E-commerce Business in China: What Should Japanese Companies Do to Increase their Presence in the Market?
Nov. 29, 2019
China is one of the largest e-commerce markets in the world right now. Its growth rate is faster than Japan's aftermarket as a whole. We interviewed Yutaka Gou and Min Hai Lan from NRI and NRI Shanghai respectively about the challenges Japanese companies will face while competing with Chinese EC companies and ways to tackle it.
China's e-commerce industry is transforming into the world's largest and fastest-growing business
In 2018 alone, China's B to C e-commerce business revenue exceeded $1.5 trillion, making it the world's largest e-commerce market. Chinese EC market has surpassed the Japanese retail market as a whole, whose total worth is JPY 140 trillion ($1.3 trillion).
China's EC market boom started in 2010 when consumers shifted from PCs to mobile devices. Subsequently, platforms like Alibaba, Tencent, and JD.COM jumped on the bandwagon and continued to expand.
If we take a peek at China's retail ranking list, e-commerce ranked highest in 2018 with platforms like T-Mall, JD.COM, and Pinduoduo as the top three retailers. Japanese companies are struggling to find ways to compete in China's EC market, which is the driving force of its retail and distribution market.
Joint analysis with Alibaba Group's TMIC on Chinese e-commerce business
NRI Shanghai, in collaboration with Alibaba Group's TMIC (Tmall Innovation Center), surveyed the Chinese EC market and compiled a report labeled "China EC Market White Paper 2019.” TMIC provides consumer and market analysis data to the Alibaba Group to further promote the planning of new products. Including Tmall and Taobao, it approximately has data on 600 million users.
This analysis selects popular Japanese products from 15 different categories. Additionally, it reveals the state of Japanese, Korean, Western, and mainland China products in the market (Japanese products here imply Japanese brands and not necessarily products made in Japan). Data for this research was collected from June 2018 to June 2019 and analyzed on three aspects: sales volume, consumer profiling, and consumer spending distribution.
China’s biggest EC sale happens on “Singles’ Day”, that is on November 11 every year. For three consecutive years, Japanese products have ranked number one on this day. However, the overall share in terms of sales value is 3.2%, and in terms of volume, it is only 1.6%.
Japanese products losing ground in China owing to the growth of Western and Chinese products
The popularity of Japanese brands in China is highest for products that promote safety and security, such as baby care, cosmetics, and personal care. However, owing to intense competition from foreign counterparts, there still exist areas where we haven't been able to expand.
The quality of Chinese products in the cosmetic industry has improved significantly. They have shown an increase in market share value and rate of sales by actively promoting their products through social media influencers. As for western cosmetics brands, thanks to their adopting a low-price strategy, Japanese and South Korean cosmetics users tend to shift to western products, which have a powerful brand image.
The principal consumers of e-commerce in China are in their late teens to early 20s (second generation of digital natives) and from the late 20s to early 30s (first generation of digital natives). Cosmetics are the main product purchased by the second generation of digital natives, and more than 70% of these are Korean products.
Among the first generation of digital natives, many consumers have children, contributing to a high ratio of baby products. Japanese baby products are highly valued for being safe and excellently designed. However, western products account for nearly 50% of baby food products, showing that we have not been able to expand our market share because we are losing ground to products from companies in other countries.
Taking on the challenge to attract digital natives, including the second generation of digital natives
Consumers of Japanese products are often those in their 30s or older with high purchasing power. Compared to foreign counterparts, we have acquired a quality purchase group. Looking at it from this perspective, we can expect to continue to expand sales of our high-quality products.
That said, the key to future growth is the first and second generation of digital natives, who support Chinese consumption. People under this group are primarily students; therefore, their consumption power is low. However, their desire to consume is comparatively higher. According to Alibaba's data, digital natives (first and second generation) account for about 1/3 of the population, but their contribution to EC accounts for 2/3 of the sales. That is why, from a mid- to long-term outlook, it is necessary to incorporate the digital natives (including the second generation) as the next-generation customer base.
One of China's consumption values is the "co-existence of consumption upgrade and downgrade." Consumption upgrade refers to wanting to buy high-quality products that suit you and enable you to live a comfortable life. Consumption downgrade refers to consumers preferring affordable items rather than spending on luxurious products to save money. Consumption upgrade and downgrade coexist within individuals, and the digital generation in China selects products and services based on both values.
For Japanese organizations to further enhance their presence in the EC market in China, they will have to shift to a business model that focuses on the digital natives, and success or failure of this business model will determine their future growth. Particularly, it will be necessary to use big data for continuous consumer insights, to strengthen product planning functions and locally-led development, to perform the core functions such as product design and content in-house, and to focus on flexible digital marketing using social media.