China's E-Commerce Market by SCcouncil


									China’s E-Commerce Market:
The Logistics Challenges
Distribution gains importance as online markets heat up in China
         population of more than 1.3 billion people. A middle class 200
         million strong and growing. More than 450 million Internet users,
         including 150 million online shoppers. As China’s remarkable
growth continues, the conditions for the e-commerce market are only
improving. But logistics, a key element in providing customer service,
remains a major challenge for e-commerce players big and small. If the
logistics market falters, will it bring down the e-commerce industry?
Not if the e-commerce players confront the issue — and quickly.

in barely five years, China’s e-commerce market—                                     in fact, managing logistics may be the main
which makes up almost 90 percent of its overall                                 differentiator as the online market heats up —
business-to-consumer (B2C) market—has become                                    along with other B2C segments, such as TV and
a formidable force. E-commerce has expanded                                     mail-order. We researched the e-commerce industry
at a compound annual growth rate (CaGr) of                                      to determine how major players are tackling the
90 percent over the past five years, rising from                                logistics issue. This paper highlights our findings.
roughly $750 million in 2004 to more than $32
billion in 2009.1 By 2014, we estimate the Chinese                              Trends in e-Commerce
e-commerce market will be worth $175 billion                                    amid the rapid growth in China’s e-commerce
(see figure 1 on page 2).                                                       market, several trends are shaping the near-term
     however, success in this rapidly growing                                   landscape.
market is not a given. in particular, logistics will                                 Rise in access channels. an estimated 150
be a challenge as e-commerce players attempt to                                 million people shop online in China today, accord-
reach more customers over wider geographic                                      ing to shanghai-based iresearch. That number is
regions while improving the quality of their offer-                             expected to rise significantly as more Chinese con-
ings. The growth of domestic express delivery—                                  sumers purchase internet-enabled cell phones—
most directly tied to e-commerce — is lagging                                   today more than half of China’s internet users
the exponential growth of e-commerce in China,                                  already use their mobile phones for internet access.
raising concerns about how well logistics players                               on Taobao (an eBay-like site that is the country’s
can handle ever-increasing volumes.                                             leader in e-commerce), more than 200,000 sellers
    All monetary amounts in this paper are U.S. dollars; growth rates are compound annual growth rates (CAGR).

                                                                                              China’s E-CoMMErCE MarkET   |   a.T. kearney   1
    Figure 1
    E-commerce is expected to continue its growth spurt through 2014

    E-commerce market size
    (2004-2014, US$ billion)
                                                                                           32                                                                        71
                                                                                                          42                                        57
                                                                              18           28                                        41
                  0.6              2         4      3           8                                                       26
         0.76              2                                    7             17                          13
                  0.15             0.3              0.46              0.6          1             5
        2004             2005            2006                  2007         2008          2009           2010       2011        2012              2013             2014
    Sources: iResearch, Analysys International, A.T. Kearney analysis                                                                Note: Figures for 2010-2014 are estimates.

    Figure 2
    Top e-commerce cities today are along the coast

    Online spending coastal cities
    (2009-2010, US$ billion)


                                                                                                  0.53           0.51         0.44               0.44              0.44

      Shanghai           Beijing         Shenzhen               Hangzhou Guangzhou              Nanjing         Suzhou       Tianjin         Wenzhou            Ningbo
    Sources: Taobao, A.T. Kearney analysis

    have opened “cell phone stores,” which could                                                percent of the market in 2009 and driven primar-
    increase sales even more (see sidebar: Who? What?                                           ily by Taobao’s early successes. however, B2C is
    Why?...China and the Online (R)evolution).                                                  gaining momentum and is expected to reach 40
        Increase in B2C business. Currently, China’s                                            percent of the market by 2015. as C2C consum-
    e-commerce market is dominated by the consumer-                                             ers gain more e-commerce experience, they are
    to-consumer (C2C) industry, accounting for 85                                               moving to B2C sites searching for higher-quality

