|Asia-Pacific III 2001
|Bringing the Benefits of E-commerce to China
|Dr. Kenneth J DeWoskin
Kenneth J. DeWoskin of PriceWaterhouseCoopers describes how e-commerce will be one of several forces that accelerate the integration, harmonisation and globalisation of China’s marketplaces. New enabling technologies complement the diplomatic and regulatory changes brought by China’s expected accession to WTO. If infrastructural problems can be overcome, in areas of general commerce, government practice, transaction support, and security, China will become a major marketplace for e-commerce activity, to the benefit of China’s consumers, foreign investors and the whole economy.
New Economy companies and traditional companies have shown intense interest in the development of e-commerce in China. International investors and foreign governments have applauded the strong support China’s government has shown for Internet and e-commerce growth, looking for a major leap over the numerous legacy difficulties in China’s business environment. China’s Internet user base has grown dramatically over the last three years. There has been an on-going discussion about exactly how many Internet users there are in China and a discussion of how active-and consuming-they are. But most recently four issues have become clear. First, the growth rate is slowing, not only in new users but also in average time on line of the existing user base and their spending power. Secondly, even China’s largest portals are struggling to generate revenue and face the need to diversify their revenue-generating activity. Thirdly, actual e-commerce development lags behind Internet growth, and although China’s official Internet data source, CNNIC, has claimed continuous high growth rates in the number of e-commerce sites, the definition of exactly what kind of activity qualifies remains uncertain. Few if any major B2B or B2C sites, fixed price, auction, or reverse auction, have emerged as a serious pure e-commerce market place. Fourthly, most observers are extremely optimistic about e-commerce growth in China and its potential contribution to China’s ambitious reform agenda. That these seem somewhat contradictory assertions underscores the complexity of under-standing and predicting e-commerce developments in an economy as unique, robust, and immense as China’s. Behind the Growth Numbers There are several competing estimates of China’s Internet population. CNNIC statistics published in January 2001 for the end of 2000 put the number at 22.5 million. But Hong Kong’s Interactive Audience Measurement Asia (IAMAsia) pegged it at 15.2 million, while International Data Corp. (IDC) said it was 16.9 million. IAMAsia used a relatively generous measure, counting anyone who had logged on at least once in the last four weeks, even unregistered users in an Internet café. CNNIC has consistently posted the highest numbers. An update by CNNIC in July 2001 indicated a slowing of growth, stating China added just 4 million new users in the first half of this year, bringing the total at the end of June to 26.5 million Internet users. According to additional data published by CNNIC, the number of users who earn less than 500rmb per month jumped from 8.3% at the end of 2000 to 20% in the middle of 2001. Although the trend to a rapidly diminishing revenue per user (RPU) and lower expendable income is evident in other infocom sectors in China, like mobile telephony, this jump from 8.3% to 20% yields the improbable conclusion that 86% of all users added in 2001 earn less than 500rmb per month. Equally puzzling is the claim that the number of users under 18 years of age jumped from 1.7% at the end of 2000 to 15.1% by mid-2001, an increase of over 3.6 million users. This yields the improbable conclusion that over 90% of the Internet users added in 2001 are under 18 years of age. The implications of these figures, or even more moderate numbers, is rather dire for the growth of e-commerce in China, especially B2C. The latest CNNIC data release would mean that 9 out of 10 of the internet users China added this year are under 18 years old and have incomes of about US$60 per month. According to the same CNNIC report, over one-fourth of China’s Internet users cannot bear a fee of more than 100rmb per month for access, and over 60% could not bear a fee of 200 rmb. Analysis of this kind of data leads to the conclusion that B2B, not B2C, will be the engine of growth. This conclusion is supported as well by surveys of current user interests and by the general immaturity of China’s direct marketing sector. Over 95% use e-mail and slightly over 12.5% shop or trade on-line. Specific numbers on China’s e-commerce growth have been difficult to compile, and that difficulty itself is an indication of key infrastructure weaknesses, including the inadequacy and fragmentation of basic transaction support systems. The first attempt to gauge the e-commerce market place was made in February 2001 by CCID, a research and consulting entity of China’s Ministry of Information Industries (MII). CCID reported 677 B2C sites in China at the end of 2000, transacting US$47.17 million. On the B2B side, they reported 370 sites, transacting US$9.29 billion. These numbers are also contested by other experts. IDC puts China’s total B2B activity level in 2000 at US$1.6 billion, about one-sixth of CNNIC’s number. Disagreement over the current levels of e-commerce activity notwithstanding, and in spite of the peculiarities of the Internet user demographics, most observers expect China’s e-commerce growth to be dramatic in the years ahead, with B2B the driving component. IDC estimates e-commerce activity to grow over 100% a year and hit over US$150 billion by 2005, driven mostly by B2B supply chain growth. “Given the historic strength of China’s regional supply chain barriers, the lack of congruence between sites and users represents both a challenge and an opportunity for e-commerce developers.” Domain names registered under ‘CN’ were reported by CNNIC at 122,099 for the end of 2000. Overwhelmingly, these were registered in Beijing. The concentration of web sites is more intense than the concentration of users in China, although there is a clear correlation between the twp. Given the historic strength of China’s regional supply chain