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China's E-Commerce Development Jiacheng
HE I. Reflection on e-Commerce Development in the U.S. In the last twenty years, China's retail and wholesale industries (CRWI), have made significant progress. China's modern commercial distribution patterns such as supermarkets, retail chains, dealerships, and distribution centers have gradually matured by learning from western countries in the early 1990s. These various forms of distribution have made major contributions to the China's economic modernization. However, while China is continuing to expand this type of modernization strategy, the United States is actually experiencing an e-commerce revolution that fundamentally changes and challenges the traditional distribution patterns mentioned above. This revolution has had a dramatic impact on domestic trading, foreign trading, wholesale and retailing industries, producer goods trading, consumer goods trading, and tangible and intangible goods trading. In fact, it has become an economic phenomenon that broadly affects the production, exchange, distribution, and consumption of products and services. William M. Daley, the secretary of Department of Commerce in the United States, has said that "While the numbers are still small, when compared to our overall economy, they are growing more rapidly and provide more evidence that electronic commerce will be the engine for economic growth in the next century". Many Chinese professionals in CRWI are impressed by the market size and scale of Wal-Mart , the US retailing giant which opened its first store in China in 1996. But few really know about Amazon.com, Auto-by-Tel, or eBay. However, with only about 200 employees and 2 years' operating history, Amazon.com achieved a total market capitalization of over US$ 30.35 billion, which is equal to 11.8% of Wal-Mart's total market capitalization of US$ 256.4 billion, 113.6% higher than that of the second biggest retailer Sears, and 531% higher than that of the third biggest retailer Kmart. Despite the Wall Street overvaluation effect, this phenomenal success still presents us a strong case for the power of e-commerce. Another two examples also surprise Chinese professionals in CRWI. Auto-by-Tel, which uses the Internet to help customers and automobile dealers purchase and sell automobiles, has more than 300 car dealers in the US who rely on their service to find potential customers. The number of customers to the web site in 1995 was 43,000, and 7 percent of them made a purchase. The number of customers reached 345,000 in 1996 and the company's revenue reached US$ 1.8 billion. In 1997, the total number of visitors grew to 1.3 million and total revenue reached more than $6 billions. No traditional wholesaler or retailer, to my knowledge, has ever achieved a growth rate as high as we see here. Another example is eBay, an online auction company. During the week of Thanksgiving in 1999, based on the number of visitors, eBay became the busiest e-commerce site, totaling over 1 million visitors per day. This number is even higher than that of Amazon.com and ToysRUs. It is also beyond question that none of the traditional auction companies have visitors even approaching this online giant's. The IT industry in China has experienced significant development in recent years. For example, the number of telephone users has grown from 1% of the country's population in 1991 to 12% in 1999. The IT industry also contributed around 20% of China's GDP growth in 1998. The IT industry not only helps China fuel the current economic growth, but also sets a solid foundation for the development of China's e-commerce in coming years. Nevertheless, some scholars and experts in China are worried that the development of e-commerce will result in the elimination of traditional retailing and wholesale industries, eventually leading to higher unemployment rate in these industries. This worry fails to recognize the opportunities brought by this emerging economy even though it gives the necessary pressure to spur the reform within the CRWI. Under the pressure of e-commerce, many inefficient distribution channels will be weakened or even eliminated, while many more efficient ones will be introduced and enhanced. Therefore, the issue facing CRWI is not to worry about this kind of "disappearance", but how to face challenges, grasp potential chances, and advance e-commerce. II. Conceptual Discussions Since Professor Wang Ke from the Chinese Academy of Social Sciences first explained the concept of e-commerce in China in 1993, many Chinese people have tried to give e-commerce a precise definition. But so far there has been no consensus in this regard. How to clearly define e-commerce has also sparked many discussions in the U.S. The Department of Commerce (DOC) is the primary government agency to administer the e-commerce activities in US. The DOC first issued an evaluation report last year on the e-commerce development titled "The Emerging Digital Economy." It released another similar report with the title "The Emerging Digital Economy II" this year. The 1999 report confessed that it was very difficult to provide a concise definition for e-commerce. This is probably why the titles for these two reports use the term "Digital Economy" instead of "e-commerce". Defining e-commerce in too generalized a sense may have disadvantages. Some scholars believe that a transaction can be called e-commerce as long as the