Companies drive e-commerce, for now

What drives Chinese e-commerce? What is the structure of the e-commerce market? Interestingly enough, Chinese e-commerce is still driven by businesses, not yet by consumers.

Today, business-to-business transactions by small and medium-sized enterprises, or SMEs, account for some 50 percent of total e-commerce in China. In turn, larger businesses account for almost 23 percent of the total. Together, SMEs and large corporations dominate three-fourths of e-commerce on the mainland.

The rest of Chinese e-commerce is driven by individual consumers. Despite lower relative volume, this sector is growing fast and thus reflects future prospects in e-commerce. As McKinsey concluded in 2013, online shopping is the "catalyst for growth" in China's e-tail revolution.

Actual online shopping by Chinese consumers accounts for almost a fourth of the total (23 percent), while the rest belongs to online travel (2 percent) and local lifestyle services (1 percent).

As e-commerce expands and consumers become more familiar with it, online shopping will increase in China. For instance, despite its current small market share, online travel has been growing at a rate of 25 percent, which suggests huge potential. The same goes for such lifestyle services as catering, leisure and wedding services.

E-commerce as policy tool

The dominance of SMEs and large corporations allows the central government to use e-commerce as a policy tool. By supporting these businesses, the government is not only promoting e-commerce, it is supporting the shift in China's growth from manufacturing and exports to the ICT sector, to innovation and to consumption.

Support for the ICT sector is an immensely attractive policy instrument because it facilitates the advancement of both mass entrepreneurship and innovation.

Technologically, e-commerce creates new investment opportunities and jobs through the integration of the Internet with primary, secondary and tertiary sectors of the economy (agriculture and natural resources, industry and service industry, respectively).

Industrially, ICT is attractive because it lowers entry barriers. Since the sector is relatively new and has fewer dominant companies, it is easier to start a thriving e-business than to join the ranks of traditional brick-and-mortar businesses in which competition is more intense and margins are less attractive.

There is also a third factor: the age of most entrepreneurs. Since e-businesses require new technologies that are more familiar to young people, e-businesses tend to offer employment to a vital new segment of the labor force – highly skilled, ambitious young graduates.

So whether one looks at the market from the standpoint of the economy, new technologies, industries or demographics, the ICT sector in general and e-commerce in particular are likely to prove central to any effort to rebalance the Chinese economy away from the old growth model (investment and net exports) to a new one (innovation and consumption).

In the past, the U.S. and advanced economies were the ones who created and commercialized new ICT innovations. In the future, such innovations will be increasingly launched in China and in other large emerging economies.

Dr Dan Steinbock is a columnist with China.org.cn. For more information please visit: http://www.h5a3.com/opinion/DanSteinbock.htm

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