Case Study Analysis

What’s the world’s largest and fastest-growing e-commerce market? It’s China, with over 800 million
Internet users, and accounting for over 50 percent of global retail e-commerce sales (projected to be
nearly 60% by 2021). China’s mobile payment market is a whopping 11 times the size of the U.S. market.
The volume of online sales in China now exceeds that in the United States. E-commerce is predicted to
account for 40.8 percent of all retail sales in China by 2021.
Chinese e-commerce is very mobile: By the end of 2018, more than 75 percent of ecommerce sales in
China—over $1 trillion worth—were transacted via a mobile device. M-commerce accounted for 81.6
per-cent of Chinese e-commerce sales in 2017. Payment for both online and in-store sales via mobile
phone services such as WeChat is sweeping the country. According to iResearch Consulting Group, a
Chinese firm, mobile payments in China totaled $9 trillion in 2016, compared to $112 billion in mobile
payments that same year in the United States. China has also become the world’s largest mobilepayment
Tencent’s WeChat, with over 900 million active users, is the dominant mobile platform in China.
Retailers and brands have found that capturing the consumer’s attention typically requires operating
within the WeChat environment on the WeChat plat-form, as opposed to building a direct-to-consumer
mobile app. Retailers such as Estee Lauder, Coach, and Gap run their loyalty programs within the
WeChat app, and conduct customer relationship management (CRM) on the WeChat platform itself.
Max Factor built a new social CRM system on the WeChat platform. It created a detailed customer
database with 36 categories of tags using online and offline data. Max Factor now use real-time data to
send personalized messages based on different stages of the customer life cycle via WeChat.
Credit cards never became widely used in China. Until recently, discretionary spending was not really
possible for many Chinese, and there has been a long-standing cultural aversion to debt. On top of that,
the government made it difficult for companies such as Visa Inc. and Mastercard Inc. to set up shop.
E-commerce has given China’s digital consumers access to products from overseas, and a notable share
of consumers appears to be taking advantage. Cross-border shoppers appear to prefer items that are
either too expensive or too scarce domestically.
The most popular categories of goods Chinese purchased online include apparel, food and beverages,
household products, consumer electronics, appliances, and personal care products. Food, luxury, and
sports and wellness products are key categories for future growth. Chinese online shoppers tend to be
young, urban, and highly educated. They are much more consumption-oriented than older generations,
which were shaped as savers by different political and economic circumstances. Younger shoppers are
more willing to spend.
Social media is an important channel for initiating online purchases. About 45 percent of Chinese
consumers use social media to discover new products, 54 percent to review and comment on products,
and 25 percent to purchase directly through a social channel. Retailers and brands need to build and
participate in social communities and engage with customers on social platforms.
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To some extent, e-commerce is replacing shopping in physical marketplaces in China, and will comprise
42 percent of growth in private consumption by 2020, according to Boston Consulting and AliResearch.
For this reason, superstores such as Walmart and Carrefour have shut down a number of stores.
It sounds like there are opportunities galore for global companies that want to sell into the Chinese ecommerce
market. Not so easy. China may be the world’s largest and fastest-growing e-commerce
market, but it is also one of the most difficult for foreign firms to penetrate. E-commerce in China is
crowded and hyper-competitive, and the country is not entirely open for online business.
First, there’s what’s called the Great Firewall of China—a combination of legislation and technologies to
regulate the Internet domestically in China. China blocks access to select foreign websites (such as
Google, Snapchat, Facebook, Twitter, and the New York Times) and can slow down cross-border Internet
traffic. China limits access to foreign information sources, blocks foreign Internet tools such as Google
search and mobile apps), and requires foreign companies to adapt to domestic regulations. A new
cybersecurity law that went into effect in June 2017 requires security checks on foreign companies and
forces firms to store key data in China. For example, Apple works with a local Chinese company to store
Chinese data from its iCloud service at a data center in southwest China.
The Great Firewall has also impacted China’s internal Internet economy by nurturing domestic
companies and reducing the appeal of products from foreign Internet companies. The Great Firewall
fosters trade protectionism that has allowed China to grow its own Internet giants: Tencent, Alibaba,
and Baidu. Tencent is one of the world’s largest Internet and technology companies, as well as its largest
and most valuable gaming and social media company. It also owns the majority of China’s music
services. Alibaba Group Holding is a multinational e-commerce, retail, Internet, AI, and technology