2   China’s E-CoMMErCE MarkET                              |   a.T. kearney
products and services (see sidebar: B2C On Your              and -4 cities, the ability to offer reliable and con-
Laptop on page 6). and as C2C sellers become                 sistent services and delivery will be among the
more established, they are launching their own               biggest challenges — and a major source of com-
B2C sites.                                                   petitive advantage.
     More geographic spread. The geographic
growth in online shopping is becoming a vital                Fixing Logistics: Three Proven Strategies
issue for the e-commerce industry. The consumer              The relative scarcity of high-quality logistics
market is currently concentrated in regions, with            providers in China often means problems for e-
the top 10 cities (in terms of Taobao usage) all             commerce firms: late deliveries, damaged and lost
located on the coast (see figure 2). shanghai is the         parcels, negative attitudes from delivery people,
largest market with $2.6 billion in total online             slow cash-on-delivery (CoD) processes, poor return
spending from May 2009 to May 2010, account-                 procedures, and no special services such as instal-
ing for 8.7 percent of total spending.                       lation or “product try-on.” such last-mile delivery
     however, eight of the top 10 fastest-growing            and customer interface issues inevitably affect the
cities on Taobao in terms of total online spending           creditability and brand image of e-commerce firms.
are inland tier-2 and -3 cities (see figure 3 on page 4).         Furthermore, e-commerce leaders in certain
This trend is expected to continue as wealth in the          industries — including baby goods, consumer
inland cities increases. as overall geographic cov-          electronics, telecommunications, computer prod-
erage expands with deeper penetration into tier-3            ucts and furniture — are struggling with logistics

Who? What? Why?...China and the Online (R)evolution
E-commerce has experienced expo-         cent in 2009 to 41 percent. accord-         More online security. With the
nential growth in China since the        ing to shanghai-based iresearch,        arrival of Web 2.0, e-commerce sites
mid 2000s, when it was just a blip on    almost 145 million people shop          in China have begun tracking and
the retail radar screen. What factors    online in China, most between age       publishing credibility records of
have spurred this online evolution?      18 and 35, with women shopping          online sellers, reducing the risk of
   More online shoppers. China           slightly more than men.                 fraud. This has helped e-commerce
has 460 million internet users—after         More purchasing power. China’s      overcome perhaps its biggest psycho-
86 million new users connected in        economic affluence has increased        logical barrier. reliable payment
2009. Yet this number is still low       significantly in the past decade.       methods, such as cash-on-delivery
when considering internet penetra-       Personal disposal income per capita     and alipay, are also making online
tion rates; China’s current internet     reached almost $1,500 in 2008 and       transactions more convenient and
penetration rate is 32 percent, com-     is expected to rise by 11 percent to    trustworthy. While “seeing is believ-
pared to the United states’ 77 per-      more than $2,800 in 2014. The per-      ing” still rings true for most Chinese
cent. But China’s internet users are     centage of households earning more      consumers, these payment methods
spending more time online, averag-       than $10,000 per year is also rising,   allow customers to see the products
ing 20 hours per week. The ratio of      from 3 percent in 2008 to an esti-      before paying for them, thus increas-
online users over age 30 rose 2.4 per-   mated 8 percent in 2014.                ing the number of transactions.

                                                                        China’s E-CoMMErCE MarkET          |   a.T. kearney   3
    Figure 3
    Online spending in tier-2 and -3 cities is growing fast

    Online spending
    (2009-2010, X times growth*)
         10.52             10.48

                                                            7.74              7.71
                                                                                                                  6.22             6.07
                                                                                                                                                     5.33              5.05

       Macau             Luohe               Ezhou         Simao           Qiqihar            Yunfu            Honghe         Wenchang             Xingtai          Guigang
    Sources: Taobao, A.T. Kearney analysis                 *X times growth refers to the number of times the city has grown; for example, Macau grew 10.52 times from 2009 to 2010.

    suppliers’ inability to handle large or irregularly                                     bottlenecks forced the company to establish its
    shaped shipments at lower costs. Few domestic                                           own express delivery operation, headquartered in
    express companies are equipped to handle freight,                                       shanghai, in January 2009. With its own network,
    and freight companies cannot provide door-to-                                           this consumer electronics, computer and telecom
    door service.                                                                           company now provides same- or next-day deliveries
        Faced with these and other challenges, we rec-                                      from four distribution centers in Beijing, shanghai,
    ommend three time-tested and proven strategies for                                      Guangzhou and Chengdu. The company plans to
    e-commerce firms to address their logistics needs.                                      invest more than $100 million to build a massive
        Build your own networks. Many large e-                                              new distribution center in shanghai in 2012,
    commerce players are choosing to build their own                                        which is said to include a 300,000 square-meter
    internal logistics networks, incorporating their                                        land with a 150,000 square-meter warehouse and
    own teams into the business model to ensure                                             the capacity to process 100,000 orders per day—
    quality. some of these companies established the                                        what would amount to a $3 billion business.
    in-house capabilities at their inception, but some                                           however, building a logistics arm is not for
    only did so after suffering serious logistics bottle-                                   every company — only for those with large
    necks from relying on third-party logistics centers                                     volumes and efficiencies, especially in last-mile
    and delivery teams. The improved quality and                                            delivery, which often accounts for half of total
    resource control have proved worthwhile, both                                           logistics costs. For example, with fewer than 500
    in increased speed of delivery and improved                                             deliveries per day in a city, deploying a company-
    customer experience.                                                                    owned delivery team could cost 15 rMB ($2.28)
        For example, posted a 300 per-                                           or more per parcel, eating away at profits. This
    cent growth rate in the past five years after logistics                                 cost could drop to less than 2 rMB ($.30) per

