Efficient strategies to achieve success on the Chinese E-commerce market

㺶⃻废庂猺庛㡨猻㖆✫写

TONGJI UNIVERSITY
㺶⃻废庂(庛㡨)
+

廟歹⛮䳑
䠖⸱⠧▂
═ 㫨歹
⧞椦◷⑍⛙⨉ℎ⧞䠖⸱⠧▂ャ⨛
⹿㢞ֻ䶿Ⅺ❭㓱▀䥥㧪㠩㓹䡆
楃 (俜)
冰䀯⃯亂䛧⹇楃
⃴ ⃻
テ⠧亂䛧
Ⲵ ⛮ 庻様⯑
⹇ ⛘ 1156017
㗨⻝㠺ラ周中允
㣆㨀 2013ㅕ4㧩20㣆


Tongji University
Graduation Thesis
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Title
E-commerce in China
Sub-title
Efficient strategies for international firms, to
implement, compete and achieve success on the
Chinese E-commerce market
Major
Business Administration
School
School of Economics and Management
Name
JUGIER Francois Armand
庻様⯑
Student No. 1156017
Supervisor
周中允
ZHOU Zhongyun


Date April 20, 2013
Statement about Originality
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Tongji University
The thesis I have submitted is the achievement of my research work under the
instruction of my supervisor. Apart from the noted citations, the results of the
thesis do not contain any content of other people’s public or non-public work.
Other individuals or organizations that contributed to this thesis are all noted
in the thesis in a definite way. I will be responsible for all legal obligations
concerning this originality statement.


+8

Signature獌
Date獌 16/05/2013
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⭿桠,步庂⨉2015ㅕ⻧㧪Ⰸ冇7↠䳜▉ⅳ匵刲䠉㔘!

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ャ⨛猾⧞ↈ◷ּ

last decade, the Chinese Internet market has achieved tremendous growth and attained
impressive heights.
With more than 500 million Internet users since 2011, China is by far the largest online market
in the world. Still, this is just the beginning as further growth is expected. Indeed, Internet users
only account for about 40% of the total population. While most developed regions of the east
coast have reached high Internet penetration levels, the less developed, inland rural areas are
still largely immature. Those regions are expected to be the main factor of further growth, as
huge investments in infrastructure are enabling Internet access to millions. Moreover, the
country’s continuing economic growth is creating a rapidly expanding middle class in
possession of considerable disposable income. Evolution of lifestyle and higher levels of
spending levels of spending will have a deep influence on China’s e-commerce development
and sophistication.
Then, new opportunities are rising following the evolution of the market and growing trends.
Online shopping and social networking platforms for example, has been widely accepted and
are recording huge growth. Micro blogging in particular, has achieved tremendous success, is it
now playing a central part of the Chinese Internet and is even shaping its future environment.
Furthermore, with the advent of smart phones and 3G technologies, the number of mobile
Internet users has grown and will continue to grow at incredible speed. It is expected that there
will be around 700 million mobile Internet users in 2015!
community and multinational corporations. With the development and sophistication of the
Chinese Internet environment came new opportunities, business models and technologies.
Hence, since the 90’s, Internet Giants have been directly investing in China’s e-commerce and
trying to establish a dominant and lasting presence on the market. However, an important
number of high profile industry leaders have failed to establish a foothold on the market.
Multinationals such as Google, Amazon, Ebay, Expedia, Groupon, that have the most expert
people, most advanced technologies and are backed by huge capital have had a disastrous track
record in China. Indeed, often in difficult position, most foreign international web firms are
lagging far behind their local competitors in term of market share and performance.
On the other hand, Local players have proved fierce competitors, not only being able to rapidly
adopt and replicate new models and technologies developed by foreign firms but also quickly
assimilating them and adapting them to better suit the market and cater to local customers.
How did smart, experienced and world famous formidable brands failed to achieve in China the
same success that they achieved in every other market?
development, practices, decisions, mistakes and performance of various local and foreign
Internet companies we have aspired at unswerving these questions. But more importantly we

ABSTRACT
Following China’s strong economic growth and rapid technological development over the
The massive potential of the market has not gone unnoticed from the International
Why do so many foreign companies struggle on the Chinese e-commerce market?
Using industry analysis, careful observation of the market, in addition to comparing the
8++

aimed at providing extensive knowledge, deep understanding and useful advices on how to
succeed on the Chinese e-commerce market.
market, what makes it so special and hard to access for foreign companies. In addition it will
provide insight on how to enter and attempt to achieve success in China’s e-commerce.
of its situation and characteristics, followed by a more detailed analysis of the online shopping
industry. A very interesting sector that is very representative of China’s e-commerce market.
Then, there will be an analysis of what makes the Chinese Internet so unique and distinct from
others. The second part exposes the most important flaws and recurrent mistakes that
experienced foreign companies when trying to expand on the Chinese market. As well as the
strengths and key factors that enabled local players to achieve success. These information are
based on the case studies and comparison of various foreign and local players on the market. A
particular attention will be given on the case of Groupon China and its local competitor Lashou.
And their different strategies to achieve a dominant position on the online group coupon market.
And finally, the last part provides practical advices, workable strategies as well as key factors
to enter, compete and succeed on the Chinese Internet market.
Keywords: China, electronic commerce, Internet environment, foreign investments, local
competition, success strategies, market adaptation, localization.

The thesis will provide the reader with the information needed to get a grasp of the Chinese
The first part will focus on the Chinese e-commerce market. Starting by a brief overview
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STATEMENT ABOUT ORIGINALITY ..................................................................................... III
ℎ㡨㜹屢 ..........................................................................................................................................IV
ABSTRACT......................................................................................................................................VI
TABLE OF CONTENTS .............................................................................................................VIII
LIST OF FIGURES AND TABLES................................................................................................X
1. China’s Internet and e-commerce market................................................................................... 1
1.1 Overview of the Chinese Internet market .............................................................................. 1
1.2 Online shopping in China ........................................................................................................ 4
1.2.1 Overview of the market ..................................................................................................................... 4
1.2.2 China’s C2C and B2C Marketplaces................................................................................................. 7
1.2.3 China’s B2C vertical portals.............................................................................................. 11
1.2.4 China’s B2C brand sites .................................................................................................................. 12
1.2.5 Particularities of the market ............................................................................................... 14
1.3 The unique structure and evolution of the Chinese e-commerce environment ................ 18
1.2.3 A youth phenomenon......................................................................................................... 18
1.3.2 The power of social networking platforms ........................................................................ 20
1.3.3 The advent of mobile Internet............................................................................................ 23
2. An industry largely dominated by local players ....................................................................... 26
2.1 Foreign expansion, characterized by an important number of failures............................ 26
2.1.1 Replicating homegrown business models to the Chinese market...................................... 27
2.1.2 Dealings with the Chinese authorities................................................................................ 29
2.1.3 Underestimating the competition....................................................................................... 31
2.1.4 Relying on a global technology platform........................................................................... 32
2.1.5 Poor partnerships and management choices ...................................................................... 33
2.2 Highly competitive and successful local players .................................................................. 35
2.1.1 Influential leaders............................................................................................................... 36
2.2.2 Willingness to take risks .................................................................................................... 36
2.2.3 Rapid diversification of offerings ...................................................................................... 37
2.2.4 Great flexibility and adaptation capabilities ...................................................................... 38
2.3 Case study: Groupon China and Lashou ............................................................................. 39
2.3.1 The Chinese daily deal market........................................................................................... 39
2.3.2 Presentation of the two players .......................................................................................... 41
2.3.3 Why did Groupon fail in China’s e-commerce market...................................................... 42
2.3.4 How did Lashou achieve success....................................................................................... 44
3. Insight and key advices for companies to enter, settle and achieve success on the
Chinese online market ..................................................................................................................... 47

TABLE OF CONTENTS
+:

3.1 Understanding and adapting to the market......................................................................... 47
3.2 Localizing ................................................................................................................................ 53
3.3 Flexibility and creativity in dealings with the government and regulations..................... 54
3.4 Finding the right partnership................................................................................................ 55
CONCLUSION ................................................................................................................................ 57
REFERENCES................................................................................................................................. 59
ACKNOWLEDGEMENTS ............................................................................................................ 62

:

Figures:
Figure 1: Total China Internet users from 2004 to early 2012..............................................1
Figure 2: Total China online shopping users, from 2007-2011………………………........5
Figure 3: Top 10 Online Shopping cities, Q1 2011..............................................................7
Figure 4: China’s C2C Websites Market Share, Q2 2011....................................................9
Figure 5: China B2C Online Platforms Market Share Q 2 2011........................................11
Figure 6: Structure of China Online Shopping Market, 2009 to expected 2011 (Share of
the market per year)..............................................................................................................12
Figure 7: Top Chinese B2C Websites by Revenue Share, Jan. 2012..................................14
Figure 8: China Online Shopping Market Breakdown, 2011..............................................16
Figure 9: China Internet usage by age groups, 2010 and 2011...........................................20
Figure 10: Number of Microblogs (E.g. Weibo / Twitter), 2011........................................22
Figure 11: Online presence of China and world biggest companies, 2011 (% of companies
that have opened a Sina Weibo Account)............................................................................24
Figure 12: Age Breakdown of China’s Mobile Users in 2012............................................25
Figure 13: Most popular mobile Internet activities in China, 2011 (Percentage of use
among the total mobile Internet users).................................................................................26
Figure: 14: China Search Engine Market Share, 2011 (By Search volume)......................32
Figure: 15 Daily deal website market share in mid 2012....................................................44
Figure 16: Sector breakdown for the Chinese Daily Deal Market 2012 (Share of total sales
by category of offerings)......................................................................................................45

LIST OF FIGURES AND TABLES
:+

Tables:

Table 1: Sector breakdown by value and growth rate, 2010...............................................17
Table 2: A market largely dominated by local players. 2011..............................................28

:++

1. China’s Internet and e-commerce market
terms of number of users. Indeed, according to official statistics from the China Internet
Networking Information Centre (CNNIC), the country’s online population reached 538
million users by June 2012. This represents more than twice the number of Internet users in
the US, the second biggest market, and accounts for more than half of the Asia Pacific
users. The Internet market was under tremendous in China during the last 10 years. We can
clearly see on Figure 1, that in 2004-2005, there were only about 100 million users
registered in China. Today Chinese consumers spend near 2 billion hours a day online!
However, as the graph (Figure 1) demonstrates, despite its massive online population, the
country is characterized by a rather low market penetration. In 2012, China’s online users
accounted for only 42% of the total population, compare to around 80% in Europe and the

1.1 Overview of the Chinese Internet market
In 2009, China overtook the United States as the world’s biggest Internet market in
Source: Data from the China Internet Networking Information Centre (CNNIC).
Figure 1: Total China Internet users from 2004 to early 2012

US, where the market is near saturation. In other words, there is still vast room for further
growth. We can expect the Chinese Internet market to enjoy continuing near two-digit
growth in the near future, and reaching the massive number of 700 million users in 2015.
In fact, the CNNIC reported more than 6 million new users per month in 2011.
Furthermore, in par with the growth of its user base, the Chinese market is developing at
incredible speed, becoming more and more sophisticated and complex. New technologies
and business models are being introduced on the web constantly and innovation is key. All
sectors, from search engine to online shopping, social networking platforms to video
hosting, instant messaging to group buying, online gaming to portals have known wide
acceptance from the market. Internet is now a deeply incorporated in the lifestyle of the
young Chinese population, and companies with ambition must achieve an online presence
and strategy to engage and gain trust from their target consumers.
The Chinese Market is particular in its geographical disparity in term of Internet access.
We can identify a strong difference of Internet usage between the large cities and most
wealthy provinces of the East, and less developed inland regions.
In the biggest cities, and wealthy provinces of the East, the Internet penetration is close to
the rate in developed countries. However, in the poorer and less developed inland regions,
the penetration is low. Indeed, among rural populations, Internet penetration is as low as
21%. Agricultural provinces such as Yunnan, Gansu, Inner Mongolia are among the least
developed Internet market. However they are also showing incredible growth, with annual
rates, exceeding 30%.
Such massive increase in Internet access massive there is possible because of heavy
investments in telecommunication infrastructure and Internet distribution, from both public
and private enterprises, as well as because of rapid increase in wages and quality of life the
Tier-2 and Tier-3 cities of China
In contrast, in the rich and developed cities such as Shanghai, Beijing Guangzhou,
Hangzhou, penetration is high and growth is slowing. Shanghai and Guangzhou for
example, have a penetration rate of about 70% and 60% respectively. Which is close to
those in developed market. And their growth rate is close to 8% annually.
The strong growth of Internet access in rural regions in par with the strong penetration rate

of urban areas leads to positive forecasts for the Chinese Internet market.
In fact it is expected that more than half of the Chinese population will have access to
Internet before 3 years. This represents 750 million Internet users, or twice the size of the
US and Japan combined! The rural population will be the main factor of growth, thus the
urban, most developed market will lead the market toward more sophistication and will
created new trends while shaping its future environment.
Indeed as can be expected, the time spent on Internet rapidly growing in major cities. In
conjunction of the development and sophistication of online website, e-commerce and
entertainment, China registered a 60% growth of hours spent online per day (between 2009
and 2011).
The continuously increasing household personal income of the massive emerging middle
class has been at the origin of Internet growth in China. Major Internet companies are
investing heavily on this population group knowing their immense potential.
Specialists expect that the continuing growth of the Chinese economy, thanks to the new
Five-Year Plan will further inflate the Chinese middle class, hence increasing disposable
income and hence, spending.
Then, another important recent contributor to Chinese Internet development is the advent
of mobile Internet. Moreover it is expected to greatly participate in the next growth phase
of Chinese Internet.
Indeed, the arrival of 3G mobile services in 2009 provoked an extremely rapid adoption of
Smartphone and China saw its number of mobile Internet users skyrocket to over 360
million in less than 3 years. We will later discuss in more details on this subjects and how
much important mobile Internet is in China.
The Chinese online environment is considered unique in many aspects. Indeed, it is
evolving toward a model radically different then what people are used to in Europe and the
US. Strong cultural roots and traditions as well as typical Chinese lifestyle and behaviours
of digital generations are shaping the new Chinese Internet.
E-commerce in China is mainly a youth phenomenon in China. And it is not surprising that
it is often used for very different purpose then in Western markets. Leisure and
entertainment online activities are by far the most popular in China. Indeed, video hosting,

music and online gaming is huge in China. Catering to the young population, those source
of entertainment attracts comprise the majority of the online population. Instant messaging
and especially QQ (the local Instant messaging leader, owned by Tencent) is widely used
in China. Much more than email for example, which in the contrary is the preferred
method of communication in Europe.
Other, more recent activities have emerged and rapidly became popular. For example,
micro blobbing has rapidly taken a predominant position. Catering to the collectivist
culture of Chinese users, blogging, micro-blogging and social platforms have quickly
acquired tremendous success. It is now one of the most popular activities in China. There
are numerous Facebook-style social platforms like Renren, Kaixin and Q-zone available
and all are boasting millions of members.
But, the biggest player is without doubt Sina Weibo, the twitter-like micro-blog leader
strong of more than 400 million users.
Sina Weibo has undergone rapid growth on China’s web; it attracted more than 250 million
users in its first 3 years and is now much bigger than Twitter. Now considered a pillar of
the Chinese Internet Market, it is an unavoidable tool for firms and medias who wish to
achieve a presence online and build awareness and reputation.
Moreover, we cannot forget about Online shopping whom the general population has
quickly adopted. A number of big online shopping platforms and website have achieved
trust and gained immense popularity. .
Online sales registered strong growth over the last few years. Indeed, Chinese Internet
retailing had a Compound Annual Growth Rate of 108% over the last 5 years (from 2007
to 2012).
It is not surprising to see that China has the world’s biggest number of online shoppers and
will likely become the largest online retail market in terms of value before 2015.

1.2 Online shopping in China
1.2.1 Overview of the market

is the fastest growing activity after Micro-blogging.
As a consequence to the impressive growth of online sales, Chinese Internet retailing total
value more than doubled since 2007. It is now the fourth most popular online activity.
China had around 195 million Chinese online shoppers in 2011, which made it first
country before the US (170 million) in term of online shoppers.
However, the trend is still gaining more and more popularity and the number of online
shoppers is growing rapidly. Indeed, it is expected to increase to more than 230 million in
2013 and as much as 329 million by 2015. Thus representing around 40% of Internet users.
Figure 2 gives a clear idea of the rapid evolution of China’s online shopping.
The robust growth of online shopping in China can be explained by various different
factors.
First and most evidently is was a consequence of the robust growth of the Internet market.
But, it is also a consequence of the swift development of online shopping infrastructure
and services. In addition of course to the genius of online shopping firms, who managed to
quickly promote their business, by fierce competitiveness, rapid expansion and high

Online buying and selling has quickly become massive in China. As a matter of fact, it
Source: Data from the China Internet Networking Information Centre (CNNIC).
Figure 2: Total China online shopping users, from 2007-2011

market adaptation. .
Indeed, local online third party platforms and third party payments have developed
brilliantly to answer the needs of the Chinese Internet population and provide them with a
higher level of convenience, competitive prices, and increased after sale services.
Moreover, the emphasis on trust and security from e-commerce players made Internet
users more inclined to shop online.
Hence, the fast growth of online shopping has created opportunities for both local and
foreign businesses, giving them the possibility of rapidly and cheaply promoting and
selling their good on a vast market and large geographic spread.
The actual level of development and complexity of Chinese online shopping is also
undeniably the result an innovative renowned local player and the influential leadership of
its founder: Jack Ma. It is a fact that the growth of e-commerce in China was characterized
by a slow start until the arrival and remarkable development of the Alibaba Group,
founded by Jack Ma. And that the market has than been continually challenged and
developed and improved thanks to its other websites, tools and platforms dedicated to
online shopping. Jack Ma is now considered in China as the godfather of Chinese
e-commerce. The Alibaba group with its various subsidiary, almost single headedly built
today’s online shopping market structure and environment from the ground up.
Namely, Taobao.com on B2C and C2C markets, Alibaba.com for the B2B and Alipay that
insured flexible and secure payments to its users.
The most developed cities and provinces are those with the biggest number of online
shoppers and shopping value. Indeed, Coastal cities account for almost 50% of total
shopping value. As you can see on the graph bellow, Guangdong, Shanghai, Beijing and
Hangzhou are leading the market.

