Five reasons why China lags behind in E-commerce

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1 Credit/payment system is not perfect-China is a cash-focused economy because of fears of fraud on both sides of the deal, and because the financial services industry is underdeveloped. According to CNNi, online payments account for only 36% of online transactions on the Internet, as high as 50% for cash-and post-office remittances. See schedule 42 comparison of Chinese online shopping payment methods with other countries in the Asia-Pacific region.

According to China UnionPay, as of 2003, the number of bank cards circulated was 650 million, most of which were debit cards or card, of which 4.8 million were genuine credit cards (without deposit requirements and revolving credit).

The development of China's online payment system may take a long time-we talk about some key issues on page 33rd.

2 Logistics/distribution system efficiency is not high-compared with the more developed countries, the delivery of products from A to B, in China there is not always an efficient way.

The OECD group has summarized the logistics/distribution problems in China (see page 58th of this report): the development gap between China and OECD countries in distribution is very large. China's distribution industry is still at an early stage. The best proof of this is that if a company has two warehouses in two places and the product is sent to another place, the local tax bureau always treats the transshipment as a sale and levies a corresponding tax.

According to Wen Tianli, although the National postal Network (China Post) in China has a large coverage and as the main distribution trading facilities (communication and payment), but its customer service is considered poor, and its remittance fees are also unreasonably high. China Post is a state-owned enterprise, with 500,000 employees, 76,000 sub-branches, 40,000 trucks and 10 aircraft by 2002. As stated on page 58th, China Post has begun to deal with overnight communications, bills payments, deposits and logistics, as well as efforts to enhance the overall technical input.

Wen Tianli pointed out that in order to solve the logistics/distribution/transportation problem, China's major online retailers-excellent network joyo.com and Dangdang Dangdang-are developing their own Internet delivery network.

Excellent network joyo.com has now been sent to 22 cities. Dangdang in the local some of the delivery partners use courier (usually riding a bicycle) to the end of the matter to customers, collect money, and then to the company.

3 credibility is not high-in the purchase of the products did not see, the credibility of low and more fraud on E-commerce poses a challenge. Integrity, security and fraud have been big problems for the Internet as a whole, and in China corruption is more prevalent than in many countries, which is a bigger problem. To a certain extent, this is due to the lack of a unified legal system, strict enforcement of the law, consumers do not have a positive appeal. Wen Tianli points out that many governments have not done anything to stop fraudulent companies, because local bureaucracies believe that the companies and their employees who do not allow them to engage in business activities will cause greater damage to local government taxes than they do with their laissez-faire practices.

As a result, people do not believe that governments will be determined to protect them from fraud. Wen Tian Li also pointed out that consumer complaints in the establishment of integrity "feedback loop" also plays an important role, while in China there is still the rule of man and dictatorship, the public can not through legal means to stop and recourse to fraud.

In terms of integrity and security, it should be noted that, in addition to the feedback system, ebay has developed a vendor verification system-ebay ebay to compare the vendor's resident ID number with the government's database, a system that helps to curb fraud.

4 The base of the installation of PCs small-fundamentally, the larger PC installation base is critical to the development of E-commerce, while China's PC penetration is still relatively low.

According to Viktor Ma, China's 2003 PC installation base was 65 million units, of which 1900 were installed at home, accounting for 29%.

According to Rebecca Runkle estimates, the U.S. PC installation base is 225 million units, of which 95 million are installed at home, the proportion of 42%. However, it is worth noting that the PCs installed at home are concentrated in large cities. In big cities, PC penetration may be as high as 100%, a figure calculated by households in Guangzhou in 2002. According to Viktor Estimates, in Beijing, Shanghai and Shenzhen and other major cities, households, household pc penetration rate of about 50%. This means that, at least from a hardware standpoint, these economically leading cities have established the conditions for conducting e-commerce.

Please refer to the important disclosures starting at page 65th of the report. 2004 Morgan Stanley Copyright. Do not copy or edit this document without the consent of Morgan Stanley.

Page 335) Low income levels-per capita relative to GDP (2003 is $1,062 per person, compared to 2003 per capita GDP of 37,312 U.S. dollars, the world level is 5,649 U.S. dollars per capita), which in itself can explain the problem.

Andy Xie added that Chinese people in the 18-25 age group in the big cities per capita disposable income of 2,000 U.S. dollars each year. As stated on 第18-19, they have little money to buy the items that are often found online. Urban households earn three times times as much as households in rural areas. Urban households ' spending on education and cultural and recreational services accounted for 9% of total living expenses in 1990 and 2002 to 15% per cent, while typical rural households spent nearly half of their income on food (compared with the average American household expenditure of 13%).

