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China braces for virtual market war

Virtual price wars disrupt real markets in China

Gulf News

Will online shopfronts demolish brick and mortar stores in China? From online modelling agencies to cut-throat price wars, the very nature of the marketplace is changing overnight, threatening to disrupt traditional businesses like never before.

A glimpse at the alternative market reveals the staggering transition taking place in a conservative market like China — where online shopping is fast changing supply chains and employment avenues.

At least 35,000 models are employed to sell anything from baseball bats and fur shoes to plasma televisions at China’s six million electronic storefronts. Stranger still, Alibaba, the e-commerce behemoth of China, itself offers model-for-hire and back-end photography services to the thousands of shops being hosted on its subsidiaries Taobao Marketplace and Taobao Mall, China’s most popular online shopping sites.

According to some estimates, the two e-shopping platforms are expected to see more than $31.45 billion worth of products traded this year. The size of China’s overall e-commerce market expanded to $75.5 billion in 2011. It will grow dramatically through 2013 at a compound annual rate of 48 per cent to hit RMB 1.5 trillion.

This growth will be fuelled by an expected increase of more than 60 per cent in the e-commerce customer base and a projected 40 per cent or more surge in customer spending.

Disruptive discounts

The explosive nature of growth spawned by business-at-a-few-clicks became unusually vitriolic this month, with Chinese shoppers caught in the midst of a controversial cut-throat price competition by home appliance online retailers.

Since early 2011, the biggest retailers had launched a series of price wars to increase trading volume and expand market share. By mid-August, however, companies like 360buy.com, Suning.com and Gome Appliances took it to a new level, offering massive discounts, with each company claiming to sell its products at lower prices than its competitors. Although this has temporarily spiked sales, it has also triggered concerns over potential market disruptions.

The latest price war has customers and market observers worried. While consumers feel that absurd discounts may leave them shortchanged, experts fear that excessively low prices may affect upstream suppliers and create disorder in the supply chain due to sudden order spikes.

According to the China Market Monitor, a firm specialising in home appliance market research, offline sales growth of large electrical goods such as televisions, washing machines and refrigerators declined by 20 per cent in the first two months of 2012, while online trading volume of large home appliances increased by 150 per cent during this period. The clothing business via e-commerce is doing equally well and is expected to reach $80.7 billion by 2015.

Only way is up

The negative consequences on physical stores is yet to be quantified, but the epicentre has very definitely shifted to mobility.

The major players and beneficiaries no doubt are the mobile phone and logistics sectors. Virtual shopping in China can only go up, aided by an increasingly cyber-savvy population. The number of mobile internet users reached 338 million in 2011 and is predicted to grow at a rate of 148.3 per cent in 2012. That growth demonstrates tremendous potential for mobile e-commerce. By July, China had 1.06 billion mobile phone accounts and at least 7 out of 10 connections this year have been for 3G network services.

Similarly, as online sales grow, Chinese express logistics companies can barely cope with the demand. Delivery firms such as Shanghai-based YTO Express Co and SF Express are buying and renting more aircraft, leasing cargo storage at airports and adding more delivery options. Giving tough competition are global shippers United Parcel Service Inc and FedEx who are currently applying for licenses to operate intercity services in China.

The online canvas, however, is not infinitely stretchable as consumer companies well know. Suning and 360buy, the second largest online retailer, both expect net profits to fall this year, despite sales growth. The virtual market at best can provide an alternative market platform, but real demand still pulls the strings.

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