China leads global "electric business Revolution"

When it comes to technology innovation centers, it's probably Silicon Valley, Seattle and Seoul that first appear in your head. After all, these are the locations of the headquarters of Amazon, Apple, Facebook, Google, Intel, Microsoft and Samsung, which have transformed the business model from financial services to the media industry.

But now the rise of China's "electronic retailing" (E-tail, consumer-oriented e-commerce) is making Hangzhou, the home of China's largest online retailer, Alibaba, the center of Technology innovation. On April 29 this year, Alibaba took an ambitious step to acquire a 18% stake in China's Twitter Sina microblog. In other technical fields, the creation from Hangzhou is also determining the development path of related industries.

China has the second largest electronic retailing market in the world (after the US), with revenue estimated at $210 billion last year. Since 2003, the annual composite growth rate of the electronic retail market has exceeded 110%. By 2020, China's electronic retail market will be equivalent to the United States, Japan, Britain, Germany and France combined.

Although broadband penetration was only 30% per cent, in 2012, electronic retailing accounted for 5%-6% of China's total retail sales, on a par with the US. The industry is now profitable, with China's electronic retailer earning 8%-10% per cent of its profit-tax amortization, slightly above the average for the physical retailer.

China's E-commerce has two notable characteristics. First, about 90% of China's electronic retailing relies on ad-financed virtual markets. On these platforms that mimic the ebay and Amazon markets, manufacturers, retailers and individuals provide goods and services to consumers through online stores. In contrast, in the US, Europe and Japan, about 70% of the market comes from electronic retailers with their own websites, including Amazon, which specializes in online businesses, and traditional retailers such as Carrefour, Dixons and Wal-Mart.

Second, online shopping in China is not simply a substitute for offline shopping, according to the McKinsey Global Research Institute. E-Retail supports value-added consumption, with 1 of billions of dollars in online consumption contributing about 0.4 dollars in additional sales. The proportion of value-added expenditure to total expenditure is higher in less developed cities in China. In these places, the lack of physical retailers means that online shopping offers certain products and brands.

Public consumption in China and other emerging economies is ushering in the internet age. The industrial structure of many countries is still developing, so electronic retailing not only determines the retail picture, but also determines the pattern of manufacturing and financial services, and even the urban landscape itself.

In most countries, retail development usually comes in three steps: first, local and regional retailers dominate, followed by a handful of national companies that eventually challenge national retailers in electronic retailing. But China lacks a national leader, with the top five retailers of different product categories taking up less than 20% per cent of the market, while the US could be as high as 60%. The establishment of physical outlets throughout the country is also time-consuming and cost-funded.

On the contrary, Alibaba (has Taobao and other markets) and Jingdong (focus on electronic products) are impressively ranked top ten Chinese retailers, and has been through the express company to establish a national coverage network. As a result, China's retail industry is likely to develop a two-step model, with electronic retailers rapidly rising and dominating the national market.

The online market makes it possible for newcomers to gain national and even international dominance without the need for large-scale front-end investment, which will profoundly influence the way retailers and manufacturers view the new consumer market. For example, Uniqlo, a Japanese retailer, used such markets to expand in China in 2009.

The size and specialization of other consumer goods industries has been weakened to a certain extent by electronic retailing, and new manufacturers have been able to enter the market to achieve consumer goods, such as clothing and cosmetics, from factories to consumers. Such companies also expand their role in the financial services industry using a wide range of contacts and high cognitive brands.

Electronic retailing may also determine the direction of Chinese urban development and change leisure behavior. The evolution of the world's urban centres revolves around shops, whether in markets or shopping malls, where large numbers of consumers view shopping as leisure activities. China's development may be smaller markets and shopping malls, while building large-scale logistics centers around the city. The public will have more free time for dinner and other activities, all of which can change the use and price of real estate.

Other emerging markets may also go the same way. Chinese electronics retailers have started to use their own advantages to export Chinese factory products to achieve international expansion, and other countries are adopting a similar online business model.

China has missed the industrial revolution of 19th century, but its move towards electronic retailing may be the power to determine the 21st century Internet revolution in emerging markets.

(Richard Coux Cooper is a professor of international economics at Harvard University and Richard Dobbs is a director of the McKinsey Global Institute.) This article is from Project Syndicate)