whole business chain involves some electronic formats. According to this definition, any business activities can be called e-commerce if the transaction contains one of the following formats: Electronic Data Interchange (EDI), electronic cashier, electronic ordering system, or even telephone, telex and telegram. For instance, Mr. Grosner, Chairman of the IBM Board of Directors, pointed out that even any communication between managers and employees in IBM can be called e-commerce. Also following this definition, some Chinese scholars call current supermarkets and retail chains in China e-commerce since they already use electronic cashiers. Other scholars even consider Chinese governmental online activities to be e-commerce. In fact, these concept and definition are not correct. For example, Wal-Mart has already used electronic cashiers and its EDI to link over 3000 suppliers for many years, yet almost no one in US ever views Wal-Mart as an e-commerce company. On the other hand, defining e-commerce in too stringent a sense also has its disadvantages. Some scholars believe that a trading activity can be considered to be e-commerce only if all of its quoting, ordering, payment and delivery activities are conducted over the Internet. Under this view, quite a few enterprise owners in China believe their business will never be good enough to develop e-commerce since most of the time online payment is not possible. In reality, a trading activity mainly contains four key transactions, which are quoting, ordering, payment, and delivery. If any of these four transactions is conducted over the Internet, then the entire business transaction should be called e-commerce. If one buys a music clip or e-book from Amazon.com, all transactions, from quoting, ordering, payment, to delivery, are conducted online. If one buys computers from Dell, quoting, ordering and payment transactions are completed over the Internet, but the delivery involves different offline approaches. If one buys meat and vegetable from Homeruns.com, both quoting and ordering are completed over the Internet, but payment and delivery are off the Internet. Similarly, if one buys steel from the online metal trading company E-Steel or an automobile from Auto-by-Tel, only quoting the price occurs over the Internet, and all other transactions are completed using offline approaches. As a matter of fact, these activities are all e-commerce. This clarification of the definition of e-commerce could help China distinguish traditional retailing and trading activities from online activities. China has just started its development of e-commerce. It is critical for everyone to share a relatively clear, formal, and practical definition. This definition will guide China's e-commerce development policies for many years to come. III. The Development of China's e-Commerce In March 6, 1998, the Beijing Century Intercom Technology Company sold its first item over the Internet. It was also the first online sale in China's business history. In the early 1990s, China began to adopt EDI, and then pushed a series of "Golden Bridge" and "Golden Card" projects using electronic technology. Especially in the security trading and aviation ticketing sectors, computers and Internet technologies have already been in widespread use. Strictly speaking, these applications cannot be called e-commerce, but are creating the preconditions for starting e-commerce. While e-commerce is stepping into its takeoff stage from its starting stage in the United States, the development of China's e-commerce is only in its infant stage. Till June of this year, there are only about 22,000 Internet Web sites in China, out of which e-commerce sites count for only 1,100. It is estimated that total spending on China's e-commerce sites in 2000 will reach US$4.2 million. Therefore, e-commerce in China has a long way to go to catch up. Fortunately, the time gap between the U.S. and China in e-commerce development is much smaller than the gap between U.S. and China in supermarket and retail chain business in the early 90s. At that time, when China tried to develop its supermarkets and retail chains, these patterns had already been practiced in the United States for about a hundred years. In e-commerce, China is only few years behind on the learning curve and the U.S. has provided us many invaluable lessons. This is a huge advantage to China, and China should and will fully use this advantage to catch up. IV. Profitability Analysis Chinese companies are increasingly trying to invest in e-commerce. In April 1997, XinHua Bookstore of Hangzhou city opened the first online bookstore in China. With only 400 website hits in the first year, the bookstore eventually closed its door with no sales at all. By way of historical comparison, when the CRWI started to invest in supermarkets in the early 1980s, almost all of them were eventually out of business due to huge losses. It was not until the 1990s when a new wave of investments poured back into supermarkets that these businesses made profits and grew large. Retail chains emerged in the beginning of 1990s in China and soon showed their profitability. Sectors other than retail chains generally reported lower profits or even losses. For e-commerce, the question is: Will the investment in e-commerce be like that in the online bookstore, in supermarkets, or in retail chains? In China, there is one key issue to which we need to pay close attention. It is that it will be