4   China’s E-CoMMErCE MarkET                        |   a.T. kearney
    parcel with more than 10,000 deliveries per day                                                                                              is wide, especially with back-up from the state
    in a city (see figure 4). as such, it is doubtful that                                                                                       postal service for remote areas.
    even the largest e-commerce players can fully                                                                                                     These large networks do not offer more com-
    address the demand internally and profitably,                                                                                                plex services such as scheduled returns, exchanges
    considering the wide geographic spread of the                                                                                                or collect-on-delivery (CoD). Given their fran-
    market. Leading companies understand if and                                                                                                  chised or sub-contracted models, there are also
    where to deploy their own logistics capabilities.                                                                                            inherent risks. For example, most players offer a
         Outsource to third-party providers. Given                                                                                               one- or two-week CoD repayment cycle, exposing
    the lack of scale and capabilities, most e-commerce                                                                                          e-commerce companies to a significant amount of
    companies still outsource their delivery services to                                                                                         risk, especially when many of the logistics and
    third-party express companies. Most express deliv-                                                                                           express players are franchised or heavily sub-
    ery providers in China can be grouped into two                                                                                               contracted. Ensuring the integrity and viability of
    types (see figure 5):                                                                                                                        the entity collecting the cash is a crucial element
         Large networks offering basic services. Firms                                                                                           to consider.
    in this group typically have large network cover-                                                                                                 an exception is shunfeng Express. The largest
    age but can provide only basic delivery services.                                                                                            private express company in China with more than
    Most rely on franchised models to expand rapidly                                                                                             2,000 fully-owned locations and reliable and fast
    (only 20 to 40 percent are self-owned) and com-                                                                                              service, shunfeng maintains a premium position
    pete mostly on speed and price. network coverage                                                                                             in the market. But its standardized services are not

    Figure 4                                                                                                                                     Figure 5
    Last mile (intra-city) delivery economics                                                                                                    The competitive landscape for domestic B2C
                                                                                                                                                 parcel delivery providers

                                                     40                       Owned

                                                                                                                                                             Topname                                      Shunfeng
                    (Average cost per parcel, RMB)

Last-mile delivery cost

                                                     25                                                                                                         TNT
                                                                                                                                                                                      ZJS                                STO

                                                                                                                                                                                                  ZTO      Yunda
                                                                                                                                                                                        HTO                             EMS

                                                                                                                                                                                 Star Express












                                                                                                                                                          Regional               Coverage and density                National
                                                                              Total parcels delivered
                                                                                      (Per city per day)                                                                                    Companies compete on network size
    Source: A.T. Kearney analysis                                                                                                                Source: A.T. Kearney analysis              C
                                                                                                                                                                                            Companies compete on service

                                                                                                                                                                 China’s E-CoMMErCE MarkET                    |   a.T. kearney   5
    B2C On Your LapTop
    These are exciting times for China’s                        clothing, 203 pairs of shoes and 164         wide retail sales compared with
    business-to-consumer (B2C) market,                          accessories every minute.                    10 percent in the United states and
    thanks largely to the growth of                                 online stores are expected to be         Japan and 5 percent in south korea.
    e-commerce. how are the different                           a big share of the e-commerce mar-           We expect TV shopping to reach
    market segments faring?                                     ket in the future, even as adoption          5 percent of Chinese retail sales in
        E-commerce. almost 90 per-                              rates vary across industries. The larg-      the next decade.
    cent of the B2C market in China is                          est e-commerce segments are home                 Mail order. Unlike European
    e-commerce, which has experienced                           supplies, apparel, publications              and north american markets, mail
    90 percent annual growth since                              (including books and DVDs), and              order remains a small market in
    2006. This rapid growth is expected                         consumer electronics (see figure).           China, with a few pure-play mail-
    to continue, with the e-commerce                                TV shopping. TV-based shopping           order companies and some top
    market possibly reaching $32 billion                        is the second-largest B2C segment            global firms (such as Bertelsmann)
    by 2014. More than 80 percent of                            reaching about $2.5 billion in 2009,         that entered in the 1990s and even-
    e-commerce takes place in online                            with four players (acorn, happiGo,           tually exited. Existing players tend
    marketplaces, of which Taobao (simi-                        oCJ and seven stars) comprising              to combine online shopping with
    lar to eBay), is the largest. Taobao                        roughly 60 percent of the market.            mail-order, with the latter serving
    customers combined account for                              Yet TV shopping is still relatively          mostly as a marketing tool.
    nearly 3 million transactions a day—                        new to China consumers—account-
    including purchasing 969 pieces of                          ing for only 0.2 percent of nation-

