China eCommerce Landscape

China eCommerce Market

Analysis Report 2013

July 2013Chapter One Industry Review and Forecast

1.1 Growth trend of the eCommerce market in China

1.2 Growth trend of online shoppers in China

1.3 New trend of the eCommerce market in China

Table of Contents




Table of Contents

1.1.1 Key Note – China eCommerce Market

- Market scale in 2012: RMB 1.2 trillion

- CAGR in 2003-2011: >100%

- Share of total retail volume: >6%

- 3G/4G coverage increases opportunities for consumers to use mobile shopping via handset

- Spending from the affluent class increases and is shifting to online channels

- Increases in credit card usage together with more developed logistic facilities, both helping to lift the online shopper base

- The growth rate of online shopping market in China is faster than any other country in the world.

- Retail e-channels in China outweigh any other country in the world

- New market entrants can expect at least 3 times growth according to the recent forecast about the market volume in 2020

Largest online shopping market in the world

Growing number of online shoppers and more comprehensive peripheral services

China – Emerging retail online development for global brands

－1－

1.1.2 Growth Trend of the eCommerce Market in China

The size of online shopping transactions in China continues to grow rapidly, with 10 times the increase over 5 years.

In 2012, the online shopping transactions hit RMB 1,259.4 billion, with an annual growth rate of 66.5%.

2006-2012 Online shopping transaction amount and growth in China

258 5421208

2500

5231

7566

12594

64.0%

110.1%

122.9%

107.0%

109.2%

44.6%

66.5%

2006 2007 2008 2009 2010 2011 2012

Online shopping amount (hundred million dollars)

Annual growth rate

Data Source: CNNIC,“2012 Online Shopping Market in China Research Report”, March 2013－2－

1.1.3 Size Forecast of eCommerce Transactions in China

Putting aside inflation into consideration, the size of eCommerce transactions in China will reach a conservative guess of RMB 2.5 trillion to 4 trillion by 2020, which is 3.5 times of the size in 2011.

Size of online shopping transactions in China, 2003-2020

397

258

61

75

60

23

159

242

74

4527

136.131.91.20.6

2003 2004 2005 2006 2007 2008 2009 2010 2011 20151 20201

RMB 10 billion

High Case

Base Case

Low Case

Data Source: McKinsey Global Institute, China’s e-tail revolution: Online shopping as a catalyst for growth, March 2013－3－

1.1.4 Online Shopping in China vs International Markets

China will become the largest online shopping market in the world; its online shopping scale:

- Exceeded Japan’s to rank world’s No.2 in 2011

- Is even higher than the sum of UK, Germany and Korea combined

- Is predicted to exceed the United States’by 2015 and become the world’s largest online shopping market

Scale of online retail market in 2011

Data Source: McKinsey Global Institute, China’s e-tail revolution: Online shopping as a catalyst for growth, March 2013

119

74

66

34

20

13

12

7

6

United States

China

Japan

United Kingdom

Germany

Korea

France

Brazil

Russia

－4－

1.1.5 Growth Rate of Online Shopping Scale in China vs International Markets

The compound growth rate of online shopping in China in 2003-2011 exceeded 100%, with an expansion speed that was faster than any other country in the world.


RMB 10 billion

2003 2004 2005 2006 2007 2008 2009 2010 2011

United States

China

Japan

United Kingdom

Germany

Korea

France

Brazil

Russia

Canada

17％

120％

27％

18％

22％

19％

35％

34％

39％

14％

CAGR03－11％

Online retail market in 2003-2011200

150

100

50

0

－5－

1.1.6 Share of eCommerce in Total Retail Sales

China’s eCommerce penetration has already surpassed the US:

- In 2012, China’s eCommerce trade sales was 6.3% of total retail amount, while US’s was only 5%.

- It is estimated that by 2020, China’s eCommerce trade sales will be 10-16% of the total retail amount.

Share of China’s eCommerce in total retail amount in 2008-2013

Data Source: CNNIC,“China Online Retail Market Data Analysis Report 2012”, February 2013

7.4%

6.3%

4.4%

3.5%

2.1%

1.3%

2008 2009 2010 2011 2012 2013e

－6－

1.1.7 Major Factors Pushing the Growth of eCommerce

Factor 1: By 2020, the online spending per capita will reach RMB 1,500 – 2,400 per year, which is 3 to 5 times the current size.

Factor 2: Expanded 3G and 4G penetration helps boost the no. of online shopping users, while broadband penetration drives the growth of PC-based online shoppers.

Factor 3: The use of credit cards is increasingly common, which further facilitates online shopping.