profitable in the long run to launch e-commerce businesses in China. But these companies may not make profits in the short term. Currently the problem is to find the necessary strategic capital investment to support their operations. Some analysts indicate that one of the important reasons why Asia cannot timely follow the development of the Internet Era in the West is the shortage of financial liquidity in the capital market. These analysts believe that the stock market regulations in Asian countries are too tight. Under this situation, those companies that do not have profitable operating records for a certain number of years, are not allowed to go public. To meet the requirements of the Internet Era, this style of capital market regulation must be changed, especially in China. V. Choices of e-Commerce So which areas should China select to spearhead its e-commerce development, the service sector or the trading sector? Within the trading sector, should China target its efforts at intangible items, such as e-books, e-music, gaming software, and computer software, or at tangible goods? In the trading of tangible goods, should we choose standardized, low-priced goods like books and computers that offer few options and easy delivery, or other types of products such as automobile, steel, coal, clothing, jewelry or food? To a certain degree, appropriate choices of e-commerce products will play an important role in the success of e-commerce in China. The e-commerce business has been classified into two models in the United States. One is business to business (B2B), and the other is business to consumer (B2C). It is generally accepted that the B2B model has been started earlier and developed faster. It contains network, computer, semi-conductor, steel, raw chemical materials, coal, auto parts, food additive and so on. Cisco and Dell could be the best B2B examples. It is an attractive area. On the other hand, a research report from the Forrester Research indicates that about half of the total online revenues will come from B2C within the next three years. The growth rates of the B2C model in different sectors are also quite different. Initially, the quickest development was in entertainment, especially in music CDs, multimedia CDs and gaming software. During that time, online brokers, online ticket booking and online auction houses were also on the fast track. Recently, the fastest growing online sales items have been computers, clothing, toys, food, medicine, beverages, automobiles and flowers. The range of goods sold over the Internet is getting wider and wider, particularly in 2000. These goods include covers jewelry, furniture, appliances, hardware, fast foods, and more. To develop e-commerce in China, there are two major aspects to be considered. First, it is necessary for all industrial sectors to avoid the overly aggressive investment. Otherwise, it may lead to a new round of investment mistakes like the one in real estate industry in the early 90s. Second, it is also necessary for each sector to be prepared to follow the wave since sooner or later e-commerce will change the path of all future business. Especially for CRWI, we must realize that the essential characteristic of the Internet economy is the lack of boundaries no matter whether the business is involved in domestic or foreign trading, or is located in the United States or China. It is necessary to further reform and open our economy so that we can break down the boundaries between the domestic trade and foreign trade, and between the trading of production materials and consumer goods, etc. VI. Development Prerequisites What are the prerequisites for China to develop an e-commerce economy? One of the crucial factors related to the growth of e-commerce is the online population. In the first half of 1999, China had 4 million Internet users, an almost 100 percent increase from the beginning of 1999. By the end of 1999, this number was 8.9 million, again doubling the number of six months earlier. It is estimated by various sources that the number will continue to double for every six months. Here, two key factors determine the growth rate of the online population in China. The first is the population of personal computer users. There were approximately 200,000 PCs in China six years ago compared to 6 million in 1999. According to official statistics, among the ten largest cities, Guangzhou ranks No.1 with 29.3% household penetration. In 2000, PC sales are estimated to increase by another 17.5%. The drastic increase of PC population is a result of the PC's ever increasing performance/price ratio and decreasing software development costs. By opening up its economy to the world, China has benefited from both price drop and performance enhancement of PCs and their peripherals through technology advances. With further development of Chinese software, computers will become more user-friendly for ordinary Chinese people. For example, the Chinese Internet platform 3721, manufactured by ChinaNet this year, is a Chinese innovation on the order of the invention of Chinese encoding technology. All of the above could stimulate the growth of the online population. Secondly, information infrastructure also plays an important role in the growth of e-commerce. Internet Service Provider (ISP) cost and service quality directly affect the online user growth rate and their stickiness to the Internet. In China, although many significant improvements in information