Locked in a struggle to be top dog, Internet retail leviathans Alibaba Group Holding Ltd. and JD.com are both investing billions of yuan as they compete for the hearts and wallets of China's growing legion of online consumers. It is their competition which is largely shaping a burgeoning market.
"Together, Alibaba and JD currently account for over 80 percent of China's online B2C space," says Will Tao, analysis director of Beijing-based market research firm iResearch Consulting Group. "Both companies are fiercely ambitious and their duopoly makes it tough for any other e-commerce player to gain a foothold."
Today China's e-commerce growth continues to outstrip all other markets. Chinese online retail sales increased by 50 percent to nearly US$450 billion in 2014, according to the National Bureau of Statistics of China, and are projected to reach well over US$600 billion by the end of this year. By comparison, annual online retail sales in the United States will be around US$350 billion by the end of 2015, up from just over US$300 billion last year.
With its trio of Alibaba, Taobao and Tmall sites, Alibaba Group remains China's undisputed e-commerce heavyweight. Founded in 1999, it boasts 350 million active users and a profit model based on fees, advertising and sales commissions.
Five years younger than Alibaba, late starter JD.com is the pretender to the throne. Compared with Alibaba's B2C-focused Tmall – a sprawling collection of self-contained online stores where individual vendors manage sales – its Beijing-based rival is more akin to Amazon. Buying, reselling and delivering products itself, the lion's share of company profits come directly from sales.
While consumers in first-tier cities such as Beijing and Shanghai can peruse a panoply of shiny new malls, their counterparts in the Chinese hinterland are poorly served when it comes to traditional brick-and-mortar shopping. Digital retail expands their shopping horizons immeasurably.
Reaching out to China's more remote buyers is now crucial for e-commerce companies looking to gain market share. "E-commerce is a great alternative to China's long-underdeveloped retail network and is one reason why the incredible migration online is now taking place," says Josh Gartner, JD.com's senior director of international communications.
While JD.com has spent heavily on delivery infrastructure, building up an array of high-tech warehouses and its own army of couriers, Alibaba's delivery model employs third-party logistics companies. Two years ago Alibaba established Cainiao, a partnership of logistics companies. Backed by US$16 billion of Alibaba funding, Cainiao's goal is to facilitate next-day, last-mile delivery in 50 Chinese cities by the end of 2015.
"Through its developing partnerships, Alibaba is now the only company in China that can deliver any product to almost anywhere in China, including third- and fourth-tier cities and rural areas, where an estimated 600 million customers live," says Hong Kong-based Alibaba spokesperson Crystal Liu.
With upward of 700 million smartphone users, according to the South China Morning Post, China's e-commerce is fast becoming "m-commerce." According to iResearch, the first quarter of this year saw the value of Chinese online sales conducted via mobile increased more than 160 percent to around US$58 billion. Such growth means the smartphone will soon become the dominant platform for online purchases.
The field of m-commerce is witnessing most of China's e-commerce innovation. In 2014 Alibaba teamed up with Sina Corp. to launch a payment option on Sina Weibo, the phone-based microblogging platform. Users can use the app to make quick payments by scanning QR codes.
JD.com's operations have received a welcome boost from its partnership with Tencent Holdings Ltd., the tech leviathan behind China’s wildly popular QQ and WeChat messaging apps. QQ has more than 815 million monthly active users, and WeChat has 500 million, according to Tencent. The company is heavily involved in messaging-driven m-commerce, leveraging Chinese consumers' preference for purchasing through socially connected platforms. It has extended its WeChat Payment system to all brands, retailers and e-stores on the app, as well as giving JD.com access to the C2C market via online marketplace Paipai.
Another area where Alibaba and JD.com are innovating is online investment funds. Both offer their customers the possibility to invest the small amounts of cash often left over in their online wallets – after a refund, for example – into funds that offer a healthy 5 percent return.
"In a country that is hesitant about investment – which is something the recent stock market crash has exacerbated – these kinds of low-risk offerings have provided a lot of cash for e-commerce giants," says Matthieu David-Experton, CEO of China-based Daxue Consulting.
There is massive potential for further e-commerce growth in China. McKinsey China estimates that by 2022, its definition of the Chinese middle class – those households earning between US$9,000 and US$34,000 a year – could have surged to 630 million (roughly twice the current population of the United States). With this burgeoning demographic spending the most on online purchases, there is massive potential for further Chinese e-commerce growth.
Increased smartphone adoption, the continued penetration of the Internet into China’s rural areas, as well as the improvement of logistics and payment systems, are all trends that will facilitate increased spending and underpin growth.
Managing such growth will present both Alibaba and JD.com with a raft of challenges: they must differentiate their online services, continue to integrate new technology and maximize delivery efficiency. As delivery volumes rise, experts say JD.com's in-house logistics operation will undoubtedly need revamping, while Alibaba will need to crack down more on counterfeiting as it looks to facilitate East-West e-commerce.
The profitability of the overall e-commerce industry industry in China is also an ongoing concern. While Alibaba's revenue was up 26 percent to US$5.64 billion last year, JD.com – which operates on a far lower profit margin – lost nearly a billion dollars last year, although the company insists ongoing diversification, a growing user base and decreased infrastructure spending will see it move into the black in the medium term.
Chinese consumers have diverse needs and expectations. In remote, lower-tier cities, where online shopping is growing fastest, the focus is still on product selection and price. Conversely, in developed cities, product quality and a reliable, convenient service are increasingly critical. Despite this dichotomy, the traditional wisdom of the retail world still applies: the right products, the right price, a rewarding shopping experience and a robust supply chain are the keys to success.
"Right now it's difficult to say whether Alibaba or JD.com will become the top dog of Chinese e-commerce," says Li Jian, a principal with management consultancy A.T. Kearney in Shanghai. "Both business models are attractive and the lines between them are starting to blur."
"Whoever emerges victorious, it will be the culmination of factors such as size, service and strategy," says Reema Patel, a director at Shanghai-based consulting firm SmithStreet Solutions. "To lead Chinese e-consumers, rather than follow them, requires sustained insight and innovation."