E-commerce is on a roll in China

Buildings Brics: Online retailing in China is poised for rapid growth with transactions set to hit US$314 billion by 2015

Vendors who use the portal of Taobao, China’s leading online retailer, protest outside the company’s headquarters in Hangzhou, last month. AFP

There was nothing virtual about the protests outside the headquarters of Taobao, the leading online retailer in China.

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The company has faced a barrage of online complaints over increases in charges for vendors using its portal to sell goods, but many decided anger voiced through the internet was not sufficient.

They turned up in their hundreds last month outside the company's headquarters in Hangzhou, a city south of Shanghai. Their other complaints centred on an online feedback system said to be open to abuse, and increases in security deposits.

The protest was a reminder that, for all of Taobao's domination of China's e-commerce sector, the company is not invulnerable.

Part of the Alibaba Group, which is 40 per cent owned by Yahoo, the online retailer had a market share of 71 per cent in the second quarter of this year, down from 75 per cent the same period a year earlier.

Some observers have suggested the company's emphasis on low cost is the main reason for a loss of appeal as shoppers become more sophisticated.

There is little doubt, however, e-commerce as a whole is set for rapid growth in China. According to a report just released by Boston Consulting Group, China's online retailing sector, which is worth US$74 billion (Dh271bn) a year, could increase to $314bn by 2015, as the number of online shoppers in the country doubles from 145 million to 329 million.

It is perhaps no surprise, given the huge size of China's population of internet users, which has been estimated at 485 million. By 2015, 44 per cent of urban Chinese are forecast to be shopping online, helping to increase China's online share of retail sales from 3.3 per cent now to 7.4 per cent.

"For this industry, the growth rate will definitely be much faster than the total retail sales growth in China," says Marie Jiang, an analyst at Pacific Epoch in Shanghai.

That is saying something, given overall retail sales in China are now running 17.2 per cent higher than a year earlier.

Yet for all the breathless expansion, fuelled in part by delivery charges of as little as a sixth of those in developed countries, Taobao and other online retailers face a problem of trust, with many consumers concerned goods they are buying might be counterfeit.

For Taobao, which acts as a portal for both small vendors and larger retailers, this is a particularly acute issue, and one that in part has led to the protests.

Several Swiss watchmakers even launched legal action against Taobao with vendors accused of offering counterfeit goods online.

Ms Jiang believes this issue is being addressed as the sector matures. "I think these fake products were an image when Taobao first started. There were a lot of vendors in there," she says.

"But all the business-to-consumer online sites want to build up a quality image among consumers, so I think right now, if you buy something … it's quite rare for the consumer to buy fake products."

Concern over the sale of fakes has led Taobao to introduce measures such as minimum prices for certain luxury goods, as this should remove obvious counterfeit goods. The company has also set aside significant sums to compensate customers who have bought fake products.

While Taobao is the first name that springs to mind when talk to turns to online retailing in China, it faces growing competition from Jingdong Mall, which operates through 360buy.com and has about one fifth of online sales. Sales through Jingdong Mall's website are more than doubling annually. It is advancing plans for an initial public offering in the first half of next year that could raise as much as $5bn, even though the company is not yet generating profits.

What is notable about China's online retailing sector is the lack of prominence of big names such as eBay and Amazon, mirroring the struggles the likes of Google have had in breaking into the world's most populous nation.

The fact that vendors are charged to sell items on eBay, in contrast to Taobao Marketplace, which generates revenue through advertising rather than by taking a cut of sales, is blamed for the company's demise in China.

Amazon is not giving up without a fight, however, and hopes to improve its market share of 2.9 per cent.

In an interview with Chinese state media, Wang Hanhua, the president of Amazon China, insisted there would be "a lot of winners" in China's e-commerce sector, suggesting perhaps the dominance of Taobao and Jingdong would not last for ever.

Amazon has rebranded its Chinese website. "They invested a lot in sales and marketing, so they are acting more and more aggressively than previously," says Ms Jiang.

"In e-commerce, you need to react very fast, but if all the actions have to be taken by the American side and go back to the Chinese side, they will waste a lot of time. It's one example of the problems US companies have in China."

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