A user logging on to China’s video-streaming iQiyi platform would be greeted with countless hours of videos and movies that would be familiar to any Netflix or Youtube viewer. One key difference, however, separates iQiyi from its Western counterparts—while watching their favorite show, users can click on a link to purchase several of the costumes, products, and clothing being used on screen. This feature allows the app to reach consumers where they already are: online, and watching over 600 million hours of content a month.
Far from unique, iQiyi represents the new wave of Chinese businesses that are blending various forms of social media, entertainment, and commerce to reach even more consumers and grab a piece of the Chinese ecommerce market that exceeded $1.3 billion in sales in 2018. While the basic transactional nature of China’s online markets would be familiar to any online shopper, cutthroat competition and a shifting regulatory and economic environment are forcing companies to iterate and transform faster than their Western counterparts.
Pinduoduo, for example, is blending online shopping with elements of social media. Through integration with social media networks such as WeChat and QQ, Pinduoduo allows consumers to band together to form a “shopping team” that can leverage its size to purchase discounted items. As a result, a group purchase on the Pinduoduo app could save a Chinese consumer up to 90% off the original price, creating compelling incentives for friends to cajole each other into buying that high-priced good.
Xiaohongshu, translated as “Little Red Book,” is another ecommerce site melding popular aspects of online shopping and social media to appeal to urban Chinese. Specializing in beauty and fashion, Xiaohongshu allows consumers to not only buy a product, but also post images, videos, and commentary showing the product in action, granting potential buyers a better sense of what they’re purchasing. While traditional sites such as Taobao may offer users a greater selection, Xiaohongshu’s personal touch and social aspect made the platform instantly popular with users and garnered the company over $300 million in Series D funding in the summer of 2018.
Massive companies such as Alibaba and JD.com, along with newer entrants such as Pinduoduo and Xiaohongshu, have emerged from the pressure cooker of China’s highly competitive tech industry and are continuing to innovate to stay ahead of the rest. These companies, however, are driven by more than just the desire for greater market share. Serious economic headwinds are buffeting tech companies in every industry, with ecommerce under particular strain.
Troubling trade winds
The lengthy trade dispute between the United States and China has had its ebbs and flows over the past few years. Recently, however, there are signs indicating that continued market uncertainty is impacting the broader Chinese economy as well as Chinese consumers. While Chinese consumers have typically remained bullish throughout past times of economic distress, declining sales, a tepid property market, and rising household debt are dampening consumer confidence and spending. These negative trends are, in turn, forcing China’s largest ecommerce players to reevaluate their strategies.
Alibaba, by far China’s largest and most recognizable ecommerce platform, broke its own sales record for its annual Singles’ Day event after over $30 billion worth of merchandise was sold in one 24-hour period. Despite this record-setting day, Alibaba was forced to cut its 2018 revenue forecast late last year, citing changing macroeconomic conditions. While Alibaba continues to grow, even slight revenue target misses can rattle a market accustomed to breakneck growth and shattered sales records year-in and year-out.
JD.com, China’s second largest ecommerce platform, faces even tougher headwinds. The company endured a rocky 2018, with CEO Richard Liu fighting various allegations of rape and sexual misconduct. In December, US prosecutors ultimately declined to press charges, and the company’s stock and morale began to recover. Nevertheless, in April, reports emerged indicating that continued revenue losses and internal mismanagement were driving JD.com to significantly trim its workforce and cut salaries. Coming on the heels of worrying trends in the overall Chinese economy, JD.com faces a tough test as it looks to recover its lost momentum.
Alibaba’s course adjustments and JD.com’s internal problems indicate that not even the largest firms are exempt from the vagaries of the stock market or broader economic declines, but few investors predict that China’s two ecommerce behemoths will fall in the near future. For smaller ecommerce players, however, the stakes of the game are higher and economic downturns or shifting regulatory burdens can dramatically impact their futures.
Consuming with confidence
Enacted on January 1 of this year, China’s Ecommerce Law covers the registration and operation of ecommerce platforms by requiring that businesses obtain the proper licenses prior to selling online. In addition, the law places stricter oversight on ecommerce operators and seeks to cut down on false advertising and tax evasion, while simultaneously seeking greater consumer protection and data privacy standards.
“Larger players such as Alibaba will be able to comply with these laws and absorb the associated costs,” says Min Chun, Senior Project Leader for Daxue Consulting, a market research and management consulting firm that specializes in the Chinese market.” The Ecommerce Law will, however, “have an impact on the small and mid-sized competitors who cannot deal with the burden of additional taxes and regulatory requirements. For consumers, they are unlikely to notice a change,” said Chun. “Over time, they may notice that there are fewer sellers and SKUs available for products, but this indicates that counterfeit or suspect merchandise has been removed from the platform.”
With China’s 1.4 billion population, sprawling logistics chains, and sheer number of players, the actual effects of the Ecommerce Law will take time to trickle down to platform operators. Chun notes, “when conducting market research in China, it’s not uncommon to run across industry players who are directly affected by new legislation who are completely unaware that certain products, business practices, or methods are now banned or under increased scrutiny.”
* * *
For consumers, the shifting sands of China’s markets will likely play out in their favor, giving them access to more platforms, larger discounts, and higher quality goods. For ecommerce platforms, the new rules have raised the stakes, forcing them to experiment or be left behind.
Currently, China’s Generation Z—those born between 1995 and 2015—represent around 13% of total Chinese household spending. As new players explore the possibilities inherent in social media integrations, augmented reality, and real-time online purchases, expect more unique platforms to emerge and capture the eyes, ears, and wallets of young Chinese shoppers. Fierce competition, regulation, and the overall Chinese economy will ultimately determine winners and losers among large and small platforms, but Chinese consumers will undoubtedly be the greatest winners.