IS5600 Seminar 3

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IS5600 Seminar 3

• Electronic Commerce in China

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E-Commerce in China

• A HK workshop seeking to apply U.S. experience to
  China was characterised as the blind leading the
  bemused.
• Experienced Chinese business people dismiss
  proponents of the Internet as crazy and/or out
  of touch with reality.
• A Fortune 500 CEO asserts that e-commerce in
  China is hopeless.
• Are expectations realistic?

These slides are based on work undertaken by
Martinsons since 2001, as well as more recent
research.
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No Shortage of Teachers Learners

• PRC enterprises hope to benefit from e-commerce.
• Chinese managers are eager to learn from dot-coms
  and Internet-enhanced businesses in the West.
• Wise men and women from the West, many touting
  themselves as e-business consultants, have been
  eager to advise Chinese clients.
• But it is difficult to transfer/apply e-commerce
  models prescriptions from market economies to
  China and make them work.

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What are the Issues?

• What are the salient characteristics of the
  business environment in China?
• Are e-commerce models and prescriptions
  transferable from the West to China?
• Which e-commerce revenue models are likely to be
  suitable for China?

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Challenges Facing E-Commerce in China

• Historically, Internet access has been limited
  and relatively expensive
• Limited of vendors buyers online
• With few vendors, who would buy?
• With few buyers, who would try to sell?
• Credit cards are relatively rare and rarely used
• Online security is perceived to be unreliable
• Transportation logistics networks
• are limited in scope and reliability
• often exhibit poor supply chain integration
• Informal processes/data are widespread
• Lack of consistent, comprehensive or enforceable
  set of rules for commerce

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What is the Fundamental Basis for Commerce? Rules
or Relationships?

• China
• Lack of rules
• Transactions between people who know and trust
  each other
• Informal and contextual information
• Implicit agreements rather than formal contracts

• Market Economy
• Full set of rational and impersonal rules
• Transactions between independent parties
• Generous amounts of public information
• Transactions can be adjudicated by 3rd party due
  to formal contract (transparent)

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THEORY OF RELATIONSHIP-BASED COMMERCE
Lack of consistent, comprehensive, and
enforceable Rules
Personal trust
Private and contextual information
Lack of separation between economic political
actors
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RELATIONSHIP-BASED E-COMMERCE
Personal trust
Private and contextual information
Lack of separation between economic
political actors
Limits of business partners
Information is not formalized or
disseminated
Distorts market by adding political criteria
Restricts market scale
Limits transparency of business activity
Encourages special favours (guanxi)
Discourages business services development
Privileged interests oppose or restrict
e-commerce
Few existing business services to leverage
Difficult to achieve profitable scale or scope of
e-commerce
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RELATIONSHIP-BASED COMMERCEONLINE CONSEQUENCES

• Fragmented markets for most goods and services
  limits advantage of online reach
• Online ventures can not leverage existing
  business services
• Scope of an online business determined more by
  what is necessary and possible not by the most
  efficient way of doing things
• Limited potential to coordinate/integrate supply
  chain why go online?
• Powerful opposition to e-commerce??

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E-COMMERCE IN CHINAEMERGING SUCCESS STORIES

• Mecox Lane (B2C)
• From mail order sales to online retailing

• Li Fung (B2B)
• Traditional B2B intermediary goes online

• Asia Aluminum Holdings (B2B)
• Builds a B2B marketspace

• cTrip.com eLong.com (B2C)
• Online travel, bookings, reservations,

• Alibaba (B2B C2C)
• Online marketspace China and Global

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Mecox Lane

• Established in 1996 as mail order pioneer
• Based in Shanghai large affluent market and
  good infrastructure
• Gradually gained consumer trust word of mouth
  advertising to highlight its guanxi
• Alliance with post office for distribution
• Persuaded local banks to provide facilities for
  credit card purchases
• Online in April 2000 after cultivating government
  officials for approval competitors closed down

http//www.m18.com/
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• Set up in 1906 to export porcelain silk from
  China
• Supplies garments, fashion accessories,
  electronics, toys to The Gap, J.C. Penney,
• Manages supply chain product design, quality
  control, shipment warehousing, letters of
  credit
• Capitalises on fragmented manufacturing industry
• Trust-based relationships with 6,000 suppliers
• Most value added by guanxi specific knowledge

http//www.lifung.com/
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Asia Aluminum Holdings

• AAH founded in 2000 by Chinas largest aluminium
  extrusion and fabrication firm
• Created on-line trading platform with many
  bundled services
• Overcame limitations through alliances
• Payment - prodded domestic banks
• to enable EFT and create Internet Debit Card
• to provide collateral loans for commodity trading
• Distribution - logistic warehouse mgmt firms
• Security - digital certification with China
  Telecom
• Starting to capture benefits of a network effect

http//www.i-metal.com/
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cTrip eLong

• 680B China travel market
• cTrip eLong emerging online players
• cTrip - 240M sales revenue in 2004
• 80 of revenue from hotel bookings
• 25 of payments made by CC (rising slowly)
• Online booking, but offline payment
• Call centres needed
• Bike courier delivery of tickets
• Few e-tickets
• May change with 2008 Olympics

http//www.cTrip.com http//www.eLong.com
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• Alibaba founded in 1999 by Jack Ma in Hangzhou
  now global in reach.
• Now 15 million registered users in 200
  countries/territories
• US4B of trade through Alibaba in 2004.
• Both China domestic and Int-China trade.
• B2B and C2C conversations and payments
• Yahoo! Buys 40 of Alibaba shares for 1B
• strategic partnership Yahoo! focus on China

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Lessons for China?

• Overcoming infrastructure limitations
• Getting Government approval
• Leveraging relationships
• Developing partnerships
• Developing trust
• Provide value-added intermediary services in
  fragmented industries
• Gain (or enhance) competitive advantage by
  building upon existing strengths and buying in
  new ones.

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E-Commerce Questions Discussion

• Will the Internet be
• a catalyst for transition to rule-based
  commerce?
• used to improve relationship-based commerce?
• Will Chinese people trust the system?
• Will privileged interests risk losing power?
• Which relationship factors will prove most
  influential?
• Is the Yahoo-Alibaba partnership a) long term, b)
  secure, c) a one-off or a sign of changes to come?

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E-Commerce Questions Discussion

• Which revenue models do you feel are most
  appropriate for the China EC market?
• Merchant?
• Intermediary?
• Bricks n clicks or pure digital?
• Will EC remain a niche industry in China or move
  to the mainstream?