August 31, 2011, 4:25 PM

Risk and reward

With the world’s largest online population, China beckons to North American e-retailers.

Lead Photo

China is the world's second-largest economy, and continues to grow at nearly 10% a year. Online shopping in China is growing even more quickly. The number of online shoppers in China grew nearly 49% to 160.51 million consumers from 2009 to 2010, according to the China Internet Network Information Center.

Few North American online retailers sell aggressively to Chinese online shoppers. And there are good reasons for that. Their usual methods of accepting payment largely don't work in China because of regulatory intervention that limits the reach of foreign credit and debit payment networks and favors domestic services. Delivery is more difficult than in most Western countries. Plus, China's own e-retailers compete fiercely, and will not easily cede their market position.

But the size of the opportunity is so vast, and growing so rapidly, that it may be time for more North American online retailers to consider selling to China's burgeoning Internet audience of 457 million consumers, the largest web user base of any country.

Market size

Online retailing in China is already significant, $48.8 billion in 2010, according to U.S. research and consulting firm Forrester Research Inc. That was nearly 30% of the U.S. e-retail sales of $165.4 billion last year, according to the U.S. Department of Commerce.

And e-commerce is growing much more quickly in China than in the U.S. While U.S. e-retail sales are growing at about 15% a year, Forrester projects a nearly 27% compound annual growth rate for China from 2010 to 2015. That would bring China's online retail sales to $159.4 billion by 2015. Credit Suisse Group is even more bullish, projecting the Chinese e-commerce market will reach $311 billion by 2015.

China's Internet users are mostly young, with 53% between the ages of 20 and 40, and 27% 10 to 19, according to the China Internet Network Information Center. Younger consumers particularly dominate online shopping, with consumers ages 20 to 30 accounting for about half of online retail purchases in 2010, estimates iResearch, a market research firm based in China.

These young online shoppers, many of them residing in the rapidly developing cities in the coastal and southeastern parts of China, are part of a rapidly growing Chinese middle class that is anxious to achieve the living standards of economically advanced countries. That's reflected in a desire by Chinese consumers to acquire more quality goods. A survey by Global Intelligence Alliance of 67 Asian consumer and retail industry professionals in China, India and Southeast Asia in November 2010 found that 70% said Chinese consumers have become more willing to pay more for better quality food and beverages over the last 12 to 18 months.

China's top e-retailers

Online retailing in China today is dominated by subsidiaries of Alibaba Group, most notably Taobao, the Chinese equivalent of eBay whose 2010 sales totaled 30 billion yuan (US$4.7 billion), nearly 10% of all online retail sales in China last year. Alibaba's empire includes, an online marketplace that Chinese manufacturers use to sell to companies abroad, including North American web retailers. The domestically important online payment service AliPay is also an Alibaba Group unit.

Second to Taobao is 360buy, a Beijing retailer whose sales grew 206% in 2010, reaching 10.2 billion yuan (US$1.6 billion) last year, according to iResearch. 360buy began as a retailer of mainly computer, communications and related consumer products, but has since expanded into discount books.

Dangdang Inc., a Chinese retailer whose shares trade on the New York Stock Exchange, is the third-largest China-based e-retailer. Known as China's, Dangdang built its business selling books, music and DVDs, and has since expanded into such categories as cosmetics, furniture and shoes.

Dangdang is also partnering with Chinese consumer electronics retailer Suning Appliance Co. Ltd. to sell books and sporting goods on the Suning online site, Suning has announced plans to launch express delivery services that will support same-day order deliveries in roughly 100 cities and towns in China by the end of 2011, a move to differentiate itself from competitors.

U.S. contenders

Among U.S. online retailers, Inc. and computer and electronics retailer Newegg Inc. are the biggest players in China, both ranking in the top 10 in e-retail sales.

Amazon, the No. 3 e-retailer in China according to iResearch, entered China via a $75 million acquisition in 2004 of, at the time the country's largest online retailer of books, music and videos.

Newegg, whose founders had business ties to China, has built its base in China without major acquisitions. As a sign of the importance of China to Newegg, one of the online retailer's founders, Fred Chang, resigned as president and CEO of Newegg Inc. in 2008 to become president of Newegg's China division.

More U.S. retailers have their eyes on China's growing e-commerce arena. For example, Wal-Mart Stores Inc., the world's largest retailer by sales, announced in June plans to build a new e-commerce headquarters in Shanghai to accelerate its web sales to Chinese consumers. A month earlier, Wal-Mart had purchased a minority stake in, the ninth-largest online retailer in China, according to iResearch.

Barriers to entry

Despite the promise, Western retailers face major obstacles in China, particularly when it comes to accepting payment and delivering goods to consumers.

The major means of accepting payment in North America, Visa and MasterCard credit and debit cards, is generally not an option in China. Chinese banks do not offer Visa or MasterCard cards that can be used in China, and most Chinese consumers pay online with cards issued by their banks and carrying the logo of UnionPay, China's payment card clearinghouse.

However, unlike in North America, a single connection to UnionPay does not guarantee acceptance of all cards carrying that brand. E-retailers still must establish direct links with individual Chinese banks as well as to UnionPay. For example,, China's top e-commerce site, offers debit and credit options through links to 53 major domestic banks as well as to Alipay, Alibaba Group's online payment system that is similar to PayPal.

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