Factor 4: By 2020, the affluent class in China (with a minimum annual average household disposable income of RMB 120,000) will reach 280 million, i.e. 20% of China’s total population. Spending will surpass Japan to be world’s no. 2. 60% will choose online as their major spending channel as they shift to online shopping from other spending channels.

2011-2020 Online spending per capita

Data Source: McKinsey Global Institute, China’s e-tail revolution: Online shopping as a catalyst for growth, March 2013BCG,“The Affluent Will Be a Major Driver of Consumption Growth in China”, November 2012

Online spending per capitaRMB / person

High case Base case Low case

5.3x

441

2360 1839 1533

441 441

4.3x 3.5x

Year 2011

Year 2020

－7－




Table of Contents

1.2.1 Key Note – Growth Trend of Online Shoppers in China

- No. of eCommerce users in 2012: 240 million

- The vast territory and high prices of real estate are beneficial to online shops’development

- Consumers from third or fourth tier cities or from rural areas tend to choose e-tailing as the coverage of actual shops is inadequate

- Online shop guarantees that brands achieve maximum penetration to target consumers

- High prices of real estate and increasing salaries eat up a large proportion of profits of traditional retail business

Largest eCommerce population in the world

Vast territory impacts online shops’development

Online shop: the best channel to enter the China Market

－8－

1.2.2 Population and Growth Trend of eCommerce Consumers

Despite the fact that the growth rate of internet users has slowed down, the online shopping population is rapidly growing. China’s online shoppers have reached 242 million people, raising the proportion to 42.9%.

China’s online shopping population and penetration in 2006-2012

Data Source: CNNIC, “2012 Online Shopping Market in China Research Report”, March 2013

33574641

7400

10800

16051

19395

24202

24.5%22.1%

24.8%

28.1%

35.1%

37.8%

42.9%

2006.12 2007.12 2008.12 2009.12 2010.12 2011.12 2012.12

Online shopping population (ten thousand people)

Online shopping penetration

－9－

1.2.3 China’s Online Shopping Population Penetration vs Other Countries

In China’s retail market, the internet coverage already surpassed the coverage of real retail shops. Due to the vast territory and high prices of real estate, the coverage of real retail shops is limited. For the consumers from third and fourth tier cities or rural areas who cannot access real retails shops, they will choose online shopping.

A unique factor in China is that internet coverage far exceeds coverage for top retail shops

Data Source: BCG,“The World’s Next E-Commerce Superpower: Navigating China’s Unique Online-Shopping Ecosystem”, November 2011

UK

France

Germany

Korea

USA

Japan

Brazil

China (Cities)

Indiat

The internet coverage within cities in China almost reaches a country’s level…

⋯ while retail consolidation almost reaches

a developing country’s level.

China’s e-commerce benefits consumers with its ability to offer more products.

52

51

49

44

30

27

26

13

3

Retail Consolidation (Proportion of top 20

retailers in total retail sales, %)

81

76

80

78

87

81

33

51

7

Internet Coverage(Population Proportion, %)

－10－

1.2.4 Key Driving Factor for Online Shopping Population Growth

The penetration of broadband network helps to increase China’s internet users, as well as the popularity of online shopping. China had 129 million broadband accounts but broadband penetration only accounted for 30%. As broadband’s popularity and speed increases, we can expect a better online shopper base which will drive the expansion of eCommerce in rural areas.


Broadband users and penetration in 2011

China

USA

Japan

Germany

France

UK

Russia

Korea

Brazil

Canada

Mexico

India

129

81

27

22

21

18

18

15

14

11

9

8

30

68

55

59

77

67

35

81

26

78

33

3

Residential broadband usersMillion

Broadband penetrationPercentage

－11－




Table of Contents

1.3.1 Key Note – New Trend of eCommerce Market in China

- The independent merchants proportion in eCommerce is 70% in US, while China’s is only 10-20%

- More than 50% users are influenced by social media when deciding to make a purchase

- The popularity of smartphones is only 1/4 of those in developed countries, but mobile shopping penetration rate is 1/2

- The advantages of independent merchants include high quality products and brands, integrated after-sales service and standardized logistic management

- Potential of shopping power driven from social media, as well as increase in number of traffic and users driven from smartphones.

Huge growth potential for independent merchants

The use of smartphones increase the online shopper base

Independent merchants have an advantage for future development

－12－

1.3.2 Structure of China eCommerce Market vs Other Countries

Compared with the independent merchant proportion of 76% in US, there is a huge potential for independent merchants in China. According to the statistics by McKinsey, independent merchants in China numbered 10% in 2011, while there was 76% in USA at the same period. As there is an increasing need, in addition to maturity of new brands in the marketplaces, we foresee a great potential for independent merchants.