Online shopping penetration follows the trend of Internet penetration.

Nevertheless online shopping trends are rapidly moving inland and new markets will
appear thanks to improved infrastructure, distribution networks and supporting services.
Furthermore, with growth slowing in most developed areas, the rapid development of
inland and rural region represents the future of online shopping in China. Experts forecast
that 77% of the new middle and higher-class household of the next decade will come from
inland cities. Naturally, online firms and sellers are aware of this trend and have quickly
realised that expanding to those regions will be determinant of further success of their
business.
Forecast for the Chinese online shopping market are more than positive.
The market’s high potential and growth opportunities are gaining attention from the
International community. Not that surprising as the number of shoppers is growing fast and
e-commerce penetration is still low, representing only a third of Internet users.
Online sales will likely triple from 2010 to 2014. This represents a Compound annual
Growth Rate of 52% between those four years. Moreover, the share of Internet users who
shop online rose from 28% to 36 % from 2009 to 2011, and is expected to reach 47% in
2015. Hence, online sales share on total retail sales could reach 8% by 2015.
Here is an analysis of the Chinese online shopping market by type of commercial activity.

Source: Data from iResearch, April 2011. Found on China Internet Watch.
Figure 3: Top 10 Online Shopping cities, Q1 2011
Total numbers of orders (million)

Indeed the market I divided into three distinct online selling business models, each having
its dominant players.
The analysis of those players will to provide key insight on strategies used by those leading
players to achieve such success.
particularities and local flavour.
The Alibaba Group largely dominates this segment. Indeed, in 2010 more than 80% of
transaction value was generated through Taobao’s consumer-to-consumer platform and
Tmall ‘s business to consumer websites. These two shopping platform had 370 million
registered users in 2010.
Taobao’s marketplace is the leader on the C2C market, and Figure 4 gives us an immediate
view of its domination on the C2C market.
This firm’s importance on the Chinese market is undeniable. With more than 80% of
market share, there is in fact more merchandise bought on its website than on the top five
Chinese brick and mortar retailers combined!

1.2.2 China’s C2C and B2C Marketplaces
Working on the same model as Ebay and Amazon’s marketplace, but with their own
Source: Data from iResearch, July 2011. Compiled from China Internet Watch.

Taobao’s success story has been achieved by a deep understanding of Chinese user’s
buying behaviour and usage patterns. In addition to creativity in building innovative
services destined at improving user and buyer experience, communication and trust.
For example, the firm developed instant messaging systems for buyers and sellers to share
product info, communicate and establish trust in transactions. An innovation that is often
cited as a determinant move in establishing dominance over its foreign competitor, eBay.
Alipay, another business owned by the Alibaba Group, has also contributed to Taobao’s
advent. Indeed, Alipay is a highly flexible and market adapted payment platform that
provides escrow and other facilitated payment systems. Those enabled thousands of users
to become online buyers.
As a matter of fact, Alipay quickly become the most common online payment system in
China, Used by more than 60% of consumers when buying on Alibaba’s marketplaces.
Furthermore, the implementation of user-friendly rating and contribution system on their
platforms was an immediate success. Buyers could then easily give their opinion and
review on products quality, durability, authenticity, delivery and more. This was essential
to cater to Internet user and achieve more trust.
Indeed, Taobao’s leaders knew that it is a common behaviour for Chinese people to share
info, ask friends and other consumers before buying. Chinese Internet users are highly
commutative online as demonstrates the success of micro-blogging. Thus Chinese web
shoppers naturally invested themselves into comments and product review. As well as
buyers extensively use these ratings and information before making a purchase.
In fact almost 50% of Chinese online users write at least one product review every
6-month. Compare to only around 20% in western markets.
Remark: Despite Taobao’s status of a consumer-to-consumer platform it is important to
know that in reality an important number of products are sold between businesses and
consumers. Sellers are often small suppliers or distributors selling part of their inventory to
other businesses or individuals. Using the platform to benefit from its fame and thus its

Figure 4: China’s C2C Websites Market Share, Q2 2011

huge number of users. There are indeed an important number of goods sold on Taobao that
are new. Whereas, on eBay most goods are second hand, sold between individuals.
Tmall’s market place is leading the B2C market.
Another creation of the Alibaba group, as shown on Figure 5, Tmall controls almost 50%
of the market. The marketplace generated transactions up to RMB 187 billion in 2012, with
more than 12 million people visiting the website every day.

Source: iResearch, July 2011. Compiled from China Internet Watch.
Figure 5: China B2C Online Platforms Market Share, Q2 2011

Tmall is quite particular and innovative in its structure. Acting as an “online mall” which
features a huge number of local and international merchants. This marketplace enables
small to multinational firms to achieve an online presence and generate online sales.
This innovative business model attracted lots of firms and thus became highly successful.
Some aimed to expand online and generate web sales, or wished only to increase their
consumer reach. Other players used the platform to give more visibility to their products.
And of course the extremely low initial price for its service granted access to expand and
sell to an important number of small to medium companies. Suddenly being able to
achieve an effective online presence and reach an immense number of new consumers, was
highly beneficial and hundred of small firms strived and expanded online..
Considering the increasing importance and unavoidable presence of the Tmall on the
Chinese online environment, even huge multinational and billion dollars companies that
don’t usually sell online expanded on Tmall. Indeed, firms like Addidas, l’Oreal, Gap,
Veromoda and many others are present on Alibaba’s B2C website. There was more than
50 000 merchants and 200 000 brands on Tmall in 2011.

1.2.3 China’s B2C vertical portals
First, it is interesting to note that in contrast to the situation in developed countries, the
proportion of traditional B2C E-commerce accounts to only 23% of total sales.
Nonetheless, following the development of Internet selling, as shown in Figure 6, the B2C
sales are expected to increase fast and take up a more consequent part of the market

B2C vertical portals are similar to Amazon.com and Buy.com. They sell a wide array of
goods from various brands directly to consumers, but they are in charge whole processes
and distribution from top to bottom.
The biggest player on this segment is 360buy.com. And second only to Tmall if we
consider the whole B2C market.
In the last few years those type of website have achieved more and more popularity in
China and saw their share of total online sales increase. Indeed with the country’s
development and its richer population, users are looking for higher quality goods and trust.
And naturally, since those B2C vertical portals are responsible to the whole operations
from top to bottom, they can give better guarantee of products origin, quality, distribution
speed, as well as a promise of an excellent after sales support.
Thus, some users are turning from marketplaces like Taobao and Tmall toward those
traditional and independent B2C vertical portals. As a matter of fact, B2C revenues are
expected to grow 2 times faster than those of C2C in the next 5 years.
360buy.com sells all kind of different goods, but is most famous for its wide array of
electronic products and home appliances. In 2011, 360buy.com generated RMB30.4 billion

Source: iResearch 2012. Found on China Internet Watch.
Figure 6: Structure of China Online Shopping Market, 2009 to expected 2015
(Share of the market per year)

in sales, selling inventory directly to its customers.
The firm achieved success by focusing on constant development and high innovation.
During the last 2 years it has accelerated its delivery speed, widen its area of distribution,
invested in logistic operations all over china and improved its customer service. This B2C
firm has indeed bold expansion objectives. Its leaders intend to build a logistic network
that covers all of china’s huge number of cities (≈95%) in the next two years.
As did Taobao, 360buy.com also quickly provided their consumers with escrow systems,
cash on delivery payments, and other market-adapted services.
Guarantee of quality products and customer satisfaction has, and will always remain the
core of their business and focus of their marketing strategies. For example, they now
guarantee that a purchased product will be taken back, changed or reimburse within 100
minutes of a customer complaint!

