Perspective
The Present Situation of and Prospects for E-Business in China
Chunxiao Liang
Alibaba Group
Abstract
As e-business in China has evolved, it is being used in large-scale applications and is likely to maintain high levels of growth. China’s e-business also may take a leading role worldwide in the next five to ten years. Accordingly, e-business service is becoming a powerful engine for the development of e-business and commercial infrastructure in the information era. As the social and economic influences of e-business expand and deepen, a new commercial civilization rooted in an information-based economy is emerging. Building an institutional system that can adapt to the development of e-business is of key importance for shaping the future.
Keywords: development of e-business, present situation, prospects
Introduction
E-business in China has undergone four stages: start up, boom, regulation, and growth. In 2008, domestic online retailing reached RMB 100 million, which signaled that e-business had entered a phase of widespread growth, application, and operations. Furthermore, it is exerting extensive and profound influence on business behaviors, organizations, other institutions, and society in general.
E-business in China started essentially in 1995, when China Telecom began to provide Internet services to the general public. In northern China, the National Planning Committee built the Chinese Goods Order System (CGOS), the first online commodity trading system in the country. In southern China, the Chinese Yellow Pages provided the first application of the Internet to business. In the same year, IBM proposed the notion of e-business.
China’s domestic Internet industry and e-business really began to boom in 1998 and 1999. Leading e-business companies, such as Alibaba, Dangdang, and Netsun, were established during that period. Government-dominated e-business platforms, such as CGOS and the Chinese commodity trading center, emerged in succession. The local government and traditional industries also started to promote e-business applications.
Similar to the global Internet, China’s domestic e-business is affected by economic trends. As evidenced by the establishment of Taobao in 2003, e-business in China has rapidly evolved to feature a market orientation, domestic dependence, and innovation.
Finally, the application of e-business has been widespread and comprehensive. E-service also has emerged as a new driving force for the development of e-business. Accordingly, the impact of e-business has become more extensive and profound, facilitating the formation of a new business civilization. In the next five to ten years, domestic e-business appears likely to continue to grow rapidly, even to the extent that it will take a leading role worldwide. Regulation and adaptation of institutions as they develop e-business also will become a primary focus.
The Present Situation and Characteristic of E-Business in China
Prevalence, Application, and Operations
After years of unprecedented growth, e-business in China has reached a stage of widespread application and operations, as indicated by the sharp rise of e-business trading volumes and the number of e-business users. In 2008, e-business trading reached 3.1 trillion Yuan, then increased by 43% the succeeding year (Xinhua News 2009). According to the National Statistics Bureau, 423,480 large businesses achieved e-business trading volumes of RMB1.2 trillion. Furthermore, 31% of small to medium-sized businesses find suppliers through electronic means, and 24% conduct online marketing promotions. E-business thus is changing the patterns of business operations and organizations and accordingly improving the efficiency of resource allocations, management levels, and innovation capabilities (Ministry of Industry and Information Technology 2009).
In 2008, online retailing industry experienced three milestones. First, the number of online retailing consumers exceeded 100 million. Second, trading volumes went beyond RMB100 billion. Third, the amount of online retailing accounted for 1% of the gross trade in consumer goods. In 2009, online retailing maintained its momentum, and trading volumes increased by 105.2%, to 263 billion Yuan (iResearch 2010). As Figure 1 shows, this amount accounted for 2.10% of the gross trade in consumer goods, an increase of .92% from the previous year. From 2007 to 2009, trading volumes for online retailing thus rose by 117% on average, or 6.5 times the average growth rate of gross trading of consumer goods over the same period. The number of entrepreneurs also reached 63 million in 2009 (Alibaba Group Research Centre 2009a). Being an e-business user clearly has become a prevalent and popular trend.
Figure 1. Proportion of Online Retail Sales to Gross Retail Sales, Consumer Goods (2005-2009)
Source: National Statistic Bureau, iResearch (2010).
Rapid Growth of e-Service and Formation of Commercial Infrastructure
In 2009, the number of e-business Web sites reached 15,600, including 9,400 were business-to-consumer sites (CNZZ 2010). This figure increases by 32.34% every year. The number of e-business platforms also rose sharply to 5,000 by the end of 2009.
The service quality of e-service platforms also is gradually improving, which attracts more e-business users and promotes the applications of e-business. For example, 67% of online retailing operated an e-service platform in 2003, but 93% did in 2008. E-business platforms have become the main channel of online retailing, and cooperation between the platforms and their users is growing stronger.
