Last year was a remarkable year for investors, but the overriding theme to consistently emerge is the driving global force that is China, and with an unparalleled e-commerce market, its influence will continue for some time yet.
There’s an apocryphal Chinese curse, “May you live in interesting times”, which could well be the mantra applied to China in the current market, albeit carrying more positive, optimistic sentiment than the saying otherwise implies.
Despite geopolitical tensions from the ongoing US trade wars and the fierce tension stemming from the Hong Kong protests, China has been quietly working to further advance its burgeoning e-commence capabilities.
China’s e-commerce ecosystem continues to evolve rapidly requiring brand owners to be agile and experimental to adapt and evolve with the market. Underpinning this is the fact the Chinese government is not just a policymaker, but also an investor, innovator and consumer.
A recent research trip to China was undertaken to better understand the rapid development of its e-commerce market. Meetings took place with a wide variety of consumer brand companies, e-commerce (digital) platforms, Chinese consumer and online marketing consultants, regulatory specialists and foreign government trade representatives to ascertain how digital e-commerce is evolving and any emerging trends.
From the state closed-circuit video surveillance system photographing your every move, to Tencent, which provides a transaction record of human behaviour through Chinese super apps such as WeChat and Alipay, it’s painfully apparent China is one of the world’s largest investors and adopters of digital technologies.
The sheer scale and size of the Chinese market and digital consumer are something that are hard to comprehend. The Chinese population of approximately 1.4 billion people has 820 million mobile internet users, more than the US (260 million) and Europe (340 million) combined with mobile internet-only users totaling 20 per cent. A staggering 70 per cent of internet users also use mobile payments (compared to just 15 per cent in the US) and the total value of mobile payment transactions total US$40 trillion, which is 250 times the size of the US mobile payments value. WeChat has 1.1 billion active daily users and its mobile phone WeChat app account can be used to buy almost anything, by simply scanning a QR code. Astonishingly, China’s homeless use WeChat-supported QR codes to accept mobile payments when panhandling.
More recently, a new player in Pinduoduo, founded in 2015, has become the third-largest Chinese e-commerce platform with approximately 500 million active users and a market capitalisation of US$25 billion (listing just 18 months ago and rising US$1.6 billion). Pinduoduo offers a value for money proposition with a team purchase function, focused on the lower tier cities and less affluent consumers. It allows multiple buyers to leverage their buying power to gain discounts which, in some cases, can be material. The platform has been able to build scale and provides delivery direct from the manufacturer to each individual consumer, cutting out the middleman and saving distribution costs. The level of information Pinduoduo has on its consumers and their buying habits has allowed the company to create sociographs on its consumers. These provide links between buyers and buying habits creating a system to understand preferences and who is influencing consumer behaviour. The algorithms are able to help predict and drive future sales (an impressive development, if somewhat alarming).
The next level of digital innovation is already evolving where artificial intelligence is being used to scan crowds walking down the street and identify who has not paid their bills. It is a chilling development in terms of consumer privacy but highlights how the Chinese government is actively involved in helping facilitate digital investment.
The Chinese government has moved to regulate the digital sector only after a delay with weak enforcement of intellectual property rights in the early days, an approach that has given innovators plenty of space to experiment. But today, the government is playing a much more active role in building world class infrastructure and acting as developer and consumer.
For any Australian, or international brand businesses, the more active role being played by Chinese government at one level increases the risk around the license to operate. However, it also highlights that to succeed in China requires not only an understanding of the commercially dynamic and fast-changing e-commerce and consumer trends, but also the importance of government-to-government relations and need for good corporate stakeholder relations.
Hamish Tadgell is a portfolio manager with SG Hiscock & Company