Can Chinese eCommerce conquer the world?

If so then why did Alibaba only grow 4.8% ex China in its last year?

China has a huge potential to be seriously disruptive of the retail infrastructure in the Rest of The World. It has near massive scopefor margin growth through exploiting B2C eCommerce direct from the source of manufacture. This growth potential is not just in established markets. “The Rest” - Africa (a key focus for us),LatAm, The Middle East and the rest of Asia are all ripe pickings.  Indeed the biggest opportunity is probably wherevera limited existing retail infrastructure cannot viably support a full retail range. The growth of eCommerce in populous countries like Nigeria & Ghana has been exponential. But some recent news suggests that Chinese companies are not really exploiting this huge potential.

All eyes have been on Chinese stocks listed on Western stock markets over recent months. The growth of China’s internet and eCommerce companies has been the centre of much of that market focus.

In London, the AIM secondary market has dwindled to only 45 Chinese companies from the 80 listed to date. According to The Financial Times (“FT” September 23 2015) five Chinese companies have floated on AIM in 2015 but 10 have left the market.

A few weeks back  Hedge Fund manager Jim Chanos precipitated a 5% fall for Alibaba (NYSE: BABA). Alibaba launched on the NYSE on September 19 2014 as the largest IPO in history. Chanos red flagged accounting concerns. At the time of writing Alibaba is still under water despite reporting significant growth for most metrics.

The AliBaba name itself was reputedly chosen by founder Jack Ma after testing it on passers-by in San Francisco. He tested against multiple ethnicities. “Alibaba” was universally recognised and associated with “Open Sesame”. That said if like me you have spent much time trying to deal with its Chinese suppliers on both AliBaba, and sister B2C AliExpress you may more easily associate it with “Forty Thieves”!

The experience of non-Chinese users of AliBaba (B2B) and AliExpress (B2C) is often not good. So can even the top Chinese Internet names help the Chinese economy to adapt and continue to grow?

The theme of whether China can successfully adapt to a higher wage economy, without following the offshoring model - that the west quietly in most cases acquiesced with - is extensively covered by many recent articles. I particularly enjoyed this excellent article from The FT which makes the argument that Chinese businesses have the ability to “Pivot” in a way that cannot be achieved elsewhere.

Whether this “pivotability” is a long term reality remains to be seen. I suspect some of these pivots may be a bit too much for Western stock market regulators to countenance. My personal favorite is the Christmas tree manufacturer that very aptly morphed in to the animation studio that produced the first “Teenage Mutant Ninja Turtles” movie.

Where my business investment interests lie is still rooted in the belief that Chinas has a large number of process and cultural advantages. These advantages in terms of integrated supply chains, scale, and adaptability in effect give it a 6^th gear.

BUT – and it is big but - as highlighted in the previously referenced articles; China may just lose interest in dealing with the West and the Rest. Manufacturers know the sheer scale of the domestic market. Scale plus the cultural and transactional simplicities of focusing on the domestic market, could lead to a singular domestic focus. A few real market observations support that trend;

Firstly AliExpress is dominated by agents for factories. The agents claim to “be the factory” but they rarely are. These“agents” often have poor English, and an even poorer understanding of marketing disciplines such as basic research.

AliExpress’s positioning is a very simple one.  Western consumers “know” that everything is made in China. Accordingly buying direct from the Chinese factory source must be cheaper. Indeed it extends even deeper in to The Western psyche. Many western consumers even assume that fakes are just made in the brand factory and leave through the back door.

The realityof dealing with AliExpress supplierscan be a hugely futile waste of energy.  No wonder Ali reported such poor ex China growth in the last year. Pricing is invariably far higher than eBay. And that is without the securityon shoddy and faulty goods. Fakes are rife – and be very clear they do not come out of the actual brand factory in anything but the rarest instance.

Regularly we see the latest and newest fashion lines offered on AliExpress. The latest footwear worn in the latest Rhiannon show will be offered at high but competitive prices just to test the market. Weknow, as one of our Macau businessessupplies clothing to dancers/entertainers in Asian clubs. Our Chinese team wastes hours tryingthese flakeysuppliers,only to find that the product the client has spotted on Ali, and wants us to source,is just a kite flying exercise to test market interest for production feasibility. I suppose grudgingly I have to slightly withdraw my previous comment about lack of market research…..Grrrr

These AliExpress merchants will not disclose the factory location or agree to factory visits or inspections. And the ones that make you really suspicious…. are the ones that will not respond to secondary follow ups of interest made by our team in China once we have started a dialog in English. Indeed the only successes we have had in concluding deals is where the same supplier also sells on the huge Chinese Taobao(C2C)/Tmall (B2C)site – only then do we get in to a sensible pricing and supply discussion.