barriers, this lack of congruence between sites and users represents both a challenge and an opportunity for e-commerce developers. Growing Pains The development of e-commerce has strong government backing in China, and this has been exemplified by its inclusion in the current five-year plan as a priority. But actualising the priority is more a matter of markets than planning. As China’s potential e-commerce players’ struggle for growth and revenue, there is no shortage of growing pains. All three of China’s internationally listed portals have had disrupted years. Leading portal Sina.com just parted company with its renowned founder Wang Zhidong, as it searched for a new direction amidst poor earnings and a depressed stock price. Another leading portal, Netease, has been in and out of acquisition talks, and the third, Sohu.com, has had a series of recent announcements pointing to new business directions. Among the things that are relatively new to Chinese enterprises is the exposure to international investors, and the notion that investors are not happy with massive reserves of operating capital, not even happy with top line growth; they want to see earnings. The physical infrastructure in China is expanding at a breathtaking rate. Massive additions have been made in the last 18 months to available bandwidth, and a recent focus on the last mile is encouraging solutions to monopoly problems with China Telecom’s data infrastructure. CNICC reports that total leased international connections at the end of 2000 totalled 2799MHz. Much of the challenge to China’s e-commerce development lies with general weakness of the commercial infrastructure itself. Taken as a whole, these impediments are formidable. They help explain the relative lag of on-line transactions compared to the rapid growth of the Internet user base. China’s commercial law has developed quickly in the last 20 years of economic reform, but the enforcement mechanisms are uneven and uncertain. Courts are far from free of local and regional political pressure, and this greatly weakens the binding power of contracts, even those signed face to face after years of negotiating, not to mention contracts completed online after a few minutes of interaction. The development of efficient payment and settlement methods has been hobbled by lack of both commercial and consumer credit rating systems, very poor credit histories of large enterprises, and lack of a central clearing facility for the fragmented credit and debit card communities. There are deeply rooted problems of consumer confidence in remote transactions. Security, authentication, and certification systems are still under development. Delivery logistics are relatively undeveloped in all but a few key locations. The relatively high cost of relatively slow throughput on China’s Internet creates an obstacle to stepping up beyond text-based e-mail and messaging. Finally, uncertainty about regulations and government intervention increases the perceived level of risk for investors and entrepreneurs alike. Central, provincial and local governments are all tasked to monitor information and communication activities, and they exercise authority with broad licence, which can obstruct free-market business for what are really competitive reasons, not reasons of governance per se. Looking Ahead Chinamet.com, a leading e-commerce site sponsored by China’s Ministry of Foreign Trade and Economic Co-operation (MOFTEC) and specialising in machinery and electronics, announced its first actual online transaction occurred on August 30, 2000. It was a sale of computers and peripherals worth about US$35,000. On the other hand, CCID reported that a single home appliance maker, Hai’er, completed online transactions of US$200 million in 2000. The most promising drivers of growth are the e-commerce activities of established and emerging companies in China that have primary, non-Internet businesses. The chemical sector has emerged as a major e-commerce driver, as have the software and hardware industries. Baoshan Iron and Steel, a leader in technology and product quality, is also leading the way toward an industry vertical for the sector. The airlines have been among China’s biggest investors in IT development, and they are likewise leaders in B2C activity. Forward-looking banks like China Merchants Bank have a significant number of their customers, by their estimate over 25%, already using online services. Conclusion It now appears likely that China will have completed the requirements for WTO membership before the end of 2001. That important membership will add fuel to the technology forces driving China to more integrated and rational marketplaces. The convergence of these and other forces, even the Beijing Olympics in 2008, promises to shatter traditional barriers to integrated and rational market-places. These barriers include an historic regionalism that has fragmented domestic markets and trade barriers for goods and services that have delayed the rationalisation of both domestic and international trade. The market forces that will drive changes are already in evidence. In advance of China’s accession to WTO, and in advance of a more permissive regulatory regime by China’s government, there is already significant growth in border-crossing services, including information services, financial services, and entertainment (music, video, gambling). Collateral benefits lie in the demands and improvement e-commerce will make of the basic commercial infrastructure. These include the improvement of commercial law and its enforcement, the continued expansion of a reliable credit rating system, proliferation of credit and debit cards, and development of alternative transaction settlement mechanisms and other non-cash means of supporting trade. China’s bricks and mortar companies, international investors and Chinese consumers will all be beneficiaries of the development of e-commerce. Over the long run, inefficiencies in information, goods and services provision benefit no one. If China’s leaders are truly committed to the internationalisation of China’s economic activity and relations, e-commerce growth will enable China’s integration into global markets more quickly than legacy behaviours and protective regulations would otherwise permit.