IOT can be used in a wide range of areas including home safety, electric power safety, public security, health monitoring and environmental protection. In 2009, the MIIT set up a working group on sensor network standardisation. Premier Wen Jiabao also delivered his ‘Let Science and Technology Lead China’s Sustainable Development’ speech, stressing the importance of selecting emerging strategic industries and calling for consistent efforts to make breakthroughs in key technologies such as IOT. Many local governments have already set out plans to promote IOT. Wuxi, in Jiangsu province, has led IOT investment and was first to test smart buses in the city. It has set up China’s first IOT industry fund of Rmb5bn. The Nanjing government has also prepared Rmb1bn to fund emerging industries and technology innovation, including IOT. Projects include a smart power grid, smart transportation network and smart medical network. Beijing to lead cloud-computing development Cloud computing is China has identified cloud computing as a key area for rapid development. With also a key focus a large number of SMEs, it can use cloud computing to improve investment returns as it negates the need to build new data centres. Cloud computing is still in its early stage in China with the development of ‘private clouds’ and ‘public clouds’. Hybrid clouds and the industry value chain will be formed during the 12th Five-Year Plan. Beijing will likely lead the development of cloud computing as it is the headquarters for most big corporates and many IT purchase decisions are made in Beijing. Cloud computing is included in Beijing’s development plan for the IT industry in the five-year plan. These projects will receive priority support from the Beijing municipal government. The Beijing government expects revenue from the cloud computing industry to reach Rmb200bn by 2015. Policy support for e-commerce Promoting e-commerce by In the 12th Five-Year Plan on national economic and social development, improving support systems China will speed up IT development and actively promote e-commerce, especially for SMEs, by improving support systems such as credit service, online payment and logistics. Premier Wen Jiabao proposed in the Government Work Report to strengthen China’s logistics and distribution network and actively promote the development of e-commerce.10 26 August 2011 Prepared for:
  11. 11. Section 1: Building an e-consumption economy Blue Books Six authorities drafting Six leading authorities, including the Ministry of Commerce, Ministry of plans for e-commerce Industry and Information Technology (MIIT) and People’s Bank of China (PBOC), are drafting the 12th Five-Year Plan on e-commerce, which puts e- payment as a core development for e-commerce, making online stores a 100% e-business. Many online shoppers still pay by cash on delivery. Shanghai has introduced the Provisions of Shanghai Municipality on Promoting E- commerce Development (see Appendix 1) to support the development of e- commerce at the local level. The policy has it as a priority although efforts are needed to improve the legal system and regulatory mechanisms. Improving e-commerce infrastructure Online payment core to The government has improved e-commerce supporting systems to propel e-commerce development growth. Online payment is at the core of e-commerce development. The PBOC issued third-party payment regulations in 2010 and granted third-party payment licenses to 27 companies in June. This will legitimate the online payment industry and encourage growth. The central bank has no plans to limit the number of licenses. Logistics is still a major bottleneck for e- commerce development in China. However, the strong demand has attracted heavy investment in the sector. China’s push in e-government, e-ID cards and technology evolution has also laid a solid foundation for e-commerce growth. New third-party payment policy opens up new opportunities Online-payment policy Last year was critical for the development of third-party payment service in is clearing up China, due to the exponential growth in the sector, but also PBOC’s issuance of new licenses and regulatory policies. The new policy will legitimate the online payment service in China and open up the market to attract more investment as well as product and application development. The third-party payment sector will likely experience another big leg-up with increasing internet penetration, clearer government rules and expanding applications. Online transaction China’s third-party online payment sector recorded phenomenal 100% YoY doubling per year growth in 2010, with transaction value exceeding Rmb1tn. The market is expected to top Rmb1.7tn in 2011 and surpass Rmb4tn in 2014. Alipay is the largest online-payment operator in China with a large 50% share, significantly ahead of the second and third-largest operators TenPay and 99bill. Figure 8 Online payment Online-payment transaction value transaction will likely reach Rmb4tn by 2014 4,500 (Rmbbn) (%) 120 100 4,000 96 100 3,500 3,000 70 80 2,500 Transaction value 60 2,000 Growth rate (RHS) 44 1,500 30 40 27 1,000 20 258 500 1,011 1,720 2,480 3,230 4,100 505 0 0 2008 2009 2010 11F 12F 13F 14F Source: iResearch26 August 2011 11 Prepared for:
  12. 12. Section 1: Building an e-consumption economy Blue Books Figure 9 Alipay has led with Online-payment operator market share a 50% market share Guangzhou Chinapay 3.8% Others 2.1% Yeepay 3.9% iPS 3.6% Shanghai Chinapay 4.1% ChinaPnR 6.1% 99bill 6.2% Alipay 50.0% Tenpay 20.3% Source: iResearch More sectors are adopting Third-party online-payment services are already widely used on C2C and third-party online payment online-travel booking sites. The service has also extended to other payments such as utility bills, funds and insurance sales. Most shoppers on independent B2C online retailers still pay upon delivery, but all B2C online retailers support third-party online-payment services. More sectors will electronise their payment with the clearly defined policies. Online payment will become a crucial part of the internet economy. Third-party payment-service providers generate revenue by charging a transaction fee to retailers and additional fee for value-added services. Competition centres on pricing, value-added services and product differentiation. Market segmentation and mobile payment will become more important as more traditional businesses move online. Trojans and fraud have Trojan horses (programs that steal information) and fraud have been an been a growing concern increasing concern in the third-party online-payment sector as its popularity grows. However, the risk can be effectively mitigated by the implementation of website registration, mobile real-name system and tightening cooperation among payment operators, banks and virus prevention and control companies. Private couriers gather steam Revenue of China’s online-shopping courier industry in 2010 was Rmb50bn, up 100% YoY. This figure was close to zero a decade ago. About four billion parcels were delivered in 2010, of which about 60%, or 2.5 billion, were from Taobao. Private courier companies accounted for 60% market share, compared with almost zero 10 years ago. However, the growth is still not enough to feed the insatiable maw of e-commerce. Strong demand from The strong demand from e-commerce has attracted more investment in the e-commerce has attracted sector. Both leading B2C companies like 360Buy and traditional retail stores more investment like Suning have significantly raised their logistics investment to capture the e-commerce opportunity. Private logistics companies such as SF Express have been doubling their size every year. China Post has partnered with Tom Group to tap the e-commerce market.12 26 August 2011 Prepared for:
  13. 13. Section 1: Building an e-consumption economy Blue Books Government has issued China has for the first time set out clear development guidelines for the postal guidelines to promote industry in the 12th Five-Year Plan. It is targeting: express-delivery industry 1) Over 90% of the express delivery in urban cities within 72 hours 2) Delivery delay rate within 0.8% 3) Damage rate within 0.01% 4) Loss rate within 0.005% 5) Express-delivery satisfaction rate over 70% The plan also expects postal revenue to double in the next five years, express delivery revenue to increase by 150% and total delivery packages to reach 6.1 billion. Constructing an e-government and issuing e-ID cards China has spurred on e- Beijing has spurred on e-government construction to reduce corruption and government construction improve efficiency. China started its “government online project” 10 years ago to reduce corruption and now all provinces and state bureaus are online. The projects included: online electronic information exchange; online government procurement bidding; online welfare payment; electronic delivery; information centre; electronic documents; electronic tax and digital ID. A wide range of e- government services can be accessed online. Introducing electronic China introduced its first electronic ID card in 2004 and expects to issue more ID card than 1.3 million second-generation resident electronic ID cards based on radio frequency identification (RFID) chips. RFID tags can send and receive data over short distances. The new ID cards can be read by a reader within 20-30 centimetres of the card. The electronic ID cards can reduce the expensive and time-consuming paper process, enhance privacy protection and better prevent identity fraud. Electronic ID cards can also provide a fast, inexpensive and secure solution for online transactions. Technology evolution supports e-commerce growth IT infrastructure has China’s IT infrastructure has developed rapidly given the country’s large developed rapidly given network and growing connectivity. Mobile internet has promoted the large network size innovation in online shopping. Mobile e-commerce has entered a fast-growing period with the popularity of 3G, falling tariffs, the launch of mobile-phone identification policy and the breakthrough of mobile payment solutions. E-commerce service could E-commerce services could further improve with the use of video and 3D further improve with technology. Technologies in internet of things such as RFID have supported video and 3D technology the real-time tracking of moving trucks and delivery status of goods, hence reducing inventory cost and optimising inventory control. This will also help improve customer satisfaction as they can now check the delivery status of their orders any time and any where. Cloud computing helps Cloud computing provides three important services for small businesses and support SMEs’ IT needs entrepreneurs: 1) Data storage - Minimising the configuration for SME’s own servers.26 August 2011 13 Prepared for:
  14. 14. Section 1: Building an e-consumption economy Blue Books 2) IT services - Reducing SMEs’ need for an in-house IT team. SMEs can also easily access the most advanced technology. 3) Open-platform data processing services - Providing direct access and convenient tools to market information and data analysis, lowering the cost of product innovation. With the increasing public data and resources shared by suppliers and consumers, this has encouraged more cooperation between e-commerce operators and internet application developers. In the past, these services could only be afforded by a few major companies. However, SMEs can now also enjoy the advanced data process solutions for their e-commerce operations with cloud computing. E-commerce is entering an explosive growth phase in China and a nationwide e-commerce era will come soon. E-commerce helps SMEs compete against big corporates SMEs first to embrace SMEs are the first to embrace the online platform as they face increasing the online platform competition from multinationals and big domestic corporates. SMEs have been a key economic driver for China, contributing more than 60% of the nation’s GDP, 40% of profit tax and 75% of employees. However, SMEs have faced difficulties in competing with the big companies, which have greater manpower, material resources, finance, technology management and information technology. The trend has become more obvious after China joined the WTO and the global financial crisis. Many SMEs have been struggling to survive. E-commerce has opened up new opportunities for SMEs and enhanced their competence. SMEs can now promote their products and services to domestic and international customers, source raw materials in a larger area and lower operating costs. Online contact can also shorten trade cycle and enhance client management. SMEs can set up an online storefront on B2B and C2C platforms at affordable prices. About 50% of big corporates have established e-commerce system and over 30% of SMEs source their product suppliers online while 24% are engaged in online marketing. B2B has provided a great B2B has provided a great platform for SMEs that do not even have a website platform for SMEs that and IT team to reach international buyers and source raw materials. B2B don’t have a website transaction value of Chinese SMEs increased 36.4% YoY to Rmb2.53tn last year, driven by economic growth, governments support of e-commerce and expansion of B2B operators’ businesses and services. a strong remains the indisputable leader in China’s B2B market, taking leader in the B2B market 57.2% share of total industry revenue. Global Sources, HC360, Made-in- China and GlobalMarket accounted for 9.9%, 3.8%, 3.3% and 3.2% share respectively. Other players also enjoyed stable growth. Dominators have decisive B2B dominant operators have decisive advantages given their large online advantages community. High-quality and extensive services are the key success factors. Currently, most B2B companies mainly provide listing and advertising services for SMEs on an annual membership fee basis. However, online transaction services such as logistic and payment could present a new opportunity for the B2B operators.14 26 August 2011 Prepared for:
  15. 15. Section 1: Building an e-consumption economy Blue BooksFigure 10 Figure 11B2B e-commerce transaction value B2B market share (2010) 16 (Rmbtn) (%) 60 Mysteel 2.4% Globalmarket 3.2% SME B2B e-commerce transaction value 14 53 Made-in-China Growth rate (RHS) 50 Netsun 1.5% 12 51 3.3% Others 19.0% 46 40 HC360 3.3% 10 42 Global Sources 36 8 30 9.9% 6 20 4 18 10 Alibaba 57.3% 2 1.9 2.5 3.6 5.3 7.8 12.2 0 0 2009 2010 11F 12F 13F 14FSource: iResearch E-commerce a critical E-commerce is also a critical factor in developing the service sector, a key factor in developing the engine for job creation. China’s service sector is still one of the least service sector developed in the world. The service sector represents only a 40% share of China’s GDP, compared with 70-80% in the developed market. Being ‘the world’s factory’ has taken its toll on China’s environment. It has faced more challenges in expanding its share of the world’s manufactured goods and the manufacturing sector can no longer create new jobs. Government has stressed The government has stressed the importance of the service sector in its 12th importance of the Five-Year Plan and expects this industry to exceed 50% of GDP by 2020. The service industry service industry can ease labour supply pressure, strengthen the non-SOE business sector, increase economic efficiency and accelerate trade and technology progress. E-commerce has helped propel growth. B2C and C2C have made wholesale and retail trades more efficient. The increasing demand for e-commerce has attracted big investment in the logistics sector from B2C companies as well as foreign firms. The growth of online-travel services has gained paced. About 35% of travellers now buy tickets or book hotel rooms online. Sofun and CRIC, China’s largest real-estate sites, provide extensive property-transaction information online. Banks and security firms have also set up their online platforms to enhance their services.Figure 12 Figure 13China’s service industry as a percentage of GDP Services share of GDP - China vs developed markets 44.0 (%) 43.7 China 43 43.5 43.1 S Korea 58 43.0 Australia 71 42.5 42.1 Germany 71 42.0 41.8 41.5 41.2 Japan 76 41.0 USA 77 40.5 UK 77 (%) 40.0 2006 2007 2008 2009 2010 0 20 40 60 80 100Source: Euromonitor26 August 2011 15 Prepared for:
  16. 16. Section 1: Building an e-consumption economy Blue Books C2C has set the stage for B2C to shine B2C will replace C2C and B2C will replace C2C and become the mainstream of online shopping as B2C become the mainstream sites offer better credibility and service quality. C2C accounted for a large of online shopping 87% share of China’s total online shopping transaction value in 2010. It has paved the way for e-commerce growth in China, but its inherent simple and low-end features have limited future growth. Most of the sellers on C2C are small companies. Fraud and consumer complaints are common on C2C platforms. Operators normally offer limited guarantee for products purchased online as they are just platform operators. With M18 and Dangdang going public, China’s B2C market has gained strong awareness domestically and internationally. All major independent B2C online retailers have aggressively scaled up their business and attracted fresh capital. More than 40 Chinese e-commerce companies raised over US$1bn in 55 deals last year. Leading C2C operators Even leading C2C operators such as Taobao and Paipai have started shifting have started shifting their their focus to B2C. Alibaba Group has spun off its B2C platform TMall. Small focus to B2C market individual online stores have also started to standardise their online operation. Baidu and Tencent are finding their way into the B2C market. Baidu has partnered with Rekuten to launch a B2C platform in China. Tencent has partnered with Groupon to offer a group-buying service. It has also acquired a stake in various vertical B2C sites such as Okbuy, a leading online shoe retailer. There could be more M&As to come. Leading B2C operators will face more direct competition for adspend, user growth, product sourcing and talents. B2C should continue to B2C should continue to gain market share. Transaction value reached gain market share Rmb63bn in 2010 with a 12.7% online shopping share, up 3% YoY. There are two types of B2C operators. Independent B2C retailers such as 360buy and Joyo Amazon, which source and sell products, account for a 6.6% share of online shopping transaction value while B2C platform operators like TMall (Alibaba Group) took up 6.0%. Figure 14 B2C gaining momentum China’s online-shopping market (C2C and B2C) (%) B2C C2C B2B 100 80 71.3 69.4 74.8 60 81.3 87.3 93.2 91.5 40 12.5 13.2 20 11.5 9.0 6.6 16.2 17.4 3.5 9.7 13.7 5.4 1.4 3.0 6.1 0 2008 2009 2010 11F 12F 13F 14F Source: iResearch16 26 August 2011 Prepared for:
  17. 17. Section 1: Building an e-consumption economy Blue BooksFigure 15 Figure 16C2C market share (including TMall) (2010) B2C market share (2010) Eachnet 3% 360buy 32% Others 31% Paipai 11% M18 2% Dangdang icson 5% Taobao 9% 86% Redbaby 3% JoyoAmazon 9% New egg VANCL 4% 5%Source: iResearch E-commerce operators Chinas online-shopping operators are likely to expand with more diversified, will expand with more standardised and branded products. Many have also launched open platforms to products offerings extend their product offerings. China’s online-shopping market as a percentage of retail sales was only 2% in 2009, much lower than the 13% in Korea and 6% in the USA. This implies strong growth potential in the next few years. Figure 17 China online retail sales Online retail sales as a share of total (2009) has lagged developed markets 14 (%) 13 12 10 8 6 6 4 2 2 0 China USA Korea Source: Alibaba Consumers are accustomed to online shopping Chinese consumers are Chinese consumers are accustomed to online shopping after the multiyear accustomed to online cultivation by early entrants like Dangdang, Joyo, Taobao and 360buy. More shopping than 200 million consumers (or 44% of internet users) already shop online. They use the web to check out product information, compare prices and place orders. Online payment adoption has also been growing. Government and e- commerce operators have put in a lot of effort to improve the internet credit system and created a healthy social environment for e-commerce. China also needs to strengthen its talent and application training to ensure sustainable growth in this market.26 August 2011 17 Prepared for:
  18. 18. Section 1: Building an e-consumption economy Blue Books Healthy economic growth spurs internet economy Healthy growth of China China’s healthy expansion will lay a solid foundation for the internet economy, will lay solid ground for ensuring continuous investments in the sector and robust growth in consumer the internet economy spending. Rising wages will also spur consumption and online spending. The financial crisis and inflation have helped drive online-shopping growth while large venture-capital inflows enable e-commerce firms to expand faster. More specific and detailed policies have driven the development of online- payment services. This is reflected in the continuous extension of third-party payment applications and stable growth in online transaction value. E-commerce a crucial E-commerce has become a crucial business for internet companies with more business for internet and more people spending their social life online. The B2B platform has companies transformed from information-based to transaction-based. Many traditional retailers have set up their online stores through self-owned B2C portals, M&A, joint ventures or a third-party e-commerce platform. The internet has become an important distribution channel. However, a poor logistics system has been a major obstacle. E-commerce’s cost advantage is fading with rising online ad rates and delivery costs. The migration of traditional businesses online may pose increasing challenges to online SMEs. Most economic factors are Most economic factors are positive for e-commerce development except positive for e-commerce logistics, which should be the key investment area for major operators in the except logistics near term. Using a light-touch