Also improving are the systems that support e-business, such as authentication, credibility, logistic distribution, and e-payment (see Figure 2). For example, e-payments in 2008 accounted for RMB3.075 billion, with trading amounts of RMB286.3 trillion in total, which represented increases of 36.24% and 10.54% respectively, from the previous year. E-payments are now available for not only commercial transactions but also e-government services, aviation, insurance, and education. Whereas historically, agriculture and industry constituted the primary commercial infrastructure, e-service systems based on massive e-business platforms are becoming the most widely represented commercial infrastructure in this information-based era.
Figure 2. Service System for e-Business
Source: Alibaba Group Research Center (2009a)
Prominent Spillover Effects
The integration of e-business and traditional industries is driving the development of logistic distribution in financial and information technology (IT) industries. For example, for logistic distributions, the broad application of e-business has significantly accelerated express delivery services. In 2008, more than 500 million parcels were delivered through e-transactions, accounting for one-third of all deliveries in this industry (Zhang 2009). E-business also facilitates the development of emerging industries. As businesses, consumers, and governments become more involved in e-business, e-service providers emerge for various areas, such as e-transaction services, business processes, IT, and outsourcing. The e-service sector thus helps meet the needs of businesses, individuals, and government agencies.
E-business also advances upgrades to regional industry, which has regional economic effects. The diffusion of e-business has enabled small and medium-sized businesses to operate online, which allows them to grow and upgrade their offerings. These trends in turn drive the regional economy. In recent years, governments in Zhe Jiang, Guang Dong, Jiang Su, and Si Chuan have considered e-business an effective means to upgrade their regional industry and adjust their economic structure. Significant government efforts attempt to promote e-business, in line with its value as an impetus of economic development.
E-business also promotes foreign trade and strengthens domestic demand, which helps ensure economic growth. Emerging markets, such as South America and the Middle East, can be developed at lower cost using e-business, such that that the impact of the modern financial crisis, which has shrunk many mature markets, can be attenuated. E-business provides a new strategy to strengthen domestic demand too, due to the popularity of online shopping. Since 2008, major cities such as Beijing and Shanghai, along with smaller cities, have seen a boom in online shopping. Approximately 50% of the gross trading online came from smaller cities.
Finally, e-business creates job opportunities through the application of e-businesses and the development of e-service. In 2009, job vacancies in the e-business sector accounted for approximately half of the new job opportunities in Shanghai, one-quarter in Zhejiang, and one-fifth of them in Guangdong. E-business also creates job opportunities indirectly by advancing the development of other industries. For example, it has promoted growth in the logistics distribution industry, leading to more job vacancies. In 2008, there were 20 million job vacancies in this industry; growth of just 1% may lead to the addition of 100,000 jobs. Each job opportunity in online retailing thus may create up to 2.85% more job opportunities in related areas, which demonstrates the multiplier effect of e-business in promoting employment.
Active Roles in the Beijing Olympics, the Financial Crisis, and Natural Disasters
First, e-business has significantly helped enterprises to survive the financial crisis by developing their markets, building their brands, and reducing their costs. These forms of assistance meant more small and medium-sized companies have survived the recession. Smaller firms that use e-business have performed better than those that do not. Specifically, 84.2% of those enterprises that have not entered e-business realms experienced trouble during the financial crisis, whereas only 16.8% of enterprises that conducted some e-business were thus affected (Nie 2009).
Second, e-business provided a solid foundation for the “technology-empowered Olympics.” During the Beijing Olympic Games, e-business offered an important support system. Its applications in the form of Olympic mobile e-business systems, e-business Web site, digital information booth, e-payment platforms, and e-logistics delivery significantly improved the technology and digitization level of both the Olympic Games and Beijing overall.
Third, recent disasters, such as massive snow storms and the Wenchuan earthquake, demonstrate the active role for e-business in mitigating tragedy. The People’s Bank of China was able to provide high-quality payment services to survivors, enterprises, and financial institutions in the disaster area using e-payments. The bank also established a “priority channel” for the allocation of disaster relief funds. Third-party e-payment platforms, such as Ali-pay, have become important channels for such relief operations and donations.
Government Efforts to Promote e-Business Development
In recent years, governments at all levels and regions have made great efforts to support and promote the e-business development, in the form of financial subsidies and practitioner training. In particular, to cope with the financial crisis, e-business promotion campaigns were initiated in Zhe Jiang, Guang Dong, and Fu Jian. Provinces such as Tian Jin, Jiang Su, Si Chuan, He Bei, and Shan Xi also were involved in these campaigns. Since 2008, the city of Hang Zhou has claimed the title, “the city of e-business,” and Guang Zhou, Hu Nan, and Shen Zhen have been certified by the central government as effective examples of e-business use. Thus, e-business has boomed in different regions.