Comparison of eCommerce Platform and Independent Merchants

50%

80%88% 89% 93% 93% 92% 93% 90%

24%

50%

20%12% 11% 7% 7% 8% 7% 10%

2003 2004 2005 2006 2007 2008 2009 2010 2011

76%

2011

RMB billion

2 5 16 27 56 128 263 461 774

China United States

eCommerce Platforms

Independent Merchants

－13－

1.3.3 The Growth Trend of Users Driven by SoLoMo

Sharing on social media drives users’passion in online shopping. Half of its users were stimulated by social media to shop or choose a brand. The development of social media drives some behaviors such as conformed purchasing, conspicuous purchasing and advance purchasing – but mostly to help users have better choices in products and brands.

Data Source: CNNIC,“2012 Online Shopping Market in China Research Report”, March 2013

Social media platforms mainly used by online shoppers

Weibo

Mogujie

Meilishuo

iGuang

Leho

Duitang

62.2%

33.1%

25.9%

10.1%

7.1%

5.7%

No. of purchases influenced by social media on users over the past 6 months

Over 10 times

6 - 10 times

4 - 5 times

1 - 3 times

7%

15%

23%

55%

－14－

1.3.4 The Growth Trend of Users Driven by SoLoMo

The popularity of smartphones helps the 3rd and 4th tier cities and rural areas to overcome the limitation of fixed broadband to directly enter the mobile shopping era. Mobile shopping in China was less than 2% in 2011 but grown to 4% in 2012, expecting an even higher jump in the future.

PC-based online shopping vs mobile shopping in 2010-2016

Data Source: iResearch,“China Online Shopping Research Report 2012”

99.5% 98.5% 95.8% 91.9% 88.3% 84.9% 82.2%

0.5% 1.5%4.2% 8.1% 11.7% 15.1% 17.8%

2010 2011 2012e 2013e 2014e 2015e 2016e

PC-based Online Shopping percentage (%)

Mobile Shopping percentage (%)

－15－

1.3.5 The Proportion of Users Driven by SoLoMo vs Other Countries

As of 2011, mobile commerce accounted for only 2% of the eCommerce market, while China’s smartphone penetration rate was only 10%. Just a year later, China’s mobile eCommerce represented about 4% of the total eCommerce market. Research also showed that the smartphone penetration is likely to increase to 23% in 2015, because of the higher tendency of average Chinese smartphone users to shop online, which brings much potential to future development.

2011 mobile commerce and smartphone penetration in major eCommerce markets


Share of mobile commerce% of eCommerce

Smartphone penetration% of population

USA

UK

Germany

France

China

Korea

42

49

35

37

10

42

5.4

4.8

3.6

3.4

1.9

0.6

－16－

－17－

Summary

- eCommerce development in China is yet saturated given the growing number of internet users, broadband coverage, smartphone coverage, and the rising of average disposable income.

- The affluent consumers in China, especially for those from small cities, are looking for high quality products and brands. The expansion rate of offline shops is far behind the expectations of these consumers.

- For brands and retail merchants who want to enter China market, the best way to maximize contact with target consumers is to set up online shops. This way they can also standardize service levels and maintain the brand image.

- Compared with the United States’market structure, and in addition to the users’increased need and maturity of new brands in the marketplaces, independent merchants will play an important role in the future of China’s market.

－18－

Appendix – Definition of terms

- Internet users : Chinese citizens who have used the internet in the past 6 months

- eCommerce: The trade of products or service via internet, mainly referring to the B2C and C2C trading. Users search for the product information on the internet, send a purchase request via the e-order service, and then complete the purchase via online payment or COD. Online travel booking and B2B trading are not included.

- eCommerce consumer: Internet users who have purchased products or services online in the past 6 months.

- Independent merchants: A sub-industry or mini-market which operates an e-trading platform, and provides a complete e-commerce solution to the consumers. Independent merchants comprise of a full range of services tailored to its consumers, providing a strong channel for sales and marketing and branding promotions. Example: VANCL and Lefeng

- eCommerce Platform: A platform for corporations to provide online trading to individuals. Corporations and merchants can make use of the shared resources such as basic infrastructure, payment platform, security platform and management platform to operate their business activities in a more efficient and low cost manner.

- Exchange rate: Based on USD and RMB rate of 6.13 in July 2013

－19－

China eCommerce Market Analysis Report

Chapter OneIndustry Review and Forecast

END

Stay tuned for

Chapter TwoCharacteristics and evolution of China eCommerce users

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