infrastructure have been made, for example, the telecommunication charge and fee took a huge cut last year, there are still many issues to be addressed. Initial installation is not too expensive, but ISP costs are still quite high and the quality of service is relatively poor. Under the current payment structure, the longer a user stays online the higher the total online cost he/she pays. Even more problematically, about 49.3% of complaints are related to slow speed, while only about 36.8% of them are about high cost. This is because the low price of Internet service attracts more people online with more traffic. The benefits generated from lower price may be dampened by poorer performance, which forces users to stay online even longer. In fact, this is not a new problem. The same dilemma happened in the course of cellular phone development in China. In the early 1990s, when the cellular phone was first introduced to the Chinese marketplace, its cost was extremely high and its service not adequate. Every time the cellular phone companies reduced the price, more users signed up and hence service became even worse. This problem was finally resolved by introducing more competition, improving infrastructure, and providing lower prices but better customer services. By the end of 1990s, the performance of China-made cellular phones as well as the quality of mobile services has excelled that of the U.S. in some areas. Therefore, it is rational to assume that in the near future, by increasing investment, including foreign capital's involvement, and developing and importing advanced technology, especially by breaking up domestic monopoly and encouraging competition, China's information infrastructure should be able to handle the rapid growth of e-commerce. There are three other important lessons we should learn from the U.S. e-commerce development. The first is the online payment support provided by financial institutions. For China, this support does not only mean technology or regulation, but also how to stimulate customers to adopt the advantages of online payment mechanism, such as credit card payment. The second is the support provided by distribution and delivery channels. Although there is no comparable distribution and delivery company like UPS or FedEx in China to perform national delivery functions, there are a lot of potential resources in the system that are available to do so. Actually, the development of e-commerce will allow these resources to be fully exploited. Third is the support provided by the ISPs and Internet Content Providers (ICPs). Major Internet players not only provide information services to consumers and small and mid-sized businesses, but also become a driving force behind the e-commerce economy. Being aware of these factors and experiences, China should be able to ride the Internet information wave to advance the development of e-commerce. VII. Government's Role The Chinese government is paying increasing attention to the development of e-commerce. In 1998, President Jiang Zemin pointed out that e-commerce represents the future direction of business development and will bring more business opportunities into China. In order to develop e-commerce, both industry and regulatory departments need to play important roles. The government should provide more efficient high-level guidance, and create a better environment by issuing appropriate laws and regulations. Recently, the leaders of the State Council of China have strongly encouraged the relevant departments of the government to study and push the development of e-commerce. Accordingly, the State Commission of Development and Planning, the State Commission of Economy and Trade and the State Administration of Internal Trade have done a lot of work to promote e-commerce. How the government plays its role could be critical to China's e-commerce success. Professor F. Warren McFarlan, former Senior Associate Dean of the Harvard Business School, visited China last September specifically to research the Internet Economy in China. After the visit, he believed that development of e-commerce in China is even more important for China than for the U.S. because the traditional business network and sales environment are highly developed in US while they lag behind in China. It will give China the opportunity to jump directly into the e-commerce era, and to leapfrog the stage of building up the traditional business network and sales environment. China's e-commerce development will have a tremendous impact on rapid expansion of its sales capacity, extending internal market demands, increasing its exports, enhancing production level and efficiency. For the United States, the basic role of government is to meet the requirements of the market economy and the Internet economy. It tries to avoid creating regulatory burdens or restrictions on Internet companies. The government realizes that the individual responsibility and the relationship between the government and companies in the Information Age have to be changed and need to be re-defined. In the areas of e-commerce management and law making, the US government is very open. It allows free development and has not hurried to set up regulations when the existing laws did not cover the new phenomenon. Sales tax is based on where the sale is made and cannot be enforced when the sale is conducted over the Internet from different states. In New Jersey, last year the state lost about US$20 million in sales