In addition, governments at all levels and in all regions pay attention to e-business in rural areas. According to the CPC Central Committee and State Council, it is necessary to support the development of direct selling, chain stores, and e-business in rural areas. State Councils and related ministries, as well as local governments, are proactive in promoting the goals of information construction and the application of e-business to rural areas. For example, the Ministry of Agriculture has built the Agriculture Information Network (http://www.agri.org.cn), supplemented by local agriculture departments that offer e-business platforms to trade farm products. The Ministry of Commerce established 20 experimental units in 20 provinces, built 20 service platforms at the county level, and hosts more than 1,400 service platforms at the basic level, which together constitute a business information system based on service platforms at different levels covering all experimental areas.
Further Trends and Prospects
China ranks first in the world in terms of the number of Internet and mobile phone users. Its e-business technology is the most comprehensive and cutting-edge in the world. Looking ahead, the number of domestic Internet users will continue to increase, and the penetration of e-business (now less than 30%) will rise sharply. The application of e-business will be more prevalent and provide more innovations for business patterns. With significant growth potential, e-business in China, driven by the booming e-services, will continue to develop at rapid rates in the next five to ten years.
I predict that from 2009 to 2015, the number of domestic Internet users will increase from 3.84 to 700 million, the number of Internet consumers will increase from 1.5 to 500 million, and the penetration rate of e-business will increase from 30% to more than 60%. The trading volume in online retailing will increase from RMB 263 billion to 2 trillion, and its proportion of gross trading in consumer goods will increase from 2.1% to 7% in the same period.
By 2015, China will lead the e-business service system and enterprise industries. The widest application of e-business also will emerge. The environment of e-business will improve, and innovations in both technology and institutions will be prominent. The impact of e-business will further widen and deepen, leading to more infrastructure and advanced business behaviors, organizations, and institutions.
Rapid Growth and Global Impact
As e-business in China continues to grow, it will exert an expanding influence on the global market, making it the leading emerging industry in the world. The process of globalization by domestic e-business practitioners and e-service providers is accelerating, and in the face of the financial crisis, many online traders and e-service providers have attempted to develop in emerging markets. Online traders and e-service providers have found new opportunities in Brazil, Turkey, Russia, and India. The financial crisis also has forced enterprises to place more emphasis on e-business and emerging markets. In turn, they are more likely to develop overseas markets with less expenses through e-business. Foreign e-business service providers are also rethinking the pace with which they enter China, perhaps because of the prosperous economy and great potential of the Chinese market.
As a future foundation of e-business service, cloud computing technology should play a significant role in breaking the monopoly of foreign companies and sustaining the development of the modern service industry, as well as small or medium-sized businesses. The application of e-service with cloud computing should play a critical role in the information-based economy in the approaching years.
Close Combination of Economy, Society, and Traditional Industry
More enterprises apply e-business methods for their procurement, sales, marketing, finance, and human resource management. This shift will facilitate the extension of e-business into deeper levels of organizations and its integration with their internal value chains. The combination of e-business and traditional industry will be stronger. Areas associated with production, circulation, and consumption will become reliant on e-business, which may alter business patterns and organizations. Such combinations can improve the efficiency of resource allocations, management, and innovation, even in traditional industries. E-business also will be more closely integrated with search engines, virtual communities, network games, and mobile communications.
The individual, diverse demands of users will require designs and provisions of e-business products and services that are customer-oriented and focused on greater service quality and customer satisfaction. An increasing number of service providers will emerge in e-business-related areas, such as payment, logistics distribution, IT, and finance, which should lead to more diversified services. E-business thus will become an indispensable part of the e-business ecosystem.
Furthermore, e-business will represent a new kind of commercial and public service infrastructure that can provide low-cost, abundant e-services to society. The characteristics of the ecosystem and its connection to e-business will be more salient, as will their socioeconomic impact.
Accelerating Innovations and Business Paradigms Related to e-Business
New technologies will combine upgrades to the consumption structure and promote further innovation, particularly related to e-business paradigms. As previously noted, cloud computing can provide powerful support for e-business providers for dealing with technology bottlenecks, such as computational ability, storage, and bandwidth, and thereby improve the services offered to customers. E-business service providers, which facilitate the application of e-business among small enterprises, could offer computational services based on the demands of these smaller firms. The Internet helps advance the efficient and intelligent organization of information acquisition, storage, processing, and transfers in e-business, which then induces fundamental changes in information, payment, and logistic distribution and promotes innovations in application and service patterns. A new concept, the “intelligent globe” also adds momentum to innovations in the development of e-business.