regulatory approach China has adopted light- China has adopted a light-touch ex-post regulation approach for the e- touch regulation approach commerce industry. The sector’s fast growth has been mainly driven by the market and the private sector. Regulations will only be introduced when needed and policies will focus on promoting the industry. China has no tax rule for online transactions yet. However, any regulations will likely favour online operators such as preferential tax rate. E-commerce will help pay E-commerce will help pay back the infrastructure investment made by the back the infrastructure government. The government was struggling to justify the heavy telecoms investment infrastructure investment with only online gaming and social networking businesses. E-commerce can bring direct economic benefits to consumers as well as enterprises. It can also create new jobs and improve productivity and competitiveness of the country. The vast benefits of e-commerce enable the government to further accelerate their telecoms and IT investment. Avoid centrally planned e-commerce regulation Industry is supervised by China’s e-commerce industry is supervised by five government departments. five government Regulatory areas focus on taxation, user rights protection, credit safety and departments market order, financial security and network and information security. The evaluation of the transaction legitimacy may also involve medical, audio- visual cultural and religious regulatory authorities. All platform-service providers, online-payment-service providers and related parties in the transactions are under the regulatory jurisdiction (figure 14). The structure will avoid centrally planned e-commerce regulation, which could hinder industry development. Each department will focus on its own area to promote e-commerce growth.18 26 August 2011 Prepared for:
  19. 19. Section 1: Building an e-consumption economy Blue BooksFigure 18Government departments supervising e-commerce industry Management Management MIIT MIIT PBOC PBOC MOFCOM MOFCOM SAIC SAIC SAT SAT main bodies main bodies Managing Managing Platform service provider Platform service provider E-payment provider E-payment provider Transaction parties Transaction parties target target (Alibaba, Taobao) (Alibaba, Taobao) (Alipay, eBay) (Alipay, eBay) (corporate/individual) (corporate/individual) Network and Network and Financial Financial Market order, credit security, Market order, credit security, Managed area Managed area Tax guarantee Tax guarantee information security information security security security consumer rights protection consumer rights protectionSource: MIIT Responsibilities of each government department are as follows: MOFCOM responsible for  The Ministry of Commerce (MOFCOM) is responsible for sector sector development development, formulating guidelines and supportive policies. It focuses on upgrading industry infrastructure, promoting the advent of an information society and creating a favourable operating environment. It doesn’t have specific management duties. MIIT in charge of  The Ministry of Industry and Information Technology (MIIT) is in network access charge of network access, equipment authentication, network and information security management. Platform services and electronic payments, which are part of online data processing and transaction, have been included in MIIT’s management of value-added telecoms services. The regulation is based on The Telecommunication Regulations guidelines. PBOC supervises online  The People’s Bank of China (PBOC) supervises online financial financial services services. Online payment has been classified as a payment service provided by non-financial institutions. Licenses for third-party payment service will be issued and relevant regulatory measures will be introduced. SAIC responsible for  The State Administration of Industry & Commerce (SAIC) is credit mechanism and responsible for managing credit mechanism and market competition. competition B2B and B2C have been identified as online platforms which require real- name registration. C2C real-name registration system has been enforced. SAT responsible for  The State Administration of Taxation (SAT) is mainly responsible collecting tax for collecting tax from related parties of the online transaction. B2B and B2C platforms have been under the taxation system. Currently, the SAT is trying to implement sales tax on C2C platforms. Under the current regulatory structure, the MOFCOM is responsible for development and regulatory policies, but does not have full authoritative power. The SAIC, PBOC, SAT and MIIT are responsible for promoting China’s e-commerce development, but they are struggling to balance the development and interests of online and traditional businesses in the industry transformation. They will likely face a bumpy ride ahead when it comes to the enforcement of new taxation and user registration policies. China’s e-commerce policies, laws and regulations Government has The National People’s Congress (NPC), the State Council and all ministries and introduced many policies commissions and the provincial/municipal governments have introduced or to promote e-commerce enacted a multitude of e-commerce policies, laws and regulations to promote sector development, credit and authentication, and online payment since 2010. This has played an important role in the development and supervision of the e-commerce sector. The government has stepped up its new policy introduction given the explosive growth in 2010.26 August 2011 19 Prepared for: