How to Build a Thriving E-Commerce Business in China

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How to Build a Thriving

E-Commerce Business in China

A Guide for Western Retailers: Navigating

the Fine Nuances of the World’s Fastest

Growing Economy

Online sales are exploding in China, and western companies are

racing to develop successful e-commerce strategies to capitalize on

this fertile market. China’s Ministry of Commerce reported that

web-based B2C sales in 2011 reached $124.22 billion, a 53.7% increase

from the previous year. Anticipating that China will soon overtake the

U.S. as the largest online shopping market, retailers around the globe

are investing heavily in technology solutions to secure a share of the

world’s biggest e-commerce growth opportunity. Most major U.S. and

European retailers have opened traditional brick and mortar

store-fronts in China, but many maintain only informational Chinese

language websites with no transactional capabilities

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1_{Forrester Research, Trends in China’s eCommerce Market, January, 2011} In cooperation with

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Digital marketing experts advise prudent conservatism when implementing an e-commerce strategy on

the Chinese subcontinent. There are many complexities involved in East Asian e-commerce implementations,

some of which are quite unique to the local buying public, and many of which are unknown to retailers outside

the country. Chinese consumers have a number of cultural traditions that should be taken into account.

The local government / legal landscape in China must be understood and appropriate adjustments made.

There are also significant technical requirements unique to China that must be understood and addressed.

Despite these challenges, selecting the right globally agile commerce platform, and an appropriately

experienced technology partner, can help retailers to successfully navigate the local landscape and develop

a winning online strategy.

This paper provides guidance on how to tailor an e-commerce solution to meet the cultural, governmental,

legal and technical specifications unique to China. Critical differences are illustrated, and solutions are

suggested, on how best to address the distinctive needs of Chinese consumers. There are also strategies

and best practices to be considered when evaluating e-commerce vendors and platforms.

Consumer Behaviors and

Preferences

According to Forrester Research, “China’s online retail market is poised to grow from $118 billion in 2011 to $356 billion in 2016. This is growth unlike any other market in the world.”4

With this rapid adoption of e-commerce, a number of distinc-tive shopping trends have emerged, and Chinese purchasing behaviors must be taken into account when developing an e-commerce strategy.

Like consumers all over the world, online buyers in China love a good bargain, as evidenced by the unparalleled popularity of TaoBao, a leading commerce site with both auctions and fixed-price offers. Bargain hunters flock to the site in search of discounted goods. Consumers in China also seek out sales and promotions. In fact, it’s estimated that purchase volumes during promotional events is more than three times higher than non-promotional periods.

Online retailers should strive to make their offerings unique by promoting samples, special offers, or special discounts. By at-tracting consumers to exclusive offers and competitively priced goods, brands can create customer loyalty and gain significant traction. Local retailers can be especially successful by integrat-ing non-traditional marketintegrat-ing to augment their online presence. Using such tactics as email campaigns, taxi cab signage, and coordinated in-store POS promotions can intensify the volume of web-based promotions, making e-commerce activities even more lucrative.

2 _{World Population Review, including ethnic Chinese in Taiwan, Macao,} and Hong Kong, February, 2012 Estimate.

3 _{arvato AG, a Bertelsmann company, China Commerce Best Practices} (internal guidelines).

4 _{Forrester Research, Asia Pacific Online Retail Forecast, 2011 To 2016,} April 16, 2012.

East-West Cultural

Differences

China and its more than 1.3 billion residents2_{are culturally}

and politically distinct from much of the rest of the world. It’s difficult to appreciate all of these differences without actually spending time in China. Thus, it’s critical for even the most successful European brands to engage global vendors with local teams in China at the beginning of their e-commerce development process. Rather than relying on out-of-country translators to bridge the gaps, a best practice is to employ native Chinese speakers in key project management positions on the implementation team.

Language and popular culture differences should not be un-derestimated, since they can lead to misunderstandings about objectives and technical specifications, and can also result in project delays and cost overruns.

Collaborating with local, native-speaking

imple-mentation partners familiar with cultural, technical,

legal, political and governmental issues will help

facilitate the development process. Daily business

in China is heavily influenced by interpersonal

rela-tionships. Effectively navigating the local landscape

can expedite acceptance during the planning and

design phases to ensure that the highest quality and

most effective solutions are implemented.

Whenever possible, team members at all levels should invest time with Chinese colleagues. In-person interactions are para-mount to cultivating relationships and ensuring clarity of direc-tion. For example, experienced China e-commerce implement-ers stress that it’s critical to co-locate with local teams during pivotal testing phases to avoid misunderstandings and delays in deployment.3_{Management by remote control from thousands of}

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Chinese consumers have enthusiastically embraced

e-commerce, but they remain cautiously wary of

big brand names. Inferior quality and counterfeit

products are common, and shoppers are skeptical

of bold claims made directly by retailers. For this

reason, third-party online customer reviews, social

media, and blogs are becoming increasingly

impor-tant promotional vehicles in China.

It is estimated that over 40% of Chinese online shoppers read and post product reviews5_{. Social media outlets, including}

Youku (video uploads similar to YouTube), kaixin (Facebook-like social applications), Tudou (another popular video site owned by Youku), weibo (similar to Twitter, but with twice as many active users) are attracting an increasing number of people accessing user-generated content, reviews and testimonials. Understand-ing these trends and buyUnderstand-ing behaviors can help retailers avoid spending unnecessary amounts of time and resources on fea-tures such as in-store review systems, and instead enable them to focus on executing other proven digital marketing tactics. Careful planning for mobile transactions is another valuable checklist item during the development of an e-commerce strategy in this market. Mobile commerce is on the rise in China with increasing numbers of mobile device owners indicating an interest in purchasing online. Planning and implementing a seamless integration with a mobile commerce solution should be a high priority.

5 _{Boston Consulting Group, The World’s Next E-Commerce Superpower;} Navigating China’s Unique Online Shopping Ecosystem, November 2011.

Government Regulations and

Compliance

The Chinese legal system exercises tight government con-trol over many aspects of daily life, making the e-commerce environment in China unique. One crucial point of difference is how the Chinese government deals with international compa-nies wishing to sell goods in China. The government refers to them as “wholly foreign-owned entities” or WFOEs. It’s critical for western retailers planning to do online business in China to retain an in-country legal counsel who can help navigate the various levels of bureaucracy within the Chinese government. This is especially important when securing an Internet Content Provider (ICP) License, which is mandatory when selling any-thing online in China. The ICP licensing process is highly com-plex, and most of the documentation and government resources relating to it are generally not available in English. Given the complicated nature of local licensing, securing assistance is the sensible approach and can save much time and expense. Another reason to obtain local counsel is to guide the develop-ment of online sales policies. Sales terms and conditions, along with policies for returns or exchanges, should be cleared with an expert who can advise how best to address relevant legal mandates and cultural norms.

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Technology Considerations

Understanding and embracing cultural preferences and purchasing behaviors can significantly increase website traffic and conversions. However, if an organization doesn’t build its e-commerce strategy on technical specifications tailored for the Chinese market, chances of success may be diminished.

Flexibility Eases Integration

An e-commerce platform must be carefully architected from the earliest phases of development to deliver a highly flexible and customizable solution that will expedite implementation. Working with a system integrator who has a local presence in China and a deep understanding of local technical specifica-tions will go a long way in expediting the launch of a new com-merce site. Comcom-merce platforms should be highly agile and able to be integrated with ERPs and other enterprise systems, some of which might be home grown. Some standards will be unique to China and will have particular integration require-ments that cannot be met with an out-of-the-box e-commerce solution.

Payment solutions and fulfillment operations should be tailored to the unique needs of local buyers. Consumer trust has long been one of the biggest barriers to the acceptance of e-commerce offerings in China. According to The Economist, “Consumers worried (quite rationally) that online firms were fraudsters, or that their credit cards would be abused, or that purchased goods would be swapped for counterfeits during shipment.”6

Alipay, an electronic payment system similar to PayPal, is ubiquitous in China. Because Alipay is escrow-based and doesn’t finalize a payment until the shipment is received by the consumer, it reduces buyer concerns about online trans-actions. Cash on delivery (COD) is another popular payment preference in China. Consumers frequently insist on complet-ing purchases in person and examincomplet-ing products before paycomplet-ing with cash.

Therefore, businesses should offer either a “buy online, pickup in store” option or make it easy for the buyer to inspect their purchase and, if necessary, easily return it via the same shipper. China is leading the world when it comes to highly personalized fulfillment models – one fashion e-tailer has partnered with FedEx to offer a personalized service where delivery people wait at the door while the customer inspects the item, tries it on, and decides whether to keep it or return it to the courier.7

Fulfillment solutions must be customized to meet the logistical challenges inherent to Chinese e-commerce. For example, in metropolitan areas, deliveries are largely fulfilled by couriers. Shipment options that Western consumers are familiar with, such as FedEx and UPS, are also offered as express delivery alternatives. Shipments to more remote areas can be tricky.

Many major e-commerce sellers will only ship to the 200 or 300 largest cities in China, and e-commerce systems have to be built to accommodate these shipping prohibitions. Chinese customers are fiercely loyal to domestic merchants and view conversion drivers such as free shipping as the exception, not the rule.

Optimizing Site Performance

To ensure a successful e-commerce implementation, orga-nizations must be aware of various technical specifications unique to China. Many organizations setting out to develop a foreign e-commerce solution are aware of the need for cur-rency and language customization. However, doing online busi-ness in China includes some lesser-known technical nuances that also must be embraced.

Despite Microsoft’s best efforts to encourage Chinese users to upgrade to a newer release, Internet Explorer 6 (introduced in 2001) is the browser of choice for about a third of China’s 505 million Internet users. E-Commerce designers must make IE6 part of their test matrix and ensure that all aspects of the e-commerce site work seamlessly in this outdated browser. Programmers should think twice about relying on functionality from the latest versions of JavaScript or other scripting lan-guages, as these may conflict with IE6. Optimizing sites for IE6 and scripting languages is necessary, but equally important is avoiding any integration with Google technologies such as Google Analytics, Google Products or Google Webmaster Tools. In the past, the Chinese government has slowed or denied access to Google websites, limiting users’ ability to complete Google searches or access any of Google's Chinese-language sites. Google is in negotiations with the Chinese Government to resolve access issues, but it is advisable to consider current limitations during the development process.

Limited Internet throughput should also be taken into account. China’s Internet infrastructure has yet to be optimized, due in part to web traffic filtering and monitoring by the government. Developers must assume wide swings in network performance in their design considerations.

There are two things that western retailers can do to prevent these issues from slowing down their websites. The first is to integrate with a local Content Delivery Network (CDN) such as China Cache. China Cache is designed to be optimized for the eccentricities of China’s Internet infrastructure. In addition, it has a close relationship with Chinese regulators, including a nationwide operating permit from the Ministry of Industry and Information to provide content delivery services. The second strategy is a thorough understanding of the local caching rules. Knowing when and how to distribute content across a CDN is just as critical.

6 _{The Economist, “The great leap online”, November 26, 2011.}

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Customizing Content

Modifying site configuration and system integration according to local specifications will help ensure optimized site perfor-mance and consumer ease of use. Incorporating features and creating content optimized for Chinese markets is equally important.

Developers don’t need to build their own ratings and reviews modules within their platforms. Instead, focus should be placed on smooth integration with local social sites includ-ing Youku (like YouTube), kaixin (similar to Facebook), Tudou (Video), and weibo (like Twitter, but larger). Chinese consumers are intensely interested in foreign brands, but online retailers should translate their product content for the local audience. Something that resonates culturally in Los Angeles and New York might not make sense in Shanghai or HangZhou.

According to Forrester Research, “Fifty-nine

per-cent of online adult consumer electronics buyers

and 34% of online adult apparel buyers state that

their preference for foreign brands is driven by

superior quality. By contrast, the key reason why a

Chinese consumer buys Chinese brands is price.”

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As a result, Chinese consumers turn to foreign

brands for luxury items, which are most successful

when they remain true to a western-style design,

but feature a relevant Chinese twist.

In determining site design, developers should also consider local technical limitations. Slow network speeds are common, and consumers may have trouble navigating rich-media sites that Western companies often develop. It’s also important to be aware of the preponderance of older computers still being used throughout China, especially outside the major urban centers. Consumers using these systems may struggle with outdated technology and slow processors, so commerce sites should be optimized for all levels of client devices. For instance, Flash animation should be avoided and content should be designed to work on lower resolution monitors.

8 _{Forrester Research, Starting Your eCommerce Business In China,} May 17, 2012.

Platform and Partner

Considerations

China is an extraordinarily challenging market to enter, and must be navigated with prudence. Retailers need a good understanding of the unique cultural, legal and technical issues, as well as local shopping customs, in order to implement an effective e-commerce solution. Fully comprehending and planning for these differences will facilitate a quicker and more cost-effective implementation. Choosing the right e-commerce platform and implementation partners are equally critical to success.

There are a number of considerations to take under advisement when selecting an e-commerce solution for the China market:

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Choose an e-commerce platform that can be quickly and easily integrated to meet the unique specifications in China (local payment systems, IE6, etc.). The ideal platform will be highly flexible, enabling seamless integration and easy customization.

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Ensure the chosen platform has native support for multi-byte language, local currency exchange and other localiza-tion demands.