The mass scale of individualized consumption demands and upgraded consumption structures should advance innovations as well. On a micro level, consumers’ fragmented needs make this advantage more prominent, because e-business supports individual services that meet individual needs at a low cost. E-business facilitates the emergence of various business patterns and service providers. On the macro level, China is undergoing a transition from the consumption of necessities to durable goods consumption. Its huge market potential provides nearly infinite space for development. More innovations in e-business patterns should result from the expansion from traditional distribution to Internet-based channels and the emergence of mass customization.
The Prevalence of Mobile e-Business
In 2009, the Chinese government issued licenses for 3G communication, symbolizing the mass application of mobile e-business. The application of 3G should continue to expand through the promotion efforts of the government, operators, and network service providers. Users can log on to the Internet and shop online any time and place with the help of mobile phone, PDA, or laptop. An integrated e-business system composed of television, Internet, and mobile phone also is on its way, and e-business will accelerate its penetration of business, academic, and daily life.
The many mobile phone users in China provide a solid foundation for developing e-business. By the end of 2009, the number of domestic mobile phone users reached 7.4 billion, and significant growth potential still exists (Li 2010). Telecom operators are working hard to construct sufficient infrastructure and offer stable technology support for developing and popularizing e-business. Governments at all levels also serve as important driving forces in the development of mobile e-business.
The Potential for e-Business in Rural Areas
Policies aimed at promoting the development of rural areas should also encourage information-based agriculture. Agriculture-related and rural area e-business will soon reach a stage of rapid growth.
In particular, netizens from rural areas will become important sources of the increases in Internet user populations. The rate at which they are becoming netizens is higher than that in urban areas. From 2007 to 2009, the increase in rural areas was 71.6% on average, compared with 34.6% in urban areas (CNNIC, 2007, 2008, 2009). By the end of 2009, the number of netizens in rural areas reached 106 million, and the growth potential remains significant. These rural netizens will drive the development of the Internet and demand for e-business in rural markets. Surveys show that more netizens in rural areas have begun to shop online and use online payments. In these areas, it is still necessary to develop low cost distribution channels for large markets to move abundant farm products; e-business can help with that effort.
Moreover, the government is greatly interested in and strongly encourages the development of rural e-business. Information and e-business play key roles in business advances. However, providing public business information in rural areas is a source of concern and hinders the application of e-business. To solve this problem, the Department of Commerce has improved e-business platforms by enriching their services, expanding the coverage of public business information in rural areas, and making sure that more rural people can benefit from it.
Emergence of New Commercial Civilization
E-business is changing the way enterprises conduct their business and how consumers live their lives. E-offers brings great value and alters people’s behaviors. Promoted by individualization and globalization, the commercial civilization of the information era, which features openness, sharing, responsibility, and transparency, is emerging, as Figure 3 shows, and is likely to revolutionize commerce by human beings (Alibaba Group Research Centre 2009b). Related infrastructures, business behaviors, organizations, and institutions also will fundamentally change.
Figure 3. Evolution of Business Civilization in the Information Era
Source: Alibaba Group Research Center (2009b).
Regarding the infrastructure, gigantic business computing centers will provide public computing and e-business service platforms, which in turn will offer cloud computing to integrate various services. They are becoming representative of commercial infrastructure in the information-based era.
In terms of business behaviors, mass customization based on flexible manufacture, individualized marketing, and social marketing will emerge. Open-sharing, responsibility, and globalization will be present in the culture and values of business.
Flat, transparent, unorganized business organizations will be prevalent. Business zoology will become the main strategy.
In terms of their social lives, people will turn from economic entities alienated by industrialized society into social beings in an information-based society who combine their work and daily life. The patterns of starting an enterprise and employment will change considerably as well.
The institutional environment will be marked by information, globalization, and marketization, prompting the continuous transition of institutions, including business as well as staff, consumers, society, environment, and their interactions.
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About the Author
Chunxiao Liang is vice president of Alibaba Group, senior research fellow of Alibaba Group Research Center, vice dean of Alibaba Business School, and executive member of Information Economics Association of China. His interests include e-business, information, and the Internet-based economy, especially netrepreneurs, e-business ecosystems, and commercial civilizations based on e-business. He has proposed the concepts of e-service, e-business ecosystems, and the development stages of netrepreneurs. He also has helped develop the outline of China’s Eleventh Five-year Plan and Report on China’s E-business for the Ministry of Commerce. E-mail: [email protected]
