A news report released in mid-August by the New York based eMarketer said that Chinese retail spending is going to grow 13.3 percent in 2016 to USD 4.886 trillion and that the country will edge past the United States’ USD 4.823 trillion to become the world’s largest retail market.
This milestone event for China will come much earlier than commonly expected. In 2015, the professional market study firm PwC predicted that the Chinese retail market will only surpass that of US in 2018. The eMarketer report expects the gap between overall retail spending in China and the US to continue widening in the coming years. By 2020, total retail sales in China are expected to reach USD 7.086 trillion, compared to USD 5.475 trillion in the US. The embedded assumption behind the retail sales growth projection is that Chinese overall retail sales will grow at a compounded rate of 9.7 percent between 2016 and 2020, while that of the US will grow at 3.2 percent. The retail sales growth assumption is in line with the projections of most economists.
The eMarketer report is based on a bottom up industry sales analysis and the embedded information is generally more predictive and accurate than macroeconomic modelled prognoses of the economy. The steady growth of overall retail sales corroborates the recently released macro GDP data that indicate that China is continuing the switch from being an investment-led manufacturing economy to a more service-driven consumer economy.
Data from the first half of 2016 show that out of the 6.7 percent overall GDP growth, consumption contributed for 4.9 percent, while investments and exports contributed 2.7% and negative 0.9% respectively. Economists agree that consumption is the most stable component in GDP composition as compared to investments and exports. The healthy growth in retail sales signify not only the confidence of consumers, but also that there is a good supply of the right kind of products that the consumers want and are willing to buy.
The economic prognosis coming from the strong retail sales figure is important to many economists. The message from the overall retail sales figure and its projection seems to indicate that the Chinese economy can probably have a soft landing in the next few years with the consumption component of GDP acting as the sole engine of a lower L-shaped economic growth path, while investment takes the side line from deleveraging pressure, overcapacity resolution, and initial industrial transition uncertainty. However, the weak global export market of the “new normal” won’t help economic growth.
What the Chinese economy will experience is a situation akin to what the US economy experienced in the immediate decades preceding the 2008 global financial crisis — consumers saved the day. Of course, as Chinese consumers finance their spending from rising incomes and huge savings, the Chinese consumer spending boom should be more enduring than the debt- and housing-bubble driven US consumer boom before the meltdown.
More significant is the sheer size of the retail market, with e-commerce in China estimated to reach USD 899.09 billion in 2016. The figure will catapult Chinese retail sales volume to the world-topping 18.4 percent of total retail sales, almost double the corresponding 8.2 percent of the US retail e-commerce percentage in overall retail spending. Chinese e-commerce expansion is expected to continue in the years ahead, and eMarketer expects the country’s e-commerce sales to hit USD 2.416 trillion or 34 percent of total retail sales by 2020. The Chinese growth rate is in stark contrast to that of the US, the erstwhile leader before 2014. US retail e-commerce value is expected to hit USD 684.24 billion or 12.5 percent of total retail sales by 2020.
Success in e-commerce retail sales requires a sophisticated communications network with high mobile and internet penetration, an efficient and fault-resistant payment system, a cost-effective logistics and infrastructure network, and a rising device-savvy middle class. A successful e-commerce platform will reflect the state’s capacity in the area of physical and human infrastructure. Similar to the economic message behind retail sales figures, the increasing e-commerce volume in China also send out strong messages about the current state of the country’s physical infrastructure and the societal potential in the adoption of new technology.
Many people hold the view that economies of scale plus a booming economy are the two sole reasons behind the Chinese success in e-commerce. While they are certainly correct on the importance of these two elements in the success of e-commerce in Chinese retail sales, they miss some critical elements in the overall scheme of things that account for the “exceptional” success. While business schools worldwide are busy dissecting the story of Alibaba, they have not spent enough time looking at how the e-commerce industry skilfully built its business model on the infrastructure provided by other key players. While the business model in Chinese e-commerce firms can be observed and imitated, the infrastructure behind their success has some non-imitable features and the Chinese global leadership in e-commerce certainly has traction to persist. Here are some important infrastructure advantages that Chinese e-commerce firms enjoy over their earlier peers in other countries.