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Select a local vendor with a history of successful e-com-merce implementations in China. The value, guidance and advice that a local partner can provide should not be under-estimated.

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Choose an implementation partner who has solid relation-ships with local vendors, a keen understanding of legal and governmental regulations, and the ability to provide guid-ance on navigating unique local business customs.

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Consider the advantages of a partner with a strong com-petence in delivering the entire end-to-end value chain, including financial services, local customer service, global call centers, payment solutions (including COD), fulfillment, returns, and server hosting.

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To recognize the substantial revenue potential of reach-ing into tier two and tier three cities without the expense of opening retail outlets, engage a partner with deep experi-ence in penetrating these markets through online channels and in providing all the support required to serve these markets successfully. This includes the appropriate local payment, remote shipping, fulfillment and customer service capabilities mentioned previously.

There are benefits to vendors who can provide one

contract for all services, a single point of contact,

integrated teams with stronger alignment between

different services (and no finger pointing), and best

practices expertise. Such comprehensiveness can

save time and money and is likely to be less

stress-ful for your personnel. Service providers with global

capabilities and proven integrations can more easily

help you expand into new markets and still offer

lo-cal expertise in your existing geographies.

59%

34%

online adult consumer electronics buyers of foreign brands

online adult apparel buyers of foreign brands

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“We have devoted signifi cant time and resources into

building our global end-to-end e-commerce value

chain and strong relationships with local partners in

China,” said Frank Zimmermann, the CEO of arvato

Systems North America. “This investment has paid

off for our customers, enabling us to expedite the

de-ployment of their e-commerce solutions and ensure

that their local online presence is highly successful.

Our customers benefi t signifi cantly from our fully

integrated fulfi llment, customer care, and fi nancial

services solutions.”

About arvato Systems

arvato Systems is a systems integrator with a solid reputation. We not only implement standard software, but also offer tailor-made, industry-specifi c and individually developed solutions. More than 2,500 dedicated employees at 25 sites throughout the world are always there for their customers. As part of the arvato network, a leading global BPO provider belonging to Bertelsmann, we have the unique capability to create entire value chains and combine IT with other arvato services to deliver an integrated service offer from one source. The strength of arvato Systems lies in the intelligent combination of planning, operation, systems integration and sup-port. Our customers appreciate the way we bring in-depth industry know-how, cross-platform expertise, a true partnership approach, and genuine entrepreneurial spirit to the table. Our solutions pave the way for your success.

www.arvato-systems.com

With arvato Systems at your side, you have a powerful partner with extensive expertise in brick-and-mortar and online retail pro-cesses gained from the arvato Group's many years of experience in service-providing operations and consumer transactions. Our E-Commerce-Software, solutions and services enable successful Cross-Channel Commerce around the globe.

http://e-commerce.arvato-systems.de/com

To begin crafting the right tailored solution for China or to speak to our consultants with global and local expertise, please feel free to email.

E-Mail: [email protected] Web: www.e-commerce.arvato-systems.de Tel: +49 5241 80-88381

“We have found that highly fl exible e-commerce

solutions work best for companies entering Chinese

markets,” said Burghardt Groeber, VP, Asia of hybris.

“By leveraging an agile platform, retailers can more

quickly and easily integrate with local systems,

re-sulting in a more effective e-commerce solution.”

About hybris

hybris helps businesses around the globe sell more goods, services and digital content through everytouchpoint, chan-nel and device. hybris delivers OmniCommerce™: state-of-the-art master data management for commerce and unifi ed commerce processes that give a business a single view of its customers, products and orders, and its customers a single view of the business. hybris' omni-channel software is built on a single platform, based on open standards, that is agile to support limitless innovation, effi cient to drive the best TCO, and scalable and extensible to be the last commerce platform companies will ever need. Both principal industry analyst fi rms rank hybris as a “leader” and list its commerce platform among the top two or three in the market. The same software is available on-premise, on-demand and managed hosted, giving merchants of all sizes maximum fl exibility. Over 500 companies have chosen hybris, including global B2B sites W.W.Grainger, Rexel, General Electric, Thomson Reuters and 3M as well as consumer brands Toys“R”Us, Metro, Bridges-tone, Levi's, Nikon, Galeries Lafayette, Migros, Nespresso and Lufthansa. hybris is the future of commerce™.

If you’d like to discuss the strategies described in this paper, or meet with one of our e-commerce solutions experts to help you expand upon these concepts, please feel free to send us an email message.

Email: [email protected] Web: www.hybris.com

How to Build a Thriving E-Commerce Business in China

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