What Can We Learn from Chinese Marketplace Boom?

It hardly comes as a surprise that Asia is the fastest-growing economic region, since China steadily leads the way and attracts a large chunk of consumer purchase and growth. To give you a sense of proportion and scale of China, consider an example: if you take every dollar that was spent in the U.S. in 2020, it would amount to roughly $870 billion, whereas China spent trillion, making China larger than the U.S., the UK, Germany, Spain, and Japan combined. Seeing unparalleled growth in the region, it makes sense to spend some time contemplating what’s going on in China and what’s driving its thriving economy.

In this article, we focus on the phenomenal growth of digital marketplaces in China in an attempt to uncover strategies and lessons we can learn and adopt for the western market.

1. THE STATE OF THE CHINESE MARKET
2. OPPORTUNITIES VS. RISKS OF THE CHINESE MARKET
3. LESSONS TO LEARN FROM CHINESE MARKETPLACES

The first thing to bear in mind about China is its massive population, with roughly half of it on smartphones. In fact, China had more smartphone users in 2021 than any other country in the world – almost 912 million, coming in before India (439 million), and the U.S. (270 million). As we know, the phone is the front door to ecommerce.

The state of off-line retail in China, on the contrary, is incomparably poor: the stores have little variety at higher prices. For a user in a small Chinese town, who has previously been exposed to only a squalid experience of a Chinese market stall, ecommerce giants such as Tencent or JD offer a splendid opportunity to enter the world of a glossy virtual shopping mall with all products half-price and deliverable within a day.

In China, online sales have grown steadily at 25% year over year for the past seven years. More than 90% of these sales are on mobile devices, compared to 50% in the U.S. So it’s hardly surprising that it was the Chinese who developed more innovative ways to sell online, such as video retail or social commerce, and many new digital channels, including the super app, which provides an all-in-one service or a one-stop shopping experience with access to many adjacent services and offerings.

One exceptional quality that differentiates Chinese ecommerce from the rest of the digital world is its focus on integration. Unlike the U.S. with its walled technology gardens where each service performs one or several specific functions, such as Google for search and Facebook for social, the Chinese platforms merged to create an integrated ecosystem in which search, social, shipping, finance, and so on are smoothly blended together. Alibaba, Tencent, JD, and, lately, Pinduoduo, ByteDance, and Meitun are all prime examples of these massive ecosystems.

Another important differentiator that defines Chinese ecommerce is the intersection of social media and retail, which can be explained best by using WeChat as an example. WeChat is the largest social media platform in China with over a billion monthly active users. WeChat has grown out of an instant messaging app to become the world's largest stand-alone mobile app that combines text messaging, social media, and mobile payments. Within WeChat, every small retailer can open up a storefront that’s already seamlessly integrated with their social network and all its adjacent services.

Another illustrative example is Pinduoduo (pdd), the largest Chinese agriculture-focused technology platform, which we’ll examine in more detail in a later section. Here, it’s worth noting pdd’s brilliant business model, which combines social commerce, referral marketing, and group buying into a single unified platform. On pdd, users get a reduction in price depending on the number of users they bring into the platform. As a result, consumers in tier-two cities have been able to get massive discounts and buy fresh market produce at unprecedentedly low prices.

Having started in 2015 as an online food supplier, Pinduoduo’s success has driven its market value above $200bn. As mentioned, pdd’s business model is quite remarkable, which, according to the company’s vice president of business strategy, David Liu, was built out of an idea to create an ecommerce experience in which people join together to buy products. During the pandemic, pdd expanded into a flourishing interactive community group-buy network across thousands of towns, in which pdd users bid on shipments of local farm produce. Pdd’s success has become a testament to wider possibilities that the Chinese market continues to offer despite seemingly impregnable competitive forces represented by ecommerce giants such as Alibaba and Tencent. In fact, according to business analysts, pdd’s share of online retail in China is soon expected to overtake that of JD’s. Rather than displacing its rivals, however, pdd achieved its success by tapping into the market the giants either ignored or had not been able to reach. Before ppd’s intervention, the farm/produce market had hardly been traded digitally. Pdd is a great reminder that, no matter how tied-up the market might look, there is always a place for upstarts.