    Figure: The largest e-commerce segments in China are housewares, apparel, publications
            and consumer electronics

    Parcel volume                                                                                                          4.5
                                                                                                               4.0                  Others

                                                                                                  3.4                               Housewares

                                                                                                                                    Baby goods

                                                                                                                                    Consumer electronics
                                                 0.3                                                                                Publications
                     0.1           0.1

       2004         2005         2006            2007        2008     2009       2010   2011     2012        2013         2014
    Note: Figures for 2010-2014 are estimates.                                                      Sources: iResearch, Analysis International, A.T. Kearney analysis

6   China’s E-CoMMErCE MarkET                           |   a.T. kearney
for everyone. China Post’s EMs, with more than           founder, Ma Yun, also invested in Best Logistics,
20,000 locations, has the largest network, but           which subsequently acquired a 70 percent stake in
speed and reliability continue to be issues.             hTo; star Express and hTo are the major
     Smaller networks offering more complex              Chinese express delivery companies. however,
services. These typically fully owned companies          given Taobao’s size (3 million shipments a day) no
have relatively smaller network coverage—some,           logistics player or acquisition alone will meet its
such as Topname, only compete regionally—and             speed and service requirements. as such, alibaba
their focus on regional services enables full-fledged    plans to invest $4.6 billion over the next five years
value-added services such as warehousing, CoD            to build a network of warehouses across the nation.
and customized delivery. These companies are
selective about where they expand their networks,        Logistics: The Key to E-success
selecting cities only if there is enough volume, and     The rapid growth of e-commerce and the subse-
they focus mainly on the B2C market.                     quent logistics challenges means both e-commerce
     international companies such as FedEx and           companies and logistics providers have an oppor-
TnT also fall into this category. They have more         tunity to move quickly to address their problems.
limited networks than the domestic players but
offer a broader range of services and are more
reliable and consistent. other providers, such as
                                                         Figure 6
kerry Eas, also serve the B2C market, with
                                                         Logistics companies are investing heavily
strengths in warehouse pick-and-pack operations          to broaden their capabilities
rather than delivery.
     There is a clear gap in the market—as no
player offers the breadth of services needed at          Cost structure per parcel (illustrative)
a competitive price across a broad network                                        100%
                                                                                   4%           Collection
demanded by e-commerce companies. however,
                                                                                   6%           Sorting
many logistics companies are investing heavily
to broaden their capabilities to fill this gap, par-
ticularly in line haul and last-mile deliveries (see
                                                                                  37%           Line haul
figure 6). Warehouse pick-and-pack, which could
represent 40 percent of total logistics cost of a
parcel (and is a manual operation today), is
another opportunity. When sizing up a potential
third-party logistics provider, it is important not
only to look at their current capabilities but also at
their growth and investment plans.                                                53%           Last-mile delivery
     Form partnerships or acquire existing firms.
a third approach is to invest in existing logistics
companies or form partnerships with them.
alibaba, the e-commerce giant that owns Taobao,
invested $4.5 million in star Express. alibaba’s         Source: A.T. Kearney analysis

                                                                        China’s E-CoMMErCE MarkET      |   a.T. kearney   7
    The solutions are unlikely to come from e-                   third-party logistics providers. indeed, within
    commerce in-house logistics, for market growth               a few years, we expect to see a transformation in
    will soon make these unsustainable. The real                 China’s e-commerce logistics landscape, where
    solutions are more likely to be found in strategic           e-commerce plus logistics providers will equal
    partnerships between e-commerce firms and                    market success.

    Mui-Fong Goh is a partner and global leader of the firm’s transportation practice. Based in the Singapore office,
    she can be reached at
    Chee Wee Gan is a principal and a leader in the firm’s Greater China transportation practice. He can be reached
    Karen Chen is a consultant in the Shanghai office and can be reached at
    Apple (Yijun) Zhang is a consultant in the Shanghai office and can be reached at

8   China’s E-CoMMErCE MarkET         |   a.T. kearney
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