conglomerate that pro-vides consumer-to-consumer, business-to-consumer, and business-to-business
sales services via web portals, as well as electronic payment services, shopping search engines, and
data-centric cloud computing services. Baidu provides Internet search services in China and
internationally along with transaction services, such as Baidu Deliveries, Baidu Mobile Game, Baidu
Wallet, and Baidu Maps.
China has its own version of many popular foreign e-commerce businesses, such as (Twitter),
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Youku Tudou (YouTube), WeChat (Facebook), and Ctrip (Orbitz and others). Alibaba has outmaneuvered
eBay, and Uber had to sell its Chinese business to a local rival. The Internet behind the Great Firewall
can be considered a “parallel universe” to the Internet that exists out-side. According to a report on
Internet freedom published by Freedom House, a U.S. pro-democracy group, China ranked last among
the countries of the world for Internet openness.
There are costs for gaining entry to the Chinese market. Initial deposits can range from $8,000 to
$25,000, annual service fees from $5,000–$10,000, and commissions on sales revenue around 5%. Other
costs can include being required to use approved agencies in the production of storefronts and sales
information as well as guaranteed stock availability and stock location. Agency fees alone can run into
many thousands of dollars. Chinese Internet filter technical requirements can make operating difficult,
and may force firms to find alternatives to the services technology companies rely on outside China.
It is possible to work with businesses that allow Chinese consumers to purchase from international
brands, without the brand having to have a Chinese presence. For example, Xiaoshongshu (Little Red
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Book) features a mobile app that allows customers to select products from key foreign markets and pay
the company for them. Xiaoshongshu then sources these products for the customer.
Some other points to keep in mind: Although China heavily regulates the Internet, most Chinese are not
that interested in bypassing government filters to visit foreign websites such as Google or Facebook.
China has an array of domestic websites to fill the void. Even when foreign websites aren’t blocked,
Chinese competitors usually prevail because so many people are using their products that they become
indispensable. Internet calling and messaging apps such as Skype and WhatsApp are accessible in China,
but they’re often no substitute for Chinese products in the Chinese market. In China, Tencent’s WeChat
app is far more popular than Skype, WhatsApp, and Slack.
Once a new technology or business model appears, the Chinese can quickly adapt it to the local market.
Oppo and Vivo, China’s first and third smart-phone brands by market share in 2016, appeal to young
people and residents in smaller, less-wealthy cities. Their phones look like iPhones and have many of the
same features, but they cost less than half the price of an iPhone. While Oppo and Vivo have doubled
their Chinese market share, Apple’s has fallen by 13 percent to the fourth position.
To keep up with increasing demand from smaller urban and rural areas, online retailers are seeking to
expand logistics infrastructure and services. For example, Cainiao, the logistics arm of Alibaba, owns
180,000 express delivery stations for the shipment of products and has recently expanded its fresh food
distribution centers across China. Logistics remains a major challenge as Chinese e-commerce players
attempt to reach more customers over wider geographic regions. China’s logistics system is far from
efficient, with insufficient warehouse space and trucking routes throughout the country. China’s
package-delivery business has been growing 30 per-cent annually, but that’s not fast enough to keep up
with demand. The scarcity of high-quality logistics providers in China often burdens e-commerce firms
with late deliveries, damaged and lost parcels, slow collect-on-delivery (COD) processes, poor return
procedures, and no special services such as installation or the ability to try on purchases. These
inefficiencies add considerably to e-commerce operating costs and erode profit margins.
Adapted from Laudon & Laudon (2020), Management Information Systems, Case Study Chapter 15.
Case Questions:

  1. What are the cultural, technical, and organizational obstacles for foreign firms that want to do
    online business with China? (Include a separate paragraph for each of these components
    (cultural, technical, and organization – with subheadings.)
  2. Describe how the factors you noted in question 1 impede organizations from setting up ecommerce sites or
    conducting business in China? (Include a separate paragraph for each of
    these components – with subheadings.)
  3. What steps could your company take to facilitate a successful e-commerce presence in China?
    Provide a full explanation.
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  4. Conduct research, and based on that research, describe e-commerce opportunities in China.
    Provide evidence for your assertions.
  5. In general, what major factors are driving the internationalization of business?
  6. How has/will current (e.g., COVID-19) and potential pandemics influence e-commerce growth
    globally. (Provide evidence to support your assertions.)

Sample Solution