If you look at the U.S., the proportion of all the dollars spent on ecommerce retail is hardly 12%. In China, on the other hand, it’s 17%. China is a massive market with around 80% of it still untouched. So, there’s a lot of room to explore. However, as Amazon and Uber can testify, big brands fail in China too. On the other hand, there are Apple and Walmart who succeeded. To make it less of a gamble, it’s important to recognize both opportunities and risks before tapping into a local market.

China is a country where government regulation is a substantial source of investor risk. The actions of antitrust authorities are particularly revealing as they can often heavily convulse the share prices. In January 2022, China published a slew of directives on regulating platforms and maintaining orderly competition, which followed earlier drafts of the same legislation in 2020. The strengthening of the antitrust laws led to new investigations and increased scrutiny of mergers and acquisitions, community group-buy schemes, and price discounting. Despite tightening regulations, analysts believe the platform breakup is remote because of its heavy impact on the economy overall. Even the crackdown on Alibaba and Ant Group is unlikely to be calamitous, because the Chinese government wouldn’t run the risk of undermining the fifth of all China’s retail sales that flow through Alibaba’s doors.

The rampant competition in China suggests that, regardless of the size, no single platform can dominate the market. Apart from already mentioned pdd, JD, Alibaba, and Meitun, there’s the explosive live-streaming market with vigorous competitors and Douyin in the front row. The vertically integrated ecosystems with everything from social media to logistics are formidable and make it hard to compete without sufficient knowledge of the local market.

Taxation is another risk component to bear in mind. What has recently emerged as another facet of President Xi Jinping's “common prosperity” drive is the possible imposition of a data tax on platform developers. During the annual financial conference in Shanghai in October 2021, officials expressed concern over the increasing, yet untaxed, revenue generated by transactions involving personal data. That means the tax environment in China will likely tighten for tech companies in another move to rein in big technology firms and redirect investments from soft tech to hard tech areas like semiconductors.

In this section, we’re going to discuss a few lessons we can learn from observing successful ecommerce enterprises in China.

As discussed, China’s digital giants have created sophisticated ecommerce ecosystems that offer a range of services, from social networking to logistics, and enable independent brands to leverage the ecosystem’s infrastructure to market their products and services to customers. For example, Alipay, a mobile, online payment platform by Alibaba that’s installed on almost every mobile device in the country, integrates the offerings of companies from Alibaba’s huge retail network and enables consumers to pay for virtually any product or service. Tencent’s WeChat Pay works similarly; its deep integration with external platforms makes transactions for consumers easier than ever. Sub-applications within the WeChat ecosystem allow brands to showcase their products and services within virtual stores all the while taking advantage of a huge user base, data tracking, analytics, and task management tools. Following Tencent’s success in implementing such sub-applications, other super apps followed suit and adopted a similar approach to ecosystem expansion.

Although TMall accounts for 64% of China’s total B2C ecommerce market (followed by JD with a 26% share), other players such as VIP.com, Xiaohongshu (RED), and Ymatou are catching up with specialized platforms. The key to them all, however, is that, besides ecommerce, these platforms provide many other services and, even more important, access to a community of like-minded individuals.

Streaming services have dramatically altered the recommendations dynamic and shifted from passive algorithms to proactive recommendations, so consumers no longer have to search for desired products, but are offered them on the fly instead. By leveraging AI-driven deep learning and natural language processing algorithms, platforms communicate consumer interest to retailers so the latter can keep up with the demand. The Chinese have also been better at managing partner networks, opting to build a partner ecosystem instead of trying to build something in-house, which allowed retailers to quickly scale up and expand their offerings at double speed.

So, this is something to borrow from the Chinese innovators – a skillful and proactive approach to building and scaling ecosystems while leveraging innovative technology solutions such as AI and ML.

One of the problems of Western platforms, such as Amazon or TripAdvisor, is that there’s limited space for feedback, which typically takes the form of a simple scoring system and comments.