taxes because of online shopping. Although the loss is important to the state, the federal government did not intervene. For similar reasons, many Congressmen even suggested that all online sales and trading should be exempted from sales tax. It is a fact that the level of modernization and market-oriented economy in China is much lower than that in the U.S. And also, e-commerce development in China is still in its infant stage while in the U.S. it is already in the take-off stage. Therefore, China must have its own resolutions for the problems that will occur in the development of e-commerce. First, the inter-departmental responsibility coordination should be emphasized. The duties of different departments should be defined clearly for effective promotion by the government. In the United States, there are still a number of problems with the development of e-commerce. A survey conducted in last December in the US had shown three major consumer issues regarding online businesses: security, technology, and services. The particular problems are delivery, credit card fraud, and services. 5% of deliveries are not on time and 8% of deliveries are never made. 47% of credit card fraud is related to online shopping. In sales, 47% of vendors do not allow merchandise returns. 87% of vendors do not promise the privacy of online shoppers' private information. All of the above issues will definitely occur in China. Therefore, in order to effectively promote the development of China's e-commerce, it is necessary to clarify the individual responsibilities of each government department. The State Economic Commission, the Ministry of Foreign Trade and the Administration of Internal Trade should be responsible for the operation management. The Ministry of Information Industry should concentrate itself on the construction of infrastructure for e-commerce. The development of e-commerce will also involve the development of finance, transportation and taxation and so on. There is a need to establish a high-level inter-departmental government organization, which is in charge of coordinating the resolution of problems in the growth of e-commerce, such as digital signature, privacy protection, credit card protection, business scope, business contract and online forgery, among others. Secondly, the Chinese government should strengthen the capital support policy. Currently, some influential ISPs and ICPs in China could not raise the necessary start-up capital from the capital market. For example, sina.com tried to raise RMB 20 million in 1996. After passing a tedious approval process of multiple departments, the fund-raising eventually failed because the banks failed to extend credit. Sina.com was forced to seek help from foreign investors, and then quickly secured a US$6 millions of venture capital. This lesson should be remembered. The venture capital system for e-commerce, or for the Internet industry in general, should be established as quickly as possible to supply initial capital for start-up companies in China. Furthermore, the constraints on allowing companies to go public in stock markets should be relaxed so that well-operated e-commerce companies can raise the necessary capital for their further development. In this aspect, Taiwan lifted the requirement for public firms to show five years' profitable operation records. Taiwan allowed newly listed high-tech companies to have certain operation losses. These approaches should be considered and tested by China. Finally, the Chinese government should also continue its reform of intellectual property rights. In the era of the Internet economy, rapid changes happen not only in manufacturing, retailing, wholesale and consumption, but also in wealth distribution. In fact, the richest persons in the U.S. are no longer from the Wal-Mart family. Instead, they are successful entrepreneurs in the IT industry and e-commerce arena. Currently, average annual salary in the IT industry is about US $53,000 while it is only US $30,000 in other sectors. In recent years, many young people just out of college become millionaires in their first year and salary per week can reach more than US$100,000. For instance, Jeffrey Bezos, president of Amazon, is only 35, but his private assets are worth billions. Jerry Yang, the founder of Yahoo.com, saw his wealth increase to US$1.5 billion in one day when the Yahoo stock price went up sharply in December 7, 1999. Many people in China now have a new belief: "making money by brains and becoming rich by intelligence." China already made a lot of progress in its economic reform. On his return from China, Professor McFarlan said that buying a PC is a dream for a young Chinese when he gets his first job, just like buying a car is for a young American. With proper guidance, this passion can become the driving force for economic development. Recently in Legend Group, a state-owned IT giant, more than one hundred employees became millionaires because of the firm's huge success in its core PC business and its stock's continuous appreciation. This represents a significant step in changing Chinese people's mentality towards the income and wealth distribution. In facing the rapid development of Internet economy, it is the time for China to fundamentally reform the income and wealth distribution system, especially for the state owned companies. (The author is Deputy Director of the State Internal Trade Administration and Director of e-Commerce Development.) |