E-Commerce Development in China

E-Commerce Development in China

Sam Choon Yin (April 2005)

 

In the last lecture of the Cybermarketing unit (taught in Xian between February and April 2005), I discussed the development of electronic commerce in China. I found this to be a useful topic to end the unit, the reason being that the audience comprised students from China.[1]

            China, with its huge market, can develop into a major player in the e-commerce industry. Indeed, the number of Internet users has grown rapidly over the years from about 50,000 in 1995 to 1.2 million in 1998, 4 million in 1999, 17 million in 2000 and 94 million by 2004 (accounting for 7.2 percent of the total population). But this is still relatively small in per capita basis as compared to other Chinese dominated places. As Table 1 shows, by the year 2000, Internet users in China accounted for merely 1.3 percent of the total population as compared to 27 percent in Hong Kong, 29 percent in Taiwan.

 

Table 1

Internet population

Places

Total Population

Internet users

Internet users as a percentage of total population

China

Hong Kong

Taiwan

Chinese in the US

1.3 billion

7 billion

22 million

3 million

16.9 million

1.9 million

6.4 million

2.1 million

1.3

27

29

70

Source: Nua Internet Survey (2000)

 

            Within China, there appears to be a wide digital divide. With more than 48,000 domain names registered in China (mostly businesses), about 88 percent of them have their offices in North China, East China and South China where the economy is more developed. Northeast China, Southwest China and Northwest China accounted for merely 11.2 percent of the total China’s websites. Efforts have been made by the Central Government to narrow the digital divide. An example includes a recent project ‘Narrow the Digital Divide – The Western Action’ launched by the Ministry of Science and Technology in April 2003, costing the country 200 million yuan.

            What are the factors hindering the growth of e-commerce in China? One problem is that company founders in China do not have a good understanding of what e-commerce is about, the technology involved, the impact of costs and the real economic benefits users could reap from the technology. Accordingly, they did not see the urgency to establish websites to supplement their core products. State-owned companies are particularly resistant to e-commerce, perhaps attributed to the lack of competition in those industries in which they dominate. On the contrary, company leaders who have received education from abroad (particularly the west) have been more receptive of the technology. Given that more students are obtaining western education, the next generations of company leaders should be more enthusiastic in pushing forward the growth of the e-commerce industry in China.

            A related point pertains to the fact that Chinese firms today still prefer to do things traditionally. For example, among those firms that had adopted e-commerce, door-to-door delivery (even using bicycles) using own effort or through small local delivery companies still dominate instead of engaging larger and more efficient delivery companies. While this may help the firms to save money, the ‘traditional’ methods are not likely to be adequate if e-commerce continues to expand. Furthermore, many local companies today are still hierarchical in nature. Such an organisational structure is not very conducive to e-commerce development, a reason being that the lower level staffs need to be heavily involved in decision-making for effective implementation of e-commerce.

It has been said that in China, there’s a lack of trust given to staffs (by managers/founders and even consumers) to solve problems or handle issues independently. The problem is compounded by the fact that many people still prefer to solve problems by means of personal, face-to-face contacts, rather than through arms-length transactions.

In the context of payments, it has been noted that online payments were generally uncommon in China (accounting for less than 50 percent) among those firms that had participated in the e-commerce industry. Instead, payments were carried out via cash-on-delivery and remissions through banks or post offices. One reason for the slow development of online payments is that banking services in China are expensive and inefficient. The banks also impose restrictions like limiting the size of online payments and allowing online services to be used only in designated cities. They have essentially hindered the development of e-commerce in China.

            The issue on security poses another problem. Security has been noted to be the biggest concern in conducting business online among the Chinese people. This is according to the 2000 survey by Ministry of Information Industry (MII). While organisations are worried about hackers and viruses, consumers are generally worried about leakage of personal information by the organisations. The fact that counterfeits and low quality products are already readily available in the Chinese market further worsened the problem.

However, it is worth noting that efforts have been made by the government to mitigate the feeling of fear among the people to go online. With effect from 1 April 2005 for example, online signatures has become valid in China. With this change, electronic signatures will have the same legal effect as handwritten signatures and seals for business transactions. The regulation aims at promoting and ensuring security on online transactions (the regulation however does not apply to marriage contracts and those pertaining to the assignment of immovable property).

High charges imposed on service providers and Internet users (consumers) have also hindered the development of e-commerce industry in China. In the former, rental fees for broadband width in China are relatively high. As a result, most businesses rent only narrow bandwidth, which essentially translates to slower download time. For consumers, getting online for an hour is also relatively more expensive accounting for 10-20 percent of an average Chinese monthly income. On the contrary, an average person in the United States pays out merely 1-2 percent of his/her monthly income to have unlimited access on the Internet. The above appears to be a double-edged sword. The narrow bandwidth provided by service providers means that potential customers could do very little within an hour to know more about the companies and the products they offered. This increases uncertainty among the consumers to buy online.

It seems that with the accession to the World Trade Organisation, the problem might be mitigated somewhat. More intensive competition from foreign participants for instance may force price down although this can happen only progressively. The reason being that under the WTO agreement, China is given a grace period of 1-6 years before foreigners are allowed to enter the Chinese market. In the meantime though, some progress could be seen in the Chinese economy as the country prepares local companies for more intensive competition later in the years. In the Internet industry for example, larger companies had been divided into smaller ones. Thus we are seeing China Unicom and other smaller companies offering Internet services in addition to incumbent China Telecom.

The last but not the least important factor hindering the growth of the e-commerce industry in China concerns the use of language. Today, many e-commerce websites registered in China are designed only in the Chinese language. To ease data exchange and cross border transactions, it may be useful for websites in China to be written in a universal language (English), rather than solely in Chinese.

 

 



[1] To prepare for the lecture, I have relied on three readings.

(1) She, Shaomin, 2005, Narrowing the Digital Divide, China Daily, 25 March 2005.

(2) Ernst, Dieter and He Jiacheng, 2000, The Future of E-Commerce in China, West-West Centre, US.

(3) James Zhu, undated, A reality Check of E-Commerce Development in China: An Analysis of Challenges facing E-Commerce in China.