1.2.4 China’s B2C brand sites
B2C brand sites are stand-alone websites, selling their products, under their brand
directly to consumers. Most big B2C brand sites are click and mortars, but a few are brick
and mortars.
The biggest player of this segment in China is VANCL.
VANCL is an apparel online retailer and the largest B2C brand site in China. It has
achieved an overwhelming success in a few years only. Indeed, the company has only been
founded in 2008. However by 2010, VANCL was already the 4th largest B2C brand retailer
on the Chinese market and in 2012 the 6th largest on the whole B2C market, as
demonstrated in Figure 7.
Founded and led by a famous and highly successful Internet entrepreneur, considered one
of China’s leading innovators. Chen Nian operated VANCL brilliantly, achieving robust
instant reputation and brand awareness through innovative online presence and smart
communication, to engage customers and generate sales.


Source: Analysis international, iResearch.
Figure 7: Top Chinese B2C Websites by Revenue Share, Jan. 2012
In fact, the company invested heavily on online advertising targeting especially video
websites such as youku.com, tudou.com and others to cater and engage the young and
active segment. VANCL invests around RMB 980.5 million per annum in efficient
advertising!
The brand success is also due to substantial involvement in Sina Weibo’s Micro-blogging,
achieving one of the most active online presences in China. This translates in constant
promotions, events, gifts, but also continual discussions from employees and fans are
taking place on their brand page. This has the effect of achieving a positive and robust
brand reputation and awareness as well as encouraging customer engagement.
Also, as did other players on the Chinese market, VANCL has concentrated on placing
customer satisfaction in the centre of its business strategy. By constantly adapting its
offerings to its customers and staying highly flexible and adaptable to the market needs.
For example, the firm’s offers free delivery and pay on delivery service. But more
surprisingly, they also grant free testing and trial of products upon delivery.
Despite the unavoidable and all-powerful Tmall market place, B2C brand sites are growing
fast and slowly taking a stronger presence on the market.

The typical Chinese online shopper is a young urban citizen with low to medium income.
Indeed, more than 90% of online shoppers are aged between 10 and 39. And 70% come
from urban areas and have a monthly income of RMB 5000 and lower.
It is interesting to note that women accounted only for 20% of shoppers in 2006. However,
this disparity faded out quickly, now responsible for 50% of online purchases. This can be
explained by development of the Internet market that was followed by a shift in online
products offerings. Indeed, fashion, apparels and cosmetics have now taken an important
share of the market.
In term of social categories, 29% of shoppers are students, 18.2% are white-collar staff,
17% are self-employed and 10% young technicians.
Chinese online shoppers spend on average 1.6 hours per week shopping online. However,
the most active segment, young people, are spending more than two hours per week on
average. Furthermore, young shoppers are estimated to spend as much as 12% of their
expenses on online purchases.
So you can understand what represents those young Chinese users for e-commerce firms.
The most popular items in China, both in terms of sales value number of purchases are
3C/home appliances (3C: computers, communications, consumers electronics) and
fashion/apparels (Figure 8). On the other hand, as shown on Table 1, the five highest
categories of items in term of growth are fashion, cosmetics, 3C/Home appliances and
daily goods.

1.2.5 Particularities and trends of the market
Chinese online shoppers preferences and behaviours are specific to the market

3C / Home appliance 23.34 123.35
Fashion 9.64 136.7
Publications / recordings 9897 114.33
Cosmetics 4.07 124.85
Jewellery 2.82 54.22
Daily goods 2.39 122.01
Food 2.18 122.01
Baby products 1.76 102.92
OTC Healthcare 0.62 96.83
Other 4.9 155.18
Total 60.69 120.63

Source: iResearch, January 2012. Compiled by China Internet Watch.
Figure 8: China Online Shopping Market Breakdown, 2011
(by number of products sold)
Table 1: Sector breakdown by value and growth rate, 2010
Value (CNY bn) Growth (%)

The payment methods used in China are quite different than what we can see in Western
countries.
As we said earlier the high flexibility of the Chinese payment platforms have played a
decisive role in the development and democratisation of online shopping in China.
Guaranteeing trust of transaction and offering market adaptable payment systems that
enabled access to millions.
On an early stage, as most Chinese consumers didn’t have a credit card and gave more
trust to cash, online sellers made available escrow systems, payment on delivery, postal
money orders and even payment at convenient stores.
More recently, we have observed a rapid increase in use of credit card in china as well as
the development of a trustworthy image to third party payment systems such as Alipay and
Tenpay. This has been a key factor in the impressive growth of online sales. Indeed today
more than 60 % of payment is made via Third party platform in China. However, cash on
delivery still account for about 10% of orders, hence no company can pretend to succeed
on the market without enabling thecash on delivery option.
The leading third party payment platform is Alipay, from Alibaba group, boasting 50% of
market shares, followed by Tenpay, from Tencent, with 21% of market share.
However, it is crucial to realise that, many consumers are still reticent or directly avoiding
online shopping. Based on insight from the IT manager of a successful foreign
multinational, established in China that I interviewed. A few main reasons for Chinese not
buying online has come up:
The first and most frequent reason is consumers have the need to see the actual product in
order to purchase.
Naturally, this is quite common for apparel products, since the consumers prefer to see
with their own eyes and try it out to be sure that it fits well. But in many case it is also due
to a problem of trust. There are many counterfeits and low quality products circulating in
China and Chinese consumers are much aware of this situation.
Another main reason is that consumers worry about the after sales services. Not
knowing where and to whom to turn to in case of a problem. Complex distribution systems

Source : Access Asia, Online Retailing in China 2011.

with many intermediaries, in case of marketplaces and big selling platforms often result in
poor after sales management.
Others see or assume the online payment system as too complicated, and ownership of a
credit card as required. This reasons is obviously invalid thus awareness and education on
online shopping and payment systems in China is still much needed.
We quickly realize that behind those main reasons for consumers avoiding online
shopping, is a lack of trust.
Online shopping players and sellers are working hard toward building more trust around
their business. Websites become more sophisticated and user friendly, providing a
complete social experience and communication with other consumers and with sellers.
Online shopping players are giving increased guarantee and promise of quality to their
consumers. And their after sales services are more complete and refined, reaching levels
close to those in developed markets. Still, payment systems have to remain highly flexible
and adaptable to consumer needs.
All those efforts will eventually convince users and bring mort buyers to the ranks.
and shopping trends. Online shopping is now widely popular trend, used by millions while
it was almost inexistent 10 years ago. Thanks to innovative platform marketplaces that
enabled a boost in online consumption, in addition to continuous improvement in user
experience, trust and flexibility; online shopping has rapidly seduced many.
However there is still much room for development. If online shopping is strong in big
cities and developed region, it is only remotely popular in smaller cities and rural areas.
Massive expansion investment toward in pair with the growing middle class will promote
further growth and bright future for online sales in China.
Evidently, most foreign companies have quickly identified the immense potential and
many opportunities that offer the E-commerce market. But most are not familiar with it
and are unable to understand its unique structure and the particularities in customer
shopping behaviours.
Thus resulting in many failed attempts to enter and establish a strong presence on the
market.

China has seen tremendous growth and radical changes in its consumption mode

The Chinese market as a whole is often seen as difficult and competitive for foreign
multinationals. The online market though is without doubt extremely hard to penetrate.
Companies that want to be competitive on this market will have to go out of their way to
understand china’s e-commerce uniqueness and benefit from its growth. They will have to
deal with smart and aggressive local players and of course understand and engage with
Chinese consumers in a meaningful way in order to build success and shape an online
presence.
1.3 The unique structure and evolution of the Chinese Internet environment

1.3.1 A youth phenomenon
The Chinese Internet environment is like no other and grows more distinctly Chinese
as it becomes larger and more sophisticated. The Chinese users have shaped the online
structure, environment and operations. Indeed, their radically different culture, way of
thinking in comparison to their homologues in western countries, have created diversity
and new models.
Young users largely dominate the e-commerce market.
First, one thing that is fundamental to understand China’s Internet development and
evolution is that the vast majority of young people among users. Indeed, as we said before,
Internet in China is mainly a youth phenomenon. Indeed, as you can see on the graph
below (Figure 9) almost 60% of Chinese Internet users have between 10 and 29 years old.


