Shanghai. CHINA – While social networks have been very hot until early this year, in the past few months we saw interest growing about e-commerce from many clients. As we were deepening our research, we were in for quite a surprise.
Status of e-commerce
The first thing we noted is that it is quite difficult to compare the status of e-commerce development in different countries due to market size, Internet population, GDP and purchasing power. How can one compare properly between such diverse markets as the United States, China, Japan and South Korea?
After working on various models, we identified the share of e-commerce as part of the total retail market as a usable metric to highlight the development of e-commerce. This confirmed our intuition that South Korea is the most advanced, with 6.5 percent of all retail being e-commerce. The United States and Japan are somewhere around 4 percent, while China is still at a very early stage with 0.63 percent, but poised for explosive growth.
If Japan is not that advanced in e-commerce, it is the world leader in mobile commerce; the leading B2C player Rakuten gets 20 percent of its revenue from mobile commerce. The whole market represented over $6 billion in 2007, far ahead of any other market and even close to the entire Chinese EC market at $8 billion.
Why and how to grow a successful EC market
This was a question discussed at a recent seminar between China’s Ministry of Commerce and the European Union where we contributed as invited experts. A successful e-commerce market actually develops the retail market and helps companies sell more, but more than anything is able to create jobs. Well over a million users make a living from eBay globally and there is huge potential in job creation with Taobao and other services in China.
One might then wonder how to enable e-commerce and accelerate its development. There are many reasons for e-commerce development that can be attributed to culture, purchasing habits, regulations, logistics reliability, credit card usage and GDP development, but once we completed the following graphic, we became quite convinced that the main enabler for e-commerce or mobile commerce was IT infrastructure.
Korea leads in Internet speed and in e-commerce, while Japan leads in 3G and mobile commerce, which seems in line with their IT infrastructure development. The key element aside from the presence of a sophisticated IT infrastructure seems to be the length during which said infrastructure has been around. For instance, Japan developed its fixed broadband more recently than Korea and has less experience with it, but Japan is expected to grow rapidly.
Just as governments have a responsibility in developing roads, bring electricity and water, we tend to think that building a strong IT infrastructure is the best enabler to develop the knowledge economy and retail market, and that governments should – directly by financing or indirectly by stirring up competition – support rapid IT development to enable economies to go digital.
As a conclusion, here are some key trends in e-commerce we identified:
(1) B2C (e.g. Amazon) and C2C (e.g. eBay) models are converging. B2C is generally a guarantee of quality but not of price, while C2C offers good price, but quality and payment is generally more risky. This year, eBay’s “fixed price auctions” are going to represent half of its revenues.
(2) Mobile commerce is going to happen. In fact, it is already happening in Japan because of their advanced infrastructure. Other countries will have the same happening when they will catch up, within the next few years.
(3) Social networks will blend with e-commerce. Remember the time when there was no Internet? There was also a time when there was no advertising. At that time, people mostly asked their friends about what to buy and what was good. As people become more and more disenchanted by advertising, this time is coming back and we saw the first signs of convergence in some services like Alimama and Japan’s NicoNico Video.
(4) Online and offline will connect. While an increasing number of offline stores are going online, already some online stores in South Korea are opening offline shops. Some Korean and Japanese auction and e-commerce sites are using existing retail networks such as convenience stores or subway stations as delivery and pick-up points.
(5) Meta-shopping will develop. This is a new concept in Korea. If you remember Korea is the world’s most advanced e-commerce market, this is worth looking into. It follows the development of numerous online shopping malls (several thousands in Korea), and provides a sophisticated-yet-easy-to-use combination of price comparison and user reviews. It has been created by Korea’s largest Internet portal Naver, who call this service “Knowledge Search”.
Just as China sells today more music online (PC and mobile) than offline, we think the combination of strong SNS usage and online shopping developments are able to help the country leapfrog from an offline to an online economy. Moreover, for retail success in China, China has the advantage of having very few barriers compared to other countries which have a strong offline retail legacy. So here is our advice to retailers in or coming to China: think digital!