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Greed and Fear in China's e-Commerce MarketMay/June 2008ChainaOnline

Distributing in an internet enabled China

Logistics in China is complex and the additional complexities of managing logistics services for e-Commerce transactions make it even more daunting. But regardless of the challenges, the lure of China’s burgeoning e-Commerce market is too enticing to be ignored.

Due to the swift growth of the Internet and the country’s rising middle class, China’s e-commerce market is considered to have great potential. The online shopping population has skyrocketed from 1.6 million users in 2001 to 32 million in 2006, and all signs point towards the online user population growing at an unprecedented rate of 26% year on year. Conversion of this increasing pool from online users to online shoppers has ecommerce merchants salivating at the opportunity to capitalize on China’s evolving internet buying population.

Regardless of business model - Business to Consumer (B2C), Business to Business (B2B) or Consumer to Consumer (C2C) – successful e-Commerce business platforms subscribe to a number of basic core pillars:

• Sound IT infrastructure to handle all aspects of transactions including, but not limited to, online payment processing and order tracking.
• Trustworthiness in that the product is indeed delivered after payment is made and the product quality lives up to its claims. This is particularly critical amongst Chinese consumers whose shopping tendencies are traditionally governed by thorough investigation of a product before purchase.
• Strong customer service so consumers feel confident their transaction can be supported by a human being if needed.
• Availability of product for immediate fulfillment upon completion of the online transaction.
• Reliable delivery of merchandise with the ability to facilitate easy return processing and payment on delivery.

Existing players and new entrants to China’s e-Commerce market must recognize the unique challenges that exist within China’s budding market yet still strive to achieve their strategic imperatives. They will do this through forming partnerships with banks, marketing agencies and most critically, logistics service providers.

China ’s Unique e-Commerce Logistics Hurdles

Putting aside the realities of China’s logistics challenges such as regionalization, poor infrastructure, high resource turnover, weak IT capabilities and fragmentation among providers, serving the logistics needs of the e-Commerce sector brings a distinct set of challenges anywhere in the world.

LSPs that serve e-Commerce companies must offer reverse logistics including the ability to handle returns efficiently and manage customer relations effectively. Major activities in reverse logistics include collection, sorting and disposing of goods to their appropriate DC, warehouse or OEM. Moreover, e-Commerce companies often foster a sales culture that will put a premium on customer service, requiring the LSP to own both the problem and solution when handling returns. While these additional services may generate significant returns for logistics companies, the LSP’s lack of retail expertise coupled with the unpredictable volume of returns creates an inherent risk in the system. Indeed the risk and returns are so high that specialist in reverse logistics have emerged.

Full-service e-Commerce related LSPs must offer payment processing in order to be effective. And China’s underdeveloped electronic payment process systems mean that LSPs serve as payment collector upon delivery. As the cultural bias against debt and credit card usage wanes and online banking transactions become more common, collections services will require less support from the LSP. Until that time however, the LSP will have to invest in the skills and a level of technology to support customer account maintenance functions related to payment and collections.

Being part of the e-Commerce supply chain requires LSPs have a level of technical integration capabilities to provide for the real-time data demands of the industry. EDI (electronic data interchange) and bar coding are some of the more standard features already required by many brick and mortar shippers, however the expectation for web enabled tracking, GPS, electronic signature and wireless technology exceeds what many China based LSPs currently provide.

Contrary to common belief, e-Commerce is particularly vibrant among China’s tier 2 and tier 3 cities, largely due to the coupling effects of lacking choices in traditional retail stores in those regions and growing internet penetration. It poses unique challenges to LSPs as they need to process small shipments under tight time constraints across a wide geography, and in a cost-effective manner.

Now, compound China’s logistics challenges with the need to service these specialized requirements of the e-Commerce industry and the critical question becomes explicitly clear: Can logistics service providers throughout China meet the high demand of the e-Commerce industry?

Viable e-Commerce companies have proven that distribution can be managed despite China’s complex set of challenges. www.8848.net, a Beijing-based online seller of books, software, and consumer products came under early criticism for unreliable delivery by one of its subcontracting logistics partners. In response, the company turned to the national postal service to deliver goods and collect money for cash-on-delivery orders. In an effort to ease the flow of goods distribution, China online retailer Dangdang.com established more than 20,000 square meters of warehouse space in Beijing as well as in the southern and south eastern regions of China. Additionally, by partnering with local 3PLs throughout 180 cities Dandang was able to ensure efficient distribution to their customers.

China ’s complicated logistics realities coupled with the high demands of the e-Commerce market make logistics services in this sector quite tricky. However, the desire to capitalize on the logistics needs of the growing internet shopping population is justifiable and one that warrants serious consideration.

By Pilar Deiter and Sam Sun