Firstly, China has built the world’s most extensive modern 4G mobile network infrastructure. By the end of 2016, the three telcos of China would have built 2.9 million 4G base stations with an estimated 4G subscriber base of 722 million (see Figure 1). Out of the country’s total mobile subscription base of more than 1.3 billion users, the mobile network will be more than 50 percent covered by the state of the art 4G system with associated smart features that facilitate e-commerce. The country started experimental 4G transmissions in 2012 with an initial rollout of 20 thousand 4G base stations. The 4G mobile expansion in China has been unprecedented in world telecoms history, and the smart e-commerce applications associated with the 4G network are an important enabler of the Chinese e-commerce platform.
Figure 1. Number of 4G Base Transmission Stations and 4G Subscribers of 3 Chinese Telcos: China Mobile, China Unicom and China Telecom
Source: Company, BofAML Global Research
The convenience of mobile e-commerce over traditional broadband internet based e-commerce is apparent from the increasing share of mobile e-commerce in overall e-commerce in all leading e-commerce countries. Figure 2 shows China as the leading country in the mobile e-commerce platform.
Figure 2. Mobile E-Commerce Sales in Overall Retail E-Commerce Sales of China, South Korea, UK and US
Source: eMarketer 2015 data
China has set a program to boost fixed-line nationwide broadband connections, and the new connections and the speed up exercise will provide a sound base for the long-term development of the e-commerce industry through the alternative Wi-Fi communications route, driving down information costs associated with e-commerce. Chinese telecom companies Huawei and ZTE, rank number one and four respectively among the top four global telecom equipment companies, together with Ericsson in second place and Nokia-Alcatel in third.
Chinese telecom equipment companies are considered the leading equipment supplying contenders in the coming 5G era. Maintaining a state of the art telecommunications network is strategically important for the future development of e-commerce in China, and the presence of leading global telecom equipment manufacturers certainly helps.
Secondly, China has built one of the world’s most sophisticated secured payment and information processing systems. In the Singles’ Day sale on November 11, 2015, Alibaba — the leading e-commerce platform of China that controlled around 58 percent of the market in 2015 — was able to close USD 14.3 billion in sales in 24 hours, with USD 5 billion in the first 90 minutes. The payment system, Alipay, processed a total of 710 million payment transactions over the one-day period, and processed 85,900 transactions per second during the peak sales period. Alibaba’s cloud arm AliCloud processed a total of 140,000 transactions per second at the peak. Alipay’s system transaction capacity was only 300 per second in 2010 and the almost 300 times scaling up of processing power using indigenous technology demonstrated the progress that China has made in the last few years on both physical and human infrastructures. It is interesting to note that out of the 167 supercomputers in the list of top 500 supercomputers of the world, a good number are used by e-commerce firms. This is in sharp contrast to the pattern elsewhere of educational and research laboratories dominating the users’ list of supercomputers.
Contrary to conventional thinking that scaling up data processing in the information system is a mundane and routine task, the error rate of a scaled up information processing system actually increases at an exponential rate. The ability to handle such a volume of data by e-commerce firms, payment processing firms, and telecom companies show that China is leading in both hardware and software in many areas of information technology.
Thirdly, the most challenging aspect of e-commerce is the logistic and last leg delivery cost issue. Alibaba’s logistics partner and affiliate, Cainiao Logistics, received 467 million delivery orders during the 24-hour shopping period on Singles’ Day in 2015, more than 15 times the daily average of 30 million orders, representing a 68 percent year-on-year increase from 278 million orders in 2014. Retail goods under e-commerce transactions are tracked from the moment the product leaves the warehouse all the way until it reaches the customer. The logistic requirement is not only immense, it must also be precise and time bound. Chinese e-commerce firms charged extremely competitive rate on deliveries, with a one kg three-day arrival parcel in China only costing less than RMB 20 nationwide. The Chinese government had set an initial target of cutting national logistics cost to 18 percent of the total goods cost by 2020, and this target was reached in 2015.
The ability to solve the logistics and last leg delivery cost issue are the most important factors behind the boom in Chinese e-commerce. The physical infrastructure of telecommunications, information processing, and logistics are also factors behind the “exceptional” success of the Chinese e-commerce industry. These factors are general purpose infrastructures and they can be used in the development of the country’s economy at large. In this regard, China’s economic development potential is probably better than what many observers think.