Dongfeng Village:  It was a Cinderella story: a vegetable-growing hamlet in China's eastern Jiangsu province that transformed itself into a village boasting millionaires and expensive cars, all through plywood, ingenuity and the internet.

In 2007 Sun Han, the 30-year-old de facto e-commerce chief in Dongfeng Village, fell in love with the designs of Swedish furniture giant Ikea and decided to make similar furniture of his own to sell on the internet.

Others in his village soon followed suit and the fairytale of wealth was born.

What were once vegetable plots have been converted into workshops and storefronts. Sun's factory, sitting on just over an acre of land, now churns out knock-off Ikea shelves and beds to fill the 200 orders he gets a day on his two online shops. But the story may not have a happy ending for everyone.

Intense competition has fuelled price wars among furniture vendors. That, combined with fee hikes from China's leading online e-commerce platform, Taobao Mall, this year forced the closure of some of fledgling businesses in this dusty village that is home to more than 1,000 Taobao furniture sellers.

"There is more competition now, but we need to continue to innovate and meet customer needs," said Sun, who looks more like a professor than a village business chief, in his black leather loafers, grey tweed jacket and half-rimmed spectacles.

Another furniture maker in the village, Wang Le, is more blunt about the situation. As others have rushed to imitate those making the copycat furniture, he says, profit margins have been undermined for all.

Fall from grace

"With everyone making similar things and prices dropping, the competition is vicious," Wang, 29, said.

"You see that baby crib?" he said, pointing to an unfinished plywood crib on the floor of a decrepit brick room in his factory. "A few years ago, I could have sold it for 600 to 800 yuan ($95-$125). Now I can only sell it for 300 yuan."

Dongfeng village's fall from grace is reminiscent of what is happening in China's wider e-commerce market. Once the darling of private equity and venture capital firms, it is now set for a period of intense competition and shake-out.

Money entering the sector and the relatively low barriers to entry have spawned a multitude of e-commerce companies that are jostling for consumers' attention. From shoes to junk food, there are an estimated 25,000 online stores in China.

"Every private investor, most of them with more money than sense, tends to think they can replicate the Amazon model in China. And so that is what really created the competition, this flood of capital," said Michael Clendenin, managing director at Shanghai-based consultancy RedTech Advisors.

With 173 million Chinese people shopping online, China's e-commerce industry is expected to surpass 750 billion yuan ($118 billion) in gross merchandise value this year, more than the gross domestic product of Vietnam. It is expected to become the world's largest e-commerce market in 2015, Boston Consulting Group said in a report recently.

Though the waters for this market look promising, analysts warn that they are shark-infested.

"It's very competitive and the margins are quite low, so it's hard to make money in it... When we think about books, how much are books in China? It's so low, but you still have to give free delivery for 29 yuan," said Hong Kong-based Samsung Securities analyst Paul Wuh.

Negative margins

Amazon.com Inc usually reports operating margins of 3-5 per cent. By comparison, Chinese online book retailer Dangdang Inc reported negative operating margins in the third quarter.

Heavy spending on log-istics, waging price wars, holding steep discount promotions and splurging on massive offline advertising are what it now takes to be an e-commerce player in China and to stay at the forefront of consumers' minds.

"It's going to be the guys with the most to lose who are going to win in the end. And what do they win? They win a business that is low margin. It's just so tough," RedTech Advisors' Clendenin said.

Alibaba Group, founded by former tour guide Jack Ma, is the biggest e-commerce player in China. Its Taobao unit is now the single largest e-commerce platform in China, dominating more than 70 percent of all transactions made online and half of all parcels sent in China.

Taobao paved the way for other e-commerce players to compete, first by creating e-payment system Alipay and also by pioneering an overall e-commerce ecosystem.