Co-authored with Chen Lin
China’s online retail sales grew 49.7% to RMB 2.79 trillion last year, prompting Ma Jiantang, head of the National Bureau of Statistics, to comment: “This is where our hope lies.” It was by far the most high-profile signal that China’s leaders, perhaps helped along by the successful IPO of Alibaba and many other Internet companies, recognize the potential of China’s 780 million online users. It is a sign that they embrace the benefits of the Internet which is expected to create 46 million new jobs in China by 2025, according to a July 2014 report by New York-based McKinsey & Co.
Ma’s comments are in line with Premier Li Keqiang’s introduction, at the 12th National People’s Congress in 2013, of a new Internet+ (Internet Plus) policy for the country. The goal: to “integrate mobile Internet, cloud computing, big data and the Internet of Things with modern manufacturing to encourage the healthy development of e-commerce”.
But can Internet+ fuel China’s economy and make up for slowing industrial production?
Retail real estate is dying, stores are closing, and the losers will be as many as 31 million traditional jobs, according to the McKinsey report. For example, sports clothes maker Li Ning Co. is expected to post losses for the third consecutive year and has closed more than 2,000 retail outlets since 2012.
Ma Jiantang noted last year that while traditional industries are facing many challenges, there are many “new products, industries, business models and formats arising from the mobile Internet.” But will the favorable wind of mobile Internet lead China to another decade of soaring GDP growth?
Clashes to intensify between old and new economies: While the ‘creative destruction’ that accompanies this transformation from old to new is a global phenomenon, its speed and scale in China is unparalleled. The country’s booming Internet retail market is not built on strong and sustainable core business competency, but rather on feeding off the struggling real economy, which suffers from high taxes, labor cost, and rent, combined with a lack of experience in the digital space.
The US has strong traditional retail networks, which rapidly establish their online channels as they evolve. But Chinese consumers have long faced a fragmented, archaic and inefficient network that is greatly challenged by disruptive Internet technology. In the US, only one of the ten top online retailers is a purely web-based player with no physical stores: Amazon. In contrast, in China only one of the ten top online retailers is brick-and-mortar: Su-Ning. The rest of the country’s traditional retailers are simply too slow in migrating to the digital world. Leveraging on existing platform providers seem to be a more efficient option than building their own online networks. That is why platform-based Internet companies take as much as 90% of market share in China, whereas the figure in the US is only 24%.
So even as millions of traditional Chinese businesses move online, they find it difficult not to rely on buying expensive advertising slots from platform providers (such as Alibaba, which has 80% of all web traffic in the retailing sector) in order to be “seen” by end customers. Note for example that while eBay’s pricing model is merely listing fees plus commission, 57% of Alibaba’s revenue comes from paid advertising. In other words, with extremely concentrated demand and fierce competition in China’s platform-dominated e-business environment, only sellers that can take advantage of economies of scale can afford to buy ads, offer low prices, and integrate their supply chain for quicker turnaround so they can break even. For the rest of the traditional players, there’s really no benefit to moving online.
Intrinsically different mobile segment: Previous research in the mobile industry has focused on the conversion rate between different platforms (PC vs. mobile in terms of screen size, ranking of the post, etc.) However our empirical research, based on a platform of millions of customers across more than 400 cities in 3,800 counties and 400,000 villages in China, suggests that differences in both conversion and sales are due to different consumer segments: the mobile-only customer, the PC-only customer, and the multi-platform/multi-channel customers.
The mobile-only customers show fragmented purchase behavior. They typically pay higher prices, but for fewer quantities which they usually purchase at midnight or while commuting; and there is significant growth coming from the rural market, which surprisingly pays a higher unit price for more “visible” and branded products (i.e. conspicuous consumption) than urban market customers. The PC-only customers purchase more quantities at a time, suggesting the ease of use on the PC platform. Meanwhile the 5% multi-channel customers, who contribute to 11% of sales, live mostly in big cities and they are more experienced customers with a longer history of frequent purchases.
This is consistent with a recent claim by the CEO of Groupon that their mobile users drive more incremental revenue and purchase activity than their PC-only customers, with each mobile customer spending over 50% more.
We also find that the products that are not selling well on PC often become very popular on mobile. If this is because there are different consumer segments, would it be good strategy to attract customers who prefer to use the mobile platform? Are existing customers becoming more promotion sensitive, or has mobile lost its advantage in attracting new customers? Should there be different marketing strategies for PC and mobile platforms, respectively? These are all important questions to ask as businesses embrace the mobile Internet.
Mobile is the bigger pie… and sweeter: Last year, desktop e-commerce for the US holiday period reached $53.2 billion, while mobile commerce hit $7.9 billion, representing 13% of total digital commerce and growing at an annual rate of 25% vs. the previous season. The figures are even more promising in China: mobile gross merchandise value (GMV) accounted for 45.5% of the total GMV of RMB 57.1 billion in Alibaba’s online shopping festival on “11.11”, as compared to 15% last year.
Furthermore, as we break down the promotional effect of desktop e-commerce and mobile commerce into the three components: price-induced demand, new demand by first-time customers, and suppressed demand pre- and post- promotion, we find that sales responses from mobile promotion (spike-shaped in the photo above) are more positive than those from PC-based promotion (wave-shaped): it has a smaller and shorter impact on pre- and post- promotional dips, and a bigger promotion pulse by attracting more new customers. We also find that paid search leads to a much higher conversion rate on mobile platforms than on PC, suggesting promising ROI in mobile-commerce.
So yes, mobile commerce will continue to grow, but you’d be missing a big part of the picture by underestimating the challenges and changing landscape happening in China’s real economy. The key to “Internet plus” is the “plus” of the real economy.
Jeongwen Chiang is Professor of Marketing at China Europe International Business School (CEIBS) and Chen Lin is Assistant Professor of Marketing at Michigan State University.
This article was written by Jeongwen Chiang from Forbes and was legally licensed through the NewsCred publisher network.