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 $175 billion amid the rapid growth in China’s e-commerce
(see figure 1 on page 2). market, several trends are shaping the near-term
however, success in this rapidly growing landscape.
market is not a given. in particular, logistics will Rise in access channels. an estimated 150
be a challenge as e-commerce players attempt to million people shop online in China today, accord-
reach more customers over wider geographic ing to shanghai-based iresearch. That number is
regions while improving the quality of their offer- expected to rise significantly as more Chinese con-
ings. The growth of domestic express delivery— sumers purchase internet-enabled cell phones—
most directly tied to e-commerce — is lagging today more than half of China’s internet users
the exponential growth of e-commerce in China, already use their mobile phones for internet access.
raising concerns about how well logistics players on Taobao (an eBay-like site that is the country’s
can handle ever-increasing volumes. leader in e-commerce), more than 200,000 sellers
All monetary amounts in this paper are U.S. dollars; growth rates are compound annual growth rates (CAGR).
China’s E-CoMMErCE MarkET | a.T. kearney 1
E-commerce is expected to continue its growth spurt through 2014
E-commerce market size
(2004-2014, US$ billion)
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.
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
Online spending in tier-2 and -3 cities is growing fast
(2009-2010, X times growth*)
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 ($2.28)
For example, 360buy.com posted a 300 per- or more per parcel, eating away at profits. This
cent growth rate in the past five years after logistics cost could drop to less than 2 rMB ($.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
(Average cost per parcel, RMB)
Last-mile delivery cost
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
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
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%
demanded by e-commerce companies. however,
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 email@example.com.
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 firstname.lastname@example.org.
Apple (Yijun) Zhang is a consultant in the Shanghai office and can be reached at email@example.com.
8 China’s E-CoMMErCE MarkET | a.T. kearney
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