August 31, 2011, 4:25 PM

Risk and reward

(Page 2 of 2)

There has been some progress in expanding online payment options. China's central bank announced in May it had awarded payment licenses to 27 non-financial institution applicants, including AliPay and PayPal. And MasterCard Worldwide has struck deals with China-based e-commerce services like AliPay so that consumers in Hong Kong and MacauÑnow part of the People's Republic of China—and Taiwan can buy on with their MasterCard cards.

Delivery is the other big challenge for e-retailers operating in China. North American retailers will not find the kind of reliable delivery services that they rely on for fulfillment at home. U.S.-based Amazon and Newegg have developed their own courier services in China to guarantee accurate, timely and undamaged deliveries to their customers rather than engaging Chinese service providers.

Tough competition

Finally, U.S. e-retailers will find tough competition in China, even though there are only a handful of large e-commerce players. For instance, when Dangdang promoted a major, two-day rebate offer earlier this year in response to increasing competition from e-retailers and, 360buy responded by offering roughly the same promotion. In another example, by the time group-buying site Groupon entered China in February there already were over 2,000 competitors offering similar voucher deals.

Chinese online retailers also have a crucial advantage: They know well the Chinese manufacturers that supply merchandise at low cost, and those connections and influence—the crucial guanxi that lubricates business dealings in China—can be difficult for foreign companies to match.

Thus, there are big obstacles North American e-retailers must weigh as they consider the big potential of online sales to Chinese consumers.

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