Chinese retail evaluation, on the other hand, is highly sophisticated and provides much richer content, which often includes storytelling, live streaming, pictures, and videos. China’s influencers can be found on all sorts of platforms from Weibo to TikTok, and consumers often consult several influencers and independent knowledge platforms, such as Zhihu and Zhishi Xingqiu, before making a purchase decision.

As consumers become more sophisticated tech users, they will eventually demand more information, which is currently very limited in the West. Sooner or later, the competition will drive Western retailers to spend more time and money teaming up with appropriate opinion leaders to educate users, promote their products and services, and drive sales in similar social ways.

Providing seamless continuous purchasing opportunities across all possible touchpoints is what makes Chinese marketplaces so successful.

Consumers can make purchases in a variety of ways: online at home, on the way to, or inside the store. They might want their fresh market produce delivered within an hour, at a specified time, or prefer to pick it up while shopping for other products.

When the highly successful Chinese fashion retailer Peacebird closed down its brick-and-mortar doors during the pandemic, it immediately switched to online channels because its online and off-line systems had been deeply integrated already.

When it comes to online purchases, Chinese buyers can purchase at any point in their online experience: browsing through a social media feed, when chatting with a friend, or by clicking on a picture, video, or live stream.

First and foremost, when considering similar approaches in the West, companies need to accelerate their digital transformations. Western businesses can achieve similar omnichannel experiences by investing in the deep integration of online and off-line selling, aligning and centralizing their sales systems as part of their transformation efforts, and partnering with other digital platforms. For example, Jumbo supermarkets and the seafood retailer Schmidt Zeevis in the Netherlands have both partnered with the online supermarket Picnic to make it easier for consumers to discover and order their products without necessarily downloading their native apps.

Chinese are extremely agile when it comes to logistics: by combining old-fashioned methods and high-tech software, Chinese companies have achieved unprecedented levels of speed and efficiency.

The speed is due to large-scale digital-first logistics integrators like Cainiao, which leverages hardware and infrastructure and optimizes them across the country. The last-mile delivery is typically supplied by a cheap labor force like freelance migrant workers on bicycles or electric scooters who are employed by third-party logistics companies such as Meituan. Although on bikes, these delivery freelancers use mobile apps with sophisticated technology that guides them to their destinations. Once the order is placed, a middleware system updates inventory, fires the information back to the company’s CRM, chooses the nearest outlet for delivery, and alerts the nearest delivery worker, who is then guided by the routing software to the right building for order delivery. Such a logistics mechanism is extremely efficient, cheap, and fast.

Although Western companies might not have access to such a cheap labor force, they can still employ technology to replicate the process. Faster and more flexible delivery services can be achieved through digitization of the back-end supply chain and deployment of cloud-based warehouse management systems.

Western companies will likely catch up with their Chinese counterparts as faster and better predictive analytics and autonomous vehicles become available for physical delivery.

Chinese companies have not only learned to promote engagement, but also loyalty. Customer loyalty is achieved in part by extraordinarily effective post-purchase management. By teaming up with influencers and cultivating fan communities, Chinese companies transform every post-purchase experience into a pre-purchase journey.

Chinese consumers are extremely well-treated. Most retailers offer instantaneous personal assistance via chatbots and 24/7 hotlines. Customers enjoy free returns within a week with no explanation and can conveniently pick up product maintenance or choose installation time slots within a retailer’s app. The loyalty programs are just as sophisticated and efficient – Taobao, Tmall, and JD offer daily coupons and discounts that generously reward loyalty.

As mentioned, the fan economy is steadily growing and takes a variety of forms. For example, Xiaomi, the home electronics company, has created a huge online ecosystem of more than 300 producers to sell products under the Xiaomi brand. These products, which all have a similar look and sell at an affordable price, have become extremely popular with Xiaomi’s fan base.

Western companies should continue investing in after-sales support and post-purchase engagement by developing more elaborate and sophisticated loyalty programs and partnering with other companies to improve existing services and offer new ones. To help you get started on developing your customers’ post-purchase journey, you may want to take a look at our article on  strategies to improve the post-purchase experience.