Source: data from the CNNIC, 2012.
Figure 9: China Internet usage by age groups, 2010 and 2011
(% of total Internet user)
Yes, even users in their forties are slow and hesitant adopters of Internet. In contrast with
young generations who can be described as Internet fanatics. Indeed, those young
generations of Chinese are seen as very curious, communicative and hungry for
entertainment. Moreover, as a result of a still immature media and entertainment industries
under government control as well as expensive prices, the Internet has filled their demand
for low cost, vast and high quality entertainment.
The young generation quickly embraced Internet and it has impacted almost every major
aspect of their lives. From the way they communicate, their mode of consumption, way of
learning and researching information to their daily lifestyle. Indeed, Internet and its many
activities have become the central component of popular culture and personal development
for young citizens.
Therefore, considering the majority of users being young and the most active segment,
Internet continues to be dominated by entertainment, especially video and online games.
Though the new trends and future potential is for community oriented platforms and


e-commerce.
1.3.2 The power of social networking platforms
Blogging and microblogging has quickly seduced the Chinese Internet users. It
became essential in today’s Chinese online environment and interactions. Indeed, those
activities have higher penetration rate in china than in any developed countries.
According to the CNNIC, social networking reached rates as high as 55% of penetration
among Internet users in 2012. China blogging and microblogging became an ideal mean
for personal expression.
Microblogging is kind of blog that contains brief entries about the daily activities of an
individual or company. It was created to keep friends, colleagues and customers up-to-date.
Besides brief text messages, of 140 word typically, small images can be included as well as
brief audio and video clips.
Microblogging has quickly become the most popular Social network model. Achieving
massive growth among the Chinese population and influencing all segments of the online
environment, from social exchange and information to e-commerce and advertising.
The phenomenon of microblogging, called Weibo in Chinese, started on this market as a
copycat of Twitter. However, it now boasts more users and is growing and expanding at a
more impressive rate than its western model. There is now three times more micro
blogging account in China than in the US. And ten times the amount of traffic referred by
the leading microblog platform in China, Sina Weibo than by twitter in the US.

The growth and popularity of the Weibo websites were unprecedented. Between 2009 and
2011 the number of subscribers to China’s top two weibo service providers had exceeded
200 million. An action that took twitter more than four years.
Today, Sina Weibo has around 400 million members, and Tencent Weibo more than 300
million members. Thus demonstrating the importance of Weibo in the online environment
and the importance of social networks and online communication in China.
Remark: The number of real active accounts is obviously lower than those figures.
The microblogging trend is only in its early stage and growth is expected to intensify in the
close future. Sina weibo has a current monthly increasing rate of register of 25.8 %!
Sina Weibo, is the largest microblogging platform in China. As we said, it was launched in
June 2009 as a twitter clone. It managed to quickly outgrown its model and rival both
through clever marketing and innovative strategies.
One of Sina’s main reasons of success is based on its viral marketing strategy. Sina Weibo
has paid or encouraged celebrities in show business, renowned businessmen,
entrepreneurs, literates and other influential figures to join its social platform and remain

Source CNNIC and Twitter, 2011. Found on China Internet Watch.
Figure 10: Number of Microblogs (E.g. Weibo / Twitter), 2011

active. Those account literally has attracted millions of followers and thus created a
snowball effect on the number of new subscribers.
Weibo’s potential and vast number of opportunities has not gone unnoticed to businesses,
big or small, online or offline, famous or not.
Both the important user base and the trust Chinese consumers place in those microblogging
platforms are extremely enticing to all firms that have ambition.
Indeed, based on a report from the Chinese Academy of Social Sciences, 70% of Weibo
users consider their account as their primary source of news and 60% say it is trustworthy.
This is huge for companies and brands. Thus the important number of firms that are trying
to achieve a presence on microblogs in China and that are using them as marketing and
promotion tools.
More than 8000 companies and 3000 media organizations are currently on Sina Weibo. As
we can see on figure 11, an important number of Chinese biggest firms and some of the
world’s biggest firms have already opened an account on Sina Weibo.
That is, because a clear correlation can be found between a firm’s success on the Chinese
market and a strong online presence via Weibo websites.
Naturally, Weibo’s are incredible tools for firms to achieve an online presence, promote
their products but also to engage potential customers, communicate, observe and obtain a
real understanding of their needs and wants.

Moreover, Chinese users are by nature active content providers. They frequently post
news, exchange photos but also comment on recent purchases. This constitutes free
advertising and can be highly helpful, or extremely dangerous in other of bad publicity.
Companies must be ready to react quickly and in a smart manner when their products and
services are publicly criticized online. Negative reviews and complain on social platforms
is a real threat to firms, as it will spread like fire. And remember that the Chinese Internet
users give great trust to what is said on those microblogging websites.
quickly understood that. Although, International firms, coming from western countries
where mircoblogging and online social spheres are not that much influential, often don’t
realize the huge potential as well as fatal threat of those platforms. Not investing enough in
online presence and failing to really reach and understand the Chinese consumers.

Source: data from Sina, CIC 2012. Found on China Internet Watch.
Figure 11: Online presence of China and world biggest companies, 2011
(% of companies that have opened a Sina Weibo Account)
Thus, a strong brand presence is vital in China, and most Chinese companies have

1.3.3 The advent of mobile Internet
The Chinese market is also particular in its high use of mobile phones to access the
Internet.
In fact, according to the CNNIC, mobile Internet users reached 356 million in December
2011. Which represents a 17.5 % growth compare to the year before. It is expected to grow
as high as 800 million in 2016. Mobile Internet has arrived in china in 2009, when the
government issued 3G licenses to the main telecom providers. Since then the Smartphones
and tablets have achieved popularity rapidly.
The youth phenomenon of China’s Internet is even stronger in the mobile Internet sector.
Indeed, as shown on Figure 12, more than 80% of its users are under 30 years old. An
important number of them use their Smartphone as the only mean of access to the Internet.

Moreover, mobile Internet users in China are more adventurous than their counterparts in
western countries. Indeed, popular activities include listening to music, playing video
games, reading books online or engaging in social networking.
Figure 13 gives us a brief view of the most used mobile Internet activities in China. It is
interesting to note the huge growth in Instant Messaging and Weibo usage, two categories
social communication.

Source: Booz Company, China’s digital champions 2012.
Figure 12: Age Breakdown of China’s Mobile Users in 2012


Source: data from the CNNIC, Jan 2012.
Figure 13: Most popular mobile Internet activities in China, 2011
(Percentage of use among the total mobile Internet users)
In order to expand on the Chinese market, it is crucial for foreign companies to
understand the Chinese Internet environment.
This means a thorough study and analysis to the market, its users and how they experience
it in their daily lives.
To reach consumers and achieve success companies must realise that replicating of their
homegrown business model and strategies won’t work on the Chinese market. As we
explained, consumers in china have a radically different culture, tradition and tastes than in
western markets. Therefore, the Chinese Internet environment is shaped differently and
does not follow the same rules.

2. China’s e-commerce market: largely dominated by local players
themselves in a dead end in the Chinese Internet industry. The real question is why and
how those firms who have been successful and unmatched all over the world keep
stumbling in China, an why aren’t they learning from their homologues past failures.
The examples of Google China, or Ebay are often cited to demonstrate the hardship of
multinationals. Backed by huge investments, advanced technology, premium brand name,
broad knowledge and experience of their business as well as how to establish a dominant
presence on new markets; they failed to understand and answer the needs of the Chinese
online users. Hence resulting in loss of market share to smart and adaptable local players.
Here is a brief listing on the respective industry leaders, both globally and on the Chinese
market (Table 2). It gives an immediate overview of local player dominance situation of
the market.

2.1 Foreign expansion, characterized by an important number of failures
As you are now aware, many foreign Internet giants struggles and often find
Table 2: A market largely dominated by local players.
Sector Leading player in China Global player
Search engine Baidu Google
C2C e-commerce Taobao eBay
B2C e-commerce Tmall, 360buy.com Amazon
Instant Messaging QQ MSN messenger
Video hosting Tudou, Youku YouTube
Imgage hosting Yupoo, Bababian Flickr
Student/young worker SNS Xiaonei Facebook
Working class SNS 51.com, Kaixin Myspace
Business SNS Tianji, Wealink Linkedin
Portal Sina, Sohu Yahoo!


