In 2015, global e-commerce is projected to reach $1.4 trillion and as much as $380 billion of that will be generated in China, said Tompkins International in a recently published a podcast.
The firm called it “an explosion of e-commerce in China as well as the explosion across retail.”
Jim Serstad, from the Tompkins’ Asia office, added China will continue to see gains largely from nine large online retailers that are leading the way in client satisfaction. Calling some efforts “extreme,” Serstad said, “They can’t compete on price, because they are all offering basically the same low prices, so they have to differentiate on service. And, the key measure they are looking at is delivery frequency.”
This has led to one e-retailer delivering goods three times a day from a distribution center to depots around cities, allowing for an afternoon delivery of goods ordered in the morning, Serstad said.
“The goal in all of this hyper-competition is to be the first and biggest open platform; that is, to have a distribution network that other smaller e-retailers can use for a fee,” he said. “And, whoever can build this sort of nationwide logistics platform with all the warehousing and logistics in place, they will be holding the holy grail of e-commerce.”
The last mile of delivery is also emerging differently in China. While Europe and the United States are accustomed to specific drivers from parcel services showing up and looking the same at a door, Serstad said China is seeing a different type of delivery growth.
“China is extremely fragmented; perhaps the largest logistics provider has less than 1 percent of the market, so the e-retailers have had to develop their own distribution network,” he said.
This has led to not only varied delivery times and styles, like the aforementioned multi-day DC trips, but also to orders being taken by bicycle, motorcycle, carts, and any available vehicle to get to their final destination.
Coverage in the country varies and Serstad noted many locations are not covered at all. Providers typically build out in a few cities and outsource to their third- and fourth-tier locations, but these outsourcing events are a relatively small part of business for most. Because of the service levels required most companies stick to doing as much delivery in their own network as possible.
Service levels deteriorate very quickly as companies use more fragmented outsourcing options, Serstad said. Some of that is due to a lack of technology and infrastructure.
“Naturally we’re going to see a pretty low level of automation because of the low cost of labor in China,” he said. “One warehouse we visited was operating just fine with operators using shopping carts for picking and people were on rollerblades and they had a self-developed warehouse management system.”
Serstad said some companies do have IT departments and plan on building systems as they grow, but these will be more tailored to individual uses and not be applicable to logistics or processes outside of their own warehouses.
“The question that we would have is whether these systems will be able to sustain the growth they are expecting,” he said. “If they are looking at a 200 percent growth in orders in the next couple of years, they are not going to be able to handle the throughput just by putting more operators in the warehouse.”
Systems will be required to control these operations, allowing them to grow successfully while maintaining the customer service levels clients are going to expect.
One area that needs developing is material handling equipment (MHE), which Serstad said is virtually unseen in China’s e-commerce warehouses. MHE will be a large investment in the coming years, not because of cost savings but because of delivery expectations.
When looking at other weaknesses, Serstad said that lacking integration with partners and a physical presence could hurt the market down the road in major cities as expansion will be difficult.
For new markets however, the lack of physical presence means that e-retailers are often the first to introduce their goods to new areas when they expand deliveries to smaller villages and more remote regions. They’re in the position to gain market share before physical retail stores arrive.
“Another advantage in China is that new entrants of e-commerce find it easier to get in using the services of established provider,” Serstad said. “Taobao has over 70 percent market share. It’s unique to start using Taobao, anyone can do it from the comfort of their living rooms, and businesses when they’re ready to move into [direct-to-customer shipments] find it very easy to use Taobao — not highly regulated at all, they don’t have to pay taxes, so actually barriers to entry are quite low.
“E-commerce is a complete game-changer for customer service in China,” he said. “Customer service has always lagged in China and has seen only incremental improvement over the years up to now. But, e-commerce is a different game, because the stakes are very clear: people will hop to a different Website if they are unhappy at all, and usually the last Website they ordered from will be the one they go back to.”
Serstad said potential of e-commerce is its ability to get goods quickly to their destination and provide answers to existing retail problems in the country. For a long time, the practice in China was to not allow any types of good returns, which meant users tested products in stores to make sure they worked. Now online shopping comes full of return policies and that addition has already begun to revolutionize the way consumers approach goods and stores by making them more trusting of brands, he said. – Geoff Whiting
Tompkins: China’s e-commerce wrestles with modernization
