E-Commerce in China: Patriarchic Benevolence

08/14/2011 10:09 pm ET | Updated Oct 14, 2011

The growth of China's consumer e-commerce sector is breathtaking, doubling year on year. On-line shopping is more than a trend; it is a phenomenon. But it took a while for things to take off. It was not until two fundamentally Chinese business essentials were addressed -- the benefits and reassurance of scale, low price as the ultimate competitive weapon -- that an inflection point was crossed.

Early days were not promising. Counterfeits were rampant. Credit card penetration was low. Chinese buyers, a kick-the-tire cohort if there ever was one -- were (and still are) suspicious of "virtual" transactions. These barriers have either faded away -- practically everyone earning over 5,000 RMB per month owns at least one credit or debit card -- or been structurally addressed by the likes of, (a "vertical" book retailer) and (a specialty electronics platform). On-line players, all domestic titans, are not making the dumb mistakes early international interlopers did. Ebay infamously crashed and burned on the mainland, even after it purchased on-line book retailer in 2006. It transplanted a Western model in the heart of the Middle Kingdom only to be outflanked by domestic competitors. The company pushed its international "auction" model. (Advertising promised the "excitement of victory," an minor e-commerce theme here.) Ebay also charged registration fees, the ultimate insult to cash-strapped netizens, the vast majority under 25 years old.

Taobao, by far the largest e-commerce "generalist," currently rules the roost and will not be displaced any time soon. (Its name can be translated as "panning for treasure.") Statistics boggle the mind. More than 800 million products are available, with 48,000 items sold every minute. The site boasts more than 370 million registered users. On good days, turnover exceeds $300 million. Average individual expenditure, however, is less than five dollars.

The platform, a unit of business-to-business behemoth, has succeeded via: a) low price, b) an army of 100,000 couriers, c) user-friendly payment schemes that reduce post-purchase anxiety and d) unrivalled breadth of manufacturer partnerships.

How is this "Chinese"?

The Scale Imperative. In the Middle Kingdom, bigger is better. Broad scale forges trust and order from chaos. China's largest appliance manufacturer, Haier, is not a particularly innovative company but consumers are drawn to its size. This suggests reliability. Its expansive retail and distribution network deployed as a one-of-a-kind national 24-hour service operation. Over the past ten years, brands such as Yili and Mengniu have morphed from local dairy brands to national titans. Transformation was driven by both top-down government support and bottom-up consumer food safety concerns. Even luxury goods must project "authority" before "craftsmanship." Louis Vuitton, Mercedes and BWM succeeded, first and foremost, because of their global clout. In the People's Republic, no one "invests" in status brands unless everyone recognizes them.

Taobao's scale is hugely beneficial. It satisfies consumers' demand for variety and their desire to compare endless product options. In this sense, size is liberating, delivering a new-age "thrill of discovery." Scale also pulls the vast majority of business-to-consumer e-tailers into the orbit of Taobao, the "host" of countless on-line stores. In addition, size translates into negotiating clout with partners. Suppliers must accept generous "no questions asked" money-back guarantees -- facilitated through zhifubao, the Chinese equivalent of Paypal -- if product performance is a problem.

The Satisfaction of Bargaining. Cash-strapped Chinese are notoriously frugal. They are unwilling to pay an extra penny unless marketers can justify the price premium. Although "face" is lost when begging for a discount, Mainlanders love a good bargain. It signals the ultimate aspirational personality trait -- i.e., clever resourcefulness. (When struggling to impress, I trot out a fail-safe laugh line: "In heaven or on earth, there is nothing more fearsome than a Jew who can negotiate in Chinese.") VIP, VVIP and Platinum VIP cards are still ubiquitous, a price of entry for any retail establishment.

Simply put, e-commerce makes people feel smart. In several ways, Taobao's scale has been deployed to transform the on-line shopping world into a wonderland of bargains. An endless array of merchandise, combined with algorithmically sophisticated search functions, facilitates comprehensive comparison pricing. Unlike many Western portals, there are no registration or transaction fees. Delivery fees, albeit not explicit mandated by Taobao, are extremely inexpensive; the price of courier service from Hangzhou to Shanghai, a journey of nearly two hours by car, is five RMB, or less than one dollar. Frequent miaosha ("seconds to kill") promotions, sponsored by individual brands but hosted by Taobao, create quickly closing windows of opportunity for savvy shoppers to grab discounts.

Taobao has shifted the balance of influence from manufacturers to hundreds of millions of Chinese consumers, each of whom have a voice in determining influential quality rankings, badged on products as "crowns."

Imperial Control of Information
. In today's digital universe, data is power. Taobao, as well as other large e-commerce "verticals," owns the transactional information -- conversion and promotion hit rates, top-selling items, etc. -- retailers depend on to gauge effectiveness of on-line activities. These data, jealously guarded, is then sold to manufacturers and research houses at a steep price. Just as the Communist Party exists as an ultimate arbiter of knowledge, information in the e-commerce universe is controlled and managed by digital Goliaths who, in turn, exist by the grace of an omnipotent Ministry of Commerce.

Even social network traffic flows, instrumental in leading shoppers to specific on-line sites, are influenced by centralized entities. Cost per sales (CPS) "unions" are paid to "seed" messages amongst thousands of bloggers and "opinion leaders." They, in turn, drive traffic to specific e-commerce destinations. In return, the "unions" are entitled to approximately 20% of a retailer's click-through revenue. ("Seeders" are specialized according to interest -- e.g., music, games -- or product category.)


China's e-commerce scene is, like the Internet itself, a paradoxical combination of "democratic" people power and top-down "management." The government, working through companies happy to comply with state regulations, has imposed a framework that grants infinitely more transparency than existed before the digital revolution, bringing consumerist "harmony" to peasants and city dwellers alike. At the same, the Party maintains the final word on what is, and is not, allowed into the public domain. "Patriarchic responsiveness," benevolent in the eyes of most but ultimately autocratic, suggests an evolution of China's traditional model of economic and political management. Revolution -- a consumer-led free for all -- is not in the cards.