Micro blogging
Sina Weibo, Tencent
Weibo
Twitter
Daily Deal / Group coupon Jiuhuashan, Meituan Groupon
Travel booking C-trip Expedia
Source: Insight from web2china, plus knowledge and observation of the market.
In the case of eBay, the e-commerce giant entered the Chinese C2C market at its infant
stage in 2003, by acquiring Eachnet for US$180 million. At that time Eachnet was China’s
biggest auction site with more than 90% of market share. However, in 2004 a new
competitor arrived on the market: Taobao.com. Founded by the Alibaba Group with a
US$52 million investment, it quickly grew to become a competitive adversary. Indeed, in
only two years Taobao achieved more than 50% of the market and eBay Eachnet’s share
had been reduced to 35%!
The battle continued, Ebay investing US$100 million in an ineffective attempt to
strengthen its presence in China. While Taobao was making incremental changes to its
business model by granting free listings for suppliers, and enabling innovative services to
answer the needs and behaviours of target consumers.
Realizing that the battle had been lost, eBay sold 51% of its China division share to
tom.com and exit the market. Today, Eachnet the early leader on auction sites holds less
than 1% of the market On the other hand, Taobao maintains 90% of the C2C market and
has become an unavoidable player on the Chinese Internet.
Similar cases happen to other colossal Internet firms such as Amazon, Groupon, Myspace,
Facebook, Ctrip and others. By studying and analysing them, we aim to discover and come
up with the key factors that contributed to these failures. And determine what are the most
frequent mistake foreign firms make while trying to expand on the Chinese market.
2.1.1 Replicating homegrown business models to the Chinese market
The major and recurrent mistake foreign firms make is replicating their business
model that worked on other market to the Chinese market. Failure to adapt its operations,
structure and business plan to a market in constant evolution and as particular as the Chine

e-commerce is an automatic fail.
Internet multinationals have achieved tremendous success in many countries with a close
to similar business model. Thus many Internet giants arrived in China with the objective of
replicating their successful and proven structure and operations. Failing to identify the
uniqueness of the Chinese market and particularities of its consumer’s behaviours.
Taking the eBay/Taobao example again: as soon as Eachnet was acquired by the
International C2C platform, it started to implement and reproduce the global model. For
example, they charged sellers for listing and sales, as they did in the US and Europe.
Taobao on the other hand granted free seller listings and achieved revenues on an
innovative business model. Indeed, the local player’s revenue stream came from sellers
who paid to improve their visibility only. Namely, sellers paid for rankings in search
results, and paid for user-defined storefront or for their position.
This granted Taobao a huge increase in its number of sellers and product offerings.
As we can imagine, considering the early development stage of the Chinese Internet
market at this time and the important number of potential sellers with low monetary means;
a paying service was a huge turnoff for many, and all flocked to Taobao’s C2C platform.
Moreover, Taobao rapidly identified the importance of bargain and communication in
Chinese transaction behaviours. And also realised that trust, especially at this early stage of
e-commerce was a major problem for Chinese users. Thus Taobao granted direct
interactions between buyers and sellers, hence reducing risk for both sides.
EBay in contrast did not allow any interaction between them until after the transaction.
The local challenger also provided thorough and user-friendly social tools to promote
customer’s product review and contributions as well as recommendations, and suggestions.
The aim was to create a sense of social community in addition to generate useful and
valuable user content.
Failure from Ebay to identify that Chinese people share a collectivistic culture and rely
heavily on word of mouth, consumer recommendations and review to make decisions was
a decisive mistake. In fact, EBay focused mainly on price and product information as they
were used to do in their other markets.
Another example of Taobao’s capacity of adaptation to its target users is the way they list

their products. Realising that Chinese consumers are keen on following fashion and trends
as well as taking part of a movement or group, the local player decided to list its products
by popularity. Once again, eBay stuck to the model they used globally and listed its
products according to auction ending time. Which was not relevant and even misleading
for the Chinese population.
Foreign Internet multinationals often aim to maintain global standards following the
expression to “stick with a winning formula”. While this way of thinking has some logic in
it and grants easier procedure and operations for firm with on a global scale, it disables
their capacity to identify the Chinese market as very different and fragmented. Furthermore,
this inflexibility makes them inapt to compete against highly adaptable competitors.
Indeed, this has been proven many times, one cannot just replicate the model and
operations used in western or global markets and implement it in China.
dealings with the government. A major mistake that many firms are responsible of, is
failing to answer and abide to the requirements or challenges from the Chinese authority.
In some cases, even making bold attempts to argue against, and challenge government
policies.
Many global Internet players originate from western countries, and share strong belief in
their traditional democratic values. Naturally they firmly believe in liberty, privacy, and
free speech. Often used to more autonomy in their actions and less governmental control in
their other markets, it is hard for them to change their ways and put up with local
regulations and policies.
The most relevant and well-known example here is the clash between Google and the
Chinese government. Google structured by western tradition and culture stands for liberty
in their operations and information freedom. Hence, the censorship and content control of
their search engine from the Chinese authority quickly breathe problems.
Indeed, a few years after its arrival Google engaged in heated but fruitless discussions with

2.1.2 Dealings with the Chinese authorities
Another frequent problems that multinationals encounter in China, is related to

the Chinese officials. They asked for more liberty in their operations and less to no direct
censorship of their content.
The two parties remained inflexible, staying on their individual positions. In consequence
of those sterile but lengthy discussions with the government, lost of large market shares to
its local rival Baidu and regular cyber attacks from hackers, Google withdrew from the
market in 2010. As shown on Figure 14, today Google’s market share in China is only
around 4.5% and Baidu’s is close de 80%. The top two source of traffic for Google in
China are Google translates and Google Maps.

Source: data from CNNIC, Dec 2011.
Figure: 14: China Search Engine Market Share, 2011
(By Search volume)
In this case, Google managers preferred to stick to their business values and principles.
Thus doing business in China on the same way they did everywhere, without adapting to
the local challenges and ways of doing business online. The consequence is the lost of a
huge market full of growth opportunities.
On the other hand, we have to understand Google’s view point in this decision to stick to
its core values and principles. Indeed, Google controlling and censoring its content would
have a negative effect on its reputation in its most profitable markets, namely the western

countries where populations value freedom of speech more than anything.
Google as a search engine turned its back on the biggest and most rapidly developing
online market in the world to secure its reputation worldwide. However Google has
managed to access China successfully via other products and service. For example it
gained popularity on the online music segment. But also Gmail, Google Chrome and
Android systems.
Baidu, the local search engine competitor greatly benefited from Google’s conflict and
withdrawal from the market. However, many specialists believe that Baidu would have
quickly achieved dominance over the market anyway.
As we can expect, Baidu and Google had a different view of how to let people access the
web. Baidu focused heavily on understanding their target consumers. They built and
adapted their business model to the underdeveloped market of this period.
In addition they adjusted their website to the local taste and offered new services that
would seduce local users. For example, at an early stage, they granted access to free online
music to attract new users to their website About government challenges and regulations,
Baidu started worked from the beginning with Chine authorities, to insure peaceful
interactions and respect of Internet regulation. Working hand to hand with Chinese
authorities and complying with Internet censorship and control gave Baidu more flexibility
and room to manoeuvre on the Chinese market. Hence it also gave Baidu support from the
government.
However it is essential to note that Chinese government regulation and censorship is a
major and sometime decisive barrier to the development of many foreign firms. In the case
of social platforms for example, a foreign enterprise social network with influence will be
considered a threat and their website and services blocked on the Chinese market.

2.1.3 Underestimating the competition
Overlooking the competition is also a key factor in foreign firm’s downfall or failure
on the market.
Underestimating of the competition and local players is recurrent mistake from online giant

when expanding into China. In some cases this miscarried judgment is due to lack of
extensive info on the market. In other cases, it is simply overlooking the local players and
failing to identify their capacity to rapidly replicate or create successful competing
businesses.
Of course, many trusted that their long and rich experience in their field of business in
addition to their successful implementation in many different countries, their financial
power and their brand reputation would be more than enough to rapidly sweep away the
local competition, and achieve market dominance. Unfortunately, they failed to identify the
reactivity and resourcefulness of the market.
Indeed, many local competitors, led by visionary leaders and innovative entrepreneurs,
have proved to be extremely rapid in first, replicating and then improving/adapting
business models to the preferences of the market. Thus becoming in a short period fierce
rivals to foreign giant groups.
A good example would be Groupon and the Chinese online group buying market.
Groupon is the world’s biggest online group buying website, and has achieved tremendous
success in many countries. However this global market leader stumbled and was enable to
gain market shares in China.
There is indeed much reason and complex factors that provoked Groupon’s failure in
China and we will discuss it in more details in Part 3. However, one of the most important
reasons is that the firm failed to identify and consider the competition for what it was.
The group buying giant arrived on the market in 2011, and at that time the market was
already extremely competitive and fragmented. In fact there were more than a thousand
similar group coupon websites in China. Competition was fierce and barriers of entry
almost inexistent. Groupon was positive that they would rapidly gain market share and
become the dominant on the group buying online market. But despite heavy investment
and an aggressive expansion in many Chinese cities, Groupon China only achieved 2.5%
of market share. Lagging behind and enable to compete against many local group purchase
websites.
Local players offered more products and services, more suited to the Chinese consumer
taste and lower prices than Groupon. The aggressive and costly expansion of Groupon in

many China cities was the consequence of overconfidence, relying on the idea that they
would rapidly beat the less experienced and financially weaker competitors.
The outcome was catastrophic, the group purchase firm had to withdraw within month of
its initial expansion, closing many office and drastically reducing its number of employees.
business in China is a dangerous thing to do. Some firm try to enter the market and achieve
success while using a base platform abroad, other insists on using their global technology
platform to manage their Chinese subsidiary. Both have been shown to be unfit for the
Chinese Internet market.
This latter is what eBay did in China. They decided to move all of EachNet users and
operations to the eBay global technology platform, thus terminating the local platform.
This decision was made in accordance with their intent to replicate the same model that
work globally, to the Chinese market, and automating their operations and systems.
However, this decision had the effect of eBay digging its own grave.
First, the massive migration of massive amounts of user data and product information,
from the china platform to the global platform was a long and laborious process. Indeed,
this made the system lag and website navigation to slow significantly. Thus resulting in
really annoying users who went to the competition. In fact, it is reported that eBay’s traffic
rate had already fell by half at the last day of the migration.
Secondly, after the migration process was over, they realised that browsing speed and
website reactivity was significantly slowed. This was the consequence of the huge amount
of data having to travel across borders and especially through China’s censorship firewall.

2.1.4 Relying on a global technology platform
Relying on a global or foreign technology platform while trying to make online
2.1.5 Poor partnerships and management choices
Another frequent problem that foreign firms encounter on the Chinese market is poor

partnerships.
Due to government policies and regulations many foreign investors choose to enter the
market by approaching a local company and establishing a joint venture. The problem is
that in many cases, both members of the JV have very different objectives in mind. Hence
eventually leading to disputes and problems.
Indeed, the foreign companies main incentive in setting up a JV is often to obtain an
Internet Content Provider (ICP) license, which is hard to get by foreigners but essential to
do business on the Internet in China. An of course they are also interested in learning from
their partner how to run a business in China.
On the other hand, local partners are most interested in obtaining transferable skills and
learn the technology from their foreign partner.
Unfortunately, as soon as they achieve their respective goals, they loose interest for the JV,
thus weakening the relationship and trust between both partners.
Gaopeng, the JV between Groupon and Tencent (one of the biggest Internet group in China)
is the perfect example of poor partnership. At least if we look at it on Groupon’s angle.
Indeed, first Tencent, the Chinese counterpart had its own group buying website among its
many online product and services. Thus the local partner didn’t have much incentive to
wish for Groupon and Gaopeng to succeed. However, Tencent surely learned a lot about
the group buying business and technology from their JV, and this benefited greatly to their
own group coupon service.
In the other hand, acquisitions have not fared much better in china. Indeed, an other
popular way to enter the market is to acquire a successful local player. However here again
many Internet acquisition didn’t have the expected result.
Amazon bought Joyo in 2004 but quickly lost market share against Dangdang and Tmall.
Ebay acquired Eachnet to establish its presence on the Chinese market but struggled and
failed against taobao. Expedia, the online travel giant has bought eLong in 2004 but
couldn’t shake Ctrip’s dominant position on the market.
Moreover the failure of acquisition is often link either with the loss of the creative talent or
mistakes in management structure.
Indeed a major factor in the failure of those three acquisitions is the loss of the creative

talent. Joyo’s influential founder, Chen Nian left the company after Amazon’s take over.
He then carried creating the amazingly successful apparel retailing website VANCL. And,
most of the senior management from Joyo followed him in his new business, hence
squadering the leadership of the firm. Bo Shao, the founder of EachNet quit the company
to work in venture capital following eBay’s acquisition, and eLong’s founder Zhang
Ligang left to found the healthcare website iKang.
The loss of these talents was catastrophic to the companies’ leadership and management.
However, their departure can be explained by the foreign buying firm decisions and
actions.
Indeed, many foreign multinationals are hesitant to fully empower their local teams and
often decide to put foreign management at the top of the hierarchy.
This results in many problem and obstacle to development: Communication problems
between foreign managers, Chinese managers and employees. Both because of the
language barrier but also because of strong cultural differences.
Inability to adapt to the market. Since, decisions makers don’t have extensive knowledge
and have difficulties understanding a market fundamentally different than their own.
Moreover, it makes those foreign firms unattractive for local talents, which is why many
acquisitions have resulted in departure of top managers.
Other firms use local teams but only give them limited autonomy in decision-making.
Indeed, local managers have to report to global headquarters for important decisions. This
dwarfs the firm’s dynamisms and reactivity and makes tem unfit to fight against the local
competition. And they are of course unpopular to local senior managers who prefer to
leave.
In consequence, this results of Chinese talents flocking toward local players. Seduced by
the leadership of charismatic entrepreneurs in addition to the opportunities of gaining
important management positions.
Insistence on short-term profits rather than market share and expansion is also seen as an
obstacle to success for foreign Internet giants. It makes them less dynamic in comparison
to the local competition, willing to cut margins and achieves heavy short-term deficits in
order to achieve strong market shares. Moreover, their focus on adhering to their global

brand concept and implementing unity, will make them less flexible and adaptable to the
rapidly changing Chinese market. Thus resulting in low tailoring of content and
appearance to local needs and tastes.
success and dominance of local competitors. We have already partly discussed their
strengths and capacity to resist and overcome competition from foreign firm. While
describing key reasons and mistake for international firms recurrent difficulties, in the last
part. However, we aim at identifying a few common particularities that are seen as
determinant of the outstanding successes of local players.
The success of local players in the fight against bigger, more experienced, financially
stronger an be listed as a consequence of:
In addition, of course, to a number of factors individual to each business and firm.

2.2 Highly competitive and successful local players
The Chinese e-commerce market is particular from others from the overwhelming
- Smart decisions
- Aggressive expansion and competition
- Rapid decision-making
- Knowledge of the market
- High flexibility and adaptation capabilities

2.2.1 Influential leaders
First and arguably most importantly, a new breed of influential and highly efficient
leadership are characteristic of the e-commerce development in China. Indeed, china’s
most successful Internet firms have been created by a new kind of brilliant entrepreneurs.
Charismatic and visionary leaders, they are excellent judges of the market, fierce
competitors and not afraid to take risks. Moreover, those great entrepreneurs are also
famous for staying modest even after achieving tremendous success and leading huge
billion dollar companies. Thus, staying close to their customers and fans and becoming

influential figures for the young and digitally connected generations.
Acclaimed as among the world’s most innovative businessman, they are serving as a
source of inspiration to the rising entrepreneurial talents.
The most famous are of course Jack Ma the father of china’s online shopping and founder
of the Alibaba group, Taobao Tmall, Alipay and others. Ma Huateng the founder of
Tencent, china’s leading Instant Messaging service. Li Yanhong, creator of the search
engine giant Baidu, and Chen Nian founder of Joyo and VANCL.
The Alibaba group, Tencent and Baidu, known as the three pillars of Chinese e-commerce
all are led by this new kind of visionary and influential leaders.

2.2.2 Willingness to take risks
The impressive performance of those leading Chinese giants is also often credited to
their willingness to take risk and aggressive drive for expansion. Since the start-up stage,
those firms were very ambitious and pursued bold strategies to induce growth. Such as
rapid expansion, huge technological investments, aggressive marketing campaigns, and
risky decisions.
For example, 360buy’s management was so confident in its success and made huge
investments at an early stage to have the best IT systems as well as a large-scale logistics
and infrastructure. The firm then followed by a bold aggressive expansion of its services in
many China cities.
Taobao and Tmall were also based on smart but risky investments from Jack Ma. During
the ”battle” against eBay for the Chinese market, Jack Ma took big chances in early stages.
Reducing drastically the firm’s revenues, and giving free subscription for sellers for
example. However this was well calculated since it enabled the firms to attract more users
to his website and gain an edge over his competitor.
People even called him “crazy Ma” at some point, not believing in the sustainability of his
business model.
In contrast, many Foreign Internet giants are more cautious when they arrive on the
Chinese market. They tend to act slowly and take deliberate, safe decisions. Having a

central power and low autonomy in country divisions evidently that slows the decision
making progress as well as encourages cautious decisions. Which in turn gives a
competitive disadvantage against highly dynamic, bold and independent players.
also remarkable in their product and services diversification.
Taking Tencent for example. One of the three biggest web company in China, achieving
profits of more than RMB8 billion in 2010. It started as an Instant Messaging application
in 1998, the all-famous QQ Messenger, its core business. Though, the firm quickly
diversified its offerings. Indeed, Tencent has now expanded in 6 business divisions adding
a myriad of new products and services. They opened a C2C e-commerce, PaiPai, the only
potential competitor e-commerce giant Taobao with 9% of market share. The company
also added a wireless Internet service to its QQ Messenger, opened a third party payment
platform, Tenpay which is now 2nd only to Alipay. Made heavy investment to expand in
the online gaming industry, developed an online media division witch hosts their own
search engine and interactive television. They successfully created a micro blogging
platform, Tencent Weibo, which became a real threat to the market leader Sina Weibo. As
well as two networking sites Qzone and Pengyou, a P2P media sharing and a web portal.
More recently Tencent also developed its own web browser Tencent traveller.
As you can see, Tencent is now a giant Internet group reaching all sectors of e-commerce.
This kind of development and wide diversification of business and services is not
particular only to Tencent. In fact, the two other two giant Chinese Internet Group, Alibaba
and Baidu followed quite similar development.
This policy of, broad diversification while maintaining customer stickiness through a
unifying brand is working miracles in China.