Taobao and Tmall of course are also owned by AliBaba Group.

Secondly, as for AliBaba itself! Just treat the supplier quoted pricings as a complete joke. In our experience,almost without fail, prices are higher than wholesale in The West. The majority of AliBaba suppliers in most sectors just seem to price match each other, as well as matching MOQ’s. If you really want to hit a competitive price, and with any semblance of quality and delivery timing reassurance, you simply have to have people on the ground in China.

Don’t for one minute think a Hong Kong or Macau, or Singapore agent can do supervision for you economically. From Hong Kong you have half a day’s travel time even to get to the first factory. And Hong Kong infrastructure and staff overheads make London or New York look cheap.You don’t have to spend much time dealing with Chinese businesses to see they don’t value these “middlemen”.

Even an operation based in the heart of Guangdong using one fully qualified field worker is only going to be able to cover 4 or 5 factories in a day. Transport costs, office overhead and margin means you are kidding yourself if you think you are really getting the task done – remotely competently - for less than US$500 per man day.

Caveat Emptor

So what is the future?

Theoretically B2C eCommerce can givethe faltering Chinese economy a huge, and potentially very disruptive,breathing space. The Chinese authorities have recognised the potential. As I said they like cutting out middlemen. Local government authorities have moved quickly to encourage and lubricate the eCommerce sector. Ex-factory customs clearance of exported eCommerce items is now the norm in the key manufacturing regions. And most intriguingly we are seeing regional government grants to factories to set up in house fulfilment centres. This is real “Route One” stuff. There is huge scope for disrupting the historical overly complex distribution chain from China to the rest of the World.

Do I know the whole answer? Emphatically NO. But logic suggests that good Chinese companies will concentrate on supplying the strengthening Chinese market. And that will leave Western companies buying from China having to deal with at best, second rate manufacturers. That will require even greater efforts and more resources on the ground to ensure compliance on specifications, materials, logistics and schedules.

Do I recommend you look outside China for you manufacture?

Look at reshoring first. If your components are still mostly coming from China…..have you really much to gain? Be realistic. Remember China has a huge supply chain, infrastructure and logistics advantage. It will have that advantage for some time even with rapidly escalating labor costs.

Here is an example from our own experience. We will launch a US trademarked women’s clothing brand in 2016 (www.lyndoroney.com). Labor costs in China for small orders are now high. But all our fabrics and fittings come from China.

We are looking at The Philippines. Labor costs are low and we believe that unlike China they will not inflate dramatically. Language and local management competencies, that we have in house, are compelling arguments for a Philippines base. Think better skills at barely 30% of Chinese costs – and yes, less inflation prone. BUT all fabrics, accessories, components need to come from China. Then we will need to hold and control stock of the same. Lead times for materials, weather, and insurance all become an expensive issue. EVEN THEN logistics are the killer. If a business wants to function in theB2C eCommerce sector out of The Philippines … forget it, even in the Free Trade Zones. All your cost savings are going to be lost by having to pay high courier and carriage costs in and out.

For The Philippines and other low cost Asian countries to compete in eCommerce they need the kind of infrastructure that Hong Kong Post or even China Post can offer. And that hastothoroughly integrate with simple and transparent customs processing.

For B2C I see an increasing number of hybrid Sino-Western ventures taking root inside China. A look at suppliers on eBay already reveals many companies with Western management on the ground operating out of China’s manufacturing bases. Interestingly a number of these were previously run out of Hong Kong, and indeed probably still invoice through Hong Kong, but operations are now close to the point of manufacture. That said for some lightweight packages these suppliers may still be hand carrying each days orders back to Hong Kong for shipment through Hong Kong Post. China Post is trying but needs much improvement in most locations

Ultimately like Jim Chanos I also see a rocky road ahead for China. But what still excites me is the “can do” attitude and the ability of Chinesemanufacturers to pivot. I firmly believe China’s remarkable growth can be sustained for some time yet out of supplying emerging markets – alongside disruptively dismantling some of the expensive wastage in the traditional developed market’s supply chains through B2C eCommerce.