Developing an effective online payment system is crucial to the development of e-commerce in China ... We believe that the development of efficient online payment systems (coupled with user-generated feedback assessment systems, which have proven to be very effective for companies such as ebay, Amazon.com and Yahoo!) is essential to the development of China's Internet. Still, it's a virgin territory and it's too early to decide who will be the winner ... Mobile phone provider?

China is clearly lagging behind other Asian countries in its online payment system (see Appendix 42). However, Chinese mobile phone providers (China Mobile and China Unicom) have established a mobile payment system that can be paid for by customers ' mobile phone bills. This payment model, while not unique to China, has been a big boost, while SMS-related shopping payments account for a larger proportion of total online shopping in China than in other countries in the Asia Pacific region (see Appendix 44).

In addition, online game providers (some with prepaid cards) have been successful. It is worth mentioning that the prepaid card (where the cardholder puts the money inside) and the mobile billing (mobile phone number connected to the individual) are more effective in limiting fraud because it means that each of them has to assume responsibility.

Schedule 43 data sources for mobile phone users by major countries: company data, Morgan Stanley research, market capitalisation date April 9, 04. (1) At&t Wireless. Market capitalisation data, (2) Deutsche Telekom market capitalisation data.

In our view, mobile providers will naturally take advantage of their competitive advantage in the large and expanded billing system, and develop a partnership with financial services institutions to boost China's online payment business.

In the fourth quarter of 03, mobile phone users in China had reached 173 million (up 23% from a year earlier) and China Unicom reached 96 million (up 45% from the previous year) (see Appendix 43). Since the two providers have their own websites and have established relationships with Chinese portals such as Sina, Sohu and NetEase, they are likely to play a bigger role if they are allowed to develop the business and motivate them.

Despite this, Mark Shuper points out that, in addition to SMS-related shopping, the mobile value-added services premium platform is temporarily not available for online purchase of products/services. Regulators have limited access to financial services for telecoms operators, legally prohibit third parties from collecting arrears, and customers are worried about personal privacy issues in customer transaction data.

A bank card?

China's credit-card industry is growing, as evidenced by the strong growth in outstanding credit cards, which, according to China UnionPay, grew 87% in the third quarter of 03 to $575 million, compared with a 21% per cent increase in total state loans in 2003 (according to the PBoC).

Credit cards are unlikely to be the only way to pay for China's Internet. China UnionPay is equivalent to China's Visa or MasterCard, a coalition established in March 02 by 85 domestic financial institutions and companies. It is the only bank card clearing group in China, providing a national bank card information exchange network that can carry out bank cards (dollars and millions of users) in the fourth quarter of 03 the market capitalisation of the company China Mobile 173.0 $59 Vodafone (Vodafone) UK 128.6 167 China Unicom China Unicom 96.0 12Telefonica moviles Spain 46.4 47Cingular & at&t Wireless (1) United States 46.3 37NTT DoCoMo Japan 46.2 109Telecom Italia Mobile Italy 44.9 49Orange France 44.6 57amx/telcel Mexico 39.3 26Verizon Wireless United States 37.4 104t-mobile (2) Germany 30.3 74KDDI Japan 23.1 25 Please refer to the important disclosures starting at page 65th of the report. 2004 Morgan Stanley Copyright. Do not copy or edit this document without the consent of Morgan Stanley.

The mutual exchange operation of Page 34 (including debit card, card). According to China UnionPay, as of the third quarter of 03, the number of bank cards with China UnionPay logo reached 206 million, accounting for 32% of the total number of bank cards.

Bank cards may become another way to pay for the Internet. It is also noteworthy that China UnionPay (in Guangzhou and Shenzhen) and Capitale-store (in Beijing) have already launched the payment via SMS.

Schedule 44 China-online shopping payment methods compared to other countries in the Asia-Pacific region Source: Idc.paypal?

The global leader in online payment systems is PayPal (an EBay affiliate) with a registered account of 40 million (up to the fourth quarter of 03) with a current account of 13 million per cent (up 67% from the previous year). ebay has developed a global expansion plan for PayPal, a service that looks likely to continue to grow. Although PayPal's business is mostly in North America (77% in the fourth quarter of 03), PayPal service is currently in use in 37 countries and has been officially promoted in the United States, Canada and the UK (pending Elmi approval).

We believe that China is a huge market opportunity for PayPal in view of ebay's foray into China with ebay. But at present, from the perspective of China's regulatory authorities, PayPal's online payment service is only provided by the bank's online banking business, and therefore subject to the approval of the China Banking Regulatory Commission (CBRC).