2.2.3 Rapid diversification of offerings
In addition to the aggressive geographical expansion in early stage, local players are
2.2.4 Great flexibility and adaptation capabilities

behaviours of Chinese consumers and adapting their offerings to the market is undeniably
a key factor in their successes.
Despite the fact that a number of local players started as a replicate of a successful
international Internet Giant, the Chinese players have rapidly been able to transform and
improve it to meet the needs and taste of local customers. Changing the design of their
website, adding new services, shifting their offerings to better satisfy the locals.
Indeed, Chinese Internet Giant and their influential leaders were always adept at
identifying the customer’s needs, quickly altering the business model and improving user
experience and customer satisfaction.
For example, Renren and Weibos started as replicates of Facebook and twitter but quickly
adapted to cater to local Chinese users. Those social networking websites are now
drastically different than their original models. They have deep characteristics of the
market, a Chinese look and feel as well as new operating structures in addition to
innovative revenues models.
Chinese Internet giants have proven to be highly adaptable and innovative as well as very
attentive to the market, key qualities to achieve success.
To conclude, local Internet giants key factors of success are that they are attentive to the
market, highly innovative and adaptable, led by charismatic leaders, and aggressive in their
expansion and diversification.

The great flexibility of local firms in their capacity of understanding the need and
2.3 Case study: Groupon China and Lashou

2.3.1 The Chinese daily deal market
Here is an analysis and comparison of two important players of the online group
coupon market in China, namely Groupon China and its Chinese counterpart Lashou, but
more importantly what made the success of one and the failure of the other.

Group buying websites or, daily deal websites provide their users with daily discounts on a
wide range of products and services. Those discount are made for all kind of product and
services. Namely, restaurants, massage parlours, clothing stores, cinemas, groceries store,
fitness centres and many others.
Based on a Business to Business to Consumer model, the retailer first provides deals and
promotions to the group buying website, that will, in turn make those available to its users
on the website. The customer will pay for the deal or coupon online, and will be able to use
it at the according at the appropriate retailer. Revenues will be divided between the group
buying website and the retailer offering discounts.
New deals are introduced every day, and become available for use, only when a minimum
number of buyers, set by the retailer, is reached.
If enough people are committed to buy the deal, their credit cards are charged and the deal
is available to all consumers. If not, the deal is cancelled.
The current world’s dominant player in this industry is Groupon. Launched in November
2008 it boasts 80% of market shares and promotes deals in more than 100 countries
worldwide. The daily deal giant has more than 37 million members worldwide and offers
one deal per day in each of its market, focusing on niche business that have not discounted
in the past. Its dominant position and resulting power grants them a 50% gross margin on
average deals.
However, despite being the world’s biggest group coupon website, and achieving rapid
success in more than 100 countries, Groupon stumbled with difficulties on this highly
competitive Chinese market.
In China, the online group coupon market emerged quite late, with the first daily deal
website opening in March 2010. However, this late arrival was followed by tremendous
growth and the emergence of thousands of local players. The impressive growth of China’s
group coupon market was to be expected as the model fits perfectly the shopping
behaviours and bargaining culture of Chinese consumers.
The market is characterized by high rivalry among competitors. There is more than 3500
nationally or locally operating group coupons websites in China, and there were more than
5000 in late 2011. Thus making China the most competitive daily deal market on the planet,

a consequence of near inexistent entry barriers.
The high level of competition, and war prices among competitors in China reduces the
gross margin on any given deal deals to about 15%, while sometimes reaching less than
10%. Far lower if we compare to Groupon’s world average of 50%. In 2012, the revenue
of daily deals websites in China accounted for RMB34 billion.
Today, the market is heading toward more concentration with the top ten players taking
more than 90% of the market. Although the market leaders are constantly changing, figure
15 will provide a clear overview of the main players.
Jiuhuashan is the actual market leader and has reached this place only recently by
providing the market with an abundance of product deals.
The average number of buyers per deal is 498, while the average sales income per deal is
about 22 000 RMB. On the chart below (Figure 16) you can see that the best selling deals
in 2012 are for dinning, shopping and leisure.

Source: Dataotan – www.dataotan.com - July 2012. Compiled by Dataotan.
Figure: 15 Daily deal website market share in mid 2012.


Source: Dataotuan, Chinese Daily Deal Market in Q2, 2012.
Figure 16: Sector breakdown for the Chinese Daily Deal Market, 2012
(Share of total sales by category of offerings)

2.3.2 Presentation of the two players
GROUPON China: Gao Peng 高朋
Gaopeng.com is the Chinese Joint‐Venture of Groupon and Tencent. It was launch in
February 2011. Since the beginning, their goal was to implement a Groupon based model
on the Chinese market, expand fast and acquire a market of 400 million of Internet users.
Since it’s implementation Gaopeng has had an aggressive expansion strategy, expanding
rapidly all over China through acquisitions. Their objectives were to offer deals in 50 cities
or more. However, in consequence to the fierce competition of the market, since Gaopeng
couldn’t achieve commissions close to it’s parent company, Groupon. They decided to
focus on targeting higher commission deals, namely high end products and services.
Today, Gaopeng is not even in the top twenty group buying companies.
LASHOU (拉手网)

Lashou was founded in Mars 2010 it has rapidly grown to become one of the biggest
group-buying firms in China. It was the dominant player on the market in 2011 and main
competitor of Groupon China during its expansion on the Chinese market. Which makes it
the most interesting player to study here.
The local player is now fourth in terms of number of deals per months and in network
coverage. Lashou.com offers 1000 deals daily, in around 350 Chinese cities, employing
more than 3 000 people. They have more than 46 000 suppliers of daily deals.
Lashou and Gaopeng underwent very different approach toward gaining market shares and
establishing a dominant position on the market.
First, it is essential to note that Lashou, on the contrary of Gaopeng focused on having lots
of deals designed for their customers even if it means lower margins. While Gaopeng
mostly sold a few higher value added deals with higher potential margins.
Both made huge investments in marketing at the beginning to acquire their first customers
and trusted on word-of‐mouth to do the rest.
However, as you know Groupon’s establishment in China via the JV Gaopeng was
disastrous. After huge drawbacks, mass lay offs and huge deficits, the firm is now willing
to exit the market to avoid further losses
difficulties in China. Here are the four main reasons we identified.
The first and most important is the failure to understand the industry structure and
competition, before designing their strategy.
Upon arriving on the Chinese market, Groupon was convinced that their experience,
knowledge of the group buying business in addition to their brand recognition and
financial power would enable them a quick expansion.
Groupon followed the strategy that worked well for them in other international markets.
The firm focused on expanding fast via huge investments in marketing and geographic

2.3.3 Why did Groupon fail on the Chinese e-commerce market?
There are various reasons and decisions that can be held as responsible for Groupon’s

expansion. Indeed, at its peak, the Chinese JV of Groupon, Gaopeng operated in more than
70 cities and employed more than 3 000 employees!
However, too absorbed in rapid expansion they failed to strengthen their presence on key
cities and markets. They should have realized that the group coupon industry in China was
extremely competitive and fragmented. Thousands of small competitors were fighting to
gain new consumers and market shares.
A real price war was waging and most local competitors were lowering as much as
possible margins and deal commissions. While maintaining quality and widening their
offerings.
On the contrary, Groupon China was not willing reduce its margins as its local competitors.
Believing in promoting higher commissions deals (high end product and services) at the
expenses of consumer’s preferences.
Moreover in every region or city, there were daily deal sites leaders, who knew well the
consumers of their respective regions as well as had strong ties with deal issuers (stores,
retailers, cinemas…).
In this situation, expansion without deep concerns on establishing strong and lasting
presence on key markets was a winning strategy. In fact, after several rounds of
downsizing Gaopeng now offers services in only 20 cities and has only a few employees.
online market conditions and its user behaviours.
As did others, Groupon approached the market in ways similar to its other markets. One
relevant example of judgemental error on the market would be Groupon’s marketing
strategy and customer relationship management operations.
They believed that an e-mail marketing strategy would be the best method. However, in
China, e-mail is not that popular in comparison to instant messaging (QQ) or
miccroblogging (Sina Weibo).
Furthermore, Groupon also made the mistake in believing that they would achieve quick
consumer loyalty. Confident by their worldwide reputation for quality, trust and best deals
available. But its managers failed to understand that the Chinese market is particular in its
low brand loyalty. Chinese consumers are in general more sensitive to price than brand,

The second reason is a failure to realize the differences and particularities of the

Efficient strategies to achieve success on the Chinese E-commerce market

Efficient strategies to achieve success on the Chinese E-commerce market

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