What Amazon Can Learn from Taobao, the Largest Chinese Ecommerce Portal

by Ivan on February 16, 2010

Taobao.com is the 11th most successful website in the world. It makes more money than most all US ecommerce sites, except Amazon, and this may be about to change. The way ecommerce works in China is different than in Europe and the US. Partly this is to do with low credit card penetration, complex delivery logistics and customer support.

How the Chinese Amazon.com works

Ecommerce is different in China for several reasons. Low credit card penetration, for example, means that Chinese buyers tend to be in the larger cities, Beijing, Shanghai, Shenzen, Xian, Nanjing and Chongqing. Once you get outside these areas, credit card penetration tends to decline.

So, how do you get around this?

taobao chinese ecommerceSimple. You pay with cash. Most ecommerce is China is cash on delivery. Here’s how it works:

  • You order products online – but don’t pay for it.
  • Chinese is mostly cash on delivery – credit cards are making inroads but with no credit history, it takes time.
  • Credit cards are still relatively new. Interest rates are high and the approval process is very stringent. In many cities, you need someone to guarantee that you’ll pay of the card if you overdraw.
  • Credit card adoption is further complicated as most people have no credit history. Many products are paid for in cash. It’s not unknown for new home-owners to pay 100% cash for a new house – they like the security of owing it now!
  • Goods are delivered by motorbike couriers. These are a carried by bike or, or for high-end goods, secured in a steel holding at the back of the bike. Keeping the couriers honest is another headache. The salary of many couriers is often less than the goods they deliver. You can imagine what happens…
  • When the goods arrive, you can (and are expected to) open the box and check the goods.
  • Your signature is recorded, sometimes on a palm/mobile/tablet device.
  • Later if you have problems, you can return the goods to the distributor.
  • In many cases, returns are not accepted (e.g. savvy students are known to swap the hard drives and return a PC with less powerful parts). Similar things happen with jewellery and other high end products.

Taobao Key Details

  • Established in 2003
  • Located in Shenzhen, a special economic zone, it is one hour from Hong Kong.
  • China’s largest Internet retail platform
  • 75% of market share, according to iResearch.
  • Platforms within Taobao include Alibaba (www.alibaba.com), an affiliate network in China and Koubei.com (www.koubei.com), China’s leading classified listing website.

taobao chinese ecommerce

Takeaways

  • Credit card adoption is on the rise but not as accessible as in the west.
  • Chinese web shoppers are very web savvy and will do intensive research before buying products.
  • Chinese web shoppers use Taobao to compare prices in the high street, e.g. printout of specs from the web to help negotiate.
  • Negotiating (i.e. haggling) is the norm in Asia. You’re expected to haggle and fight for a better price. Only westerns pay the sticker price.
  • Taobao is now so popular it is considering high streets branches and partnerships to capitalize on its position.
  • Consumer-to-consumer (C2C) trading accounted for US$2 billion turnover in Q1 2008.
  • Plans to have 700 stores available to buyers for the launch of mall.taobao.com. Companies pay five percent of transaction value to Taobao if their outlet fails to sell more than US$133,333 a year. In addition, they have to pay a 5,000 to 15,000 yuan one-time deposit for Taobao to compensate shoppers in case of complaints.

Ecommerce Opportunities in China

  • Upselling & cross-selling are not as common as in the west.
  • Long-term relationships are not cultivated, e.g. most ecommerce retailers don’t request email addresses and if they do (it seems to me) don’t know how to leverage these.
  • Sales people are not trained to help customers. Their role is more to accommodate the customer rather than look for up-selling opportunities etc. They don’t waste time on this as they assume you won’t come back, which is often the case.

Taobao v Amazon

Do you think Amazon poses a real threat to Taobao? Can US ecommerce sites make a profit in the China? What do you think?

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Ivan Walsh, Internet Business ExpertAbout Ivan Walsh Got a question about running an online business? Contact me on Google Plus, @IvanWalsh, and Facebook

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{ 3 comments }

Jeff February 18, 2010 at 3:45 am

Taobao is now so successful that it’s taken its online business offline. What it’s doing here in China is setting up many high street shops where you can go in and ‘browse’ and then buy online, from inside the store.
Jeff Yang

Annie March 3, 2010 at 12:21 am

Taobao purchases are usually made with Alipay as the mode of payment, which is not exactly the same as cash on delivery. Alipay is similar to Paypal, with one major difference: when the buyer makes a purchase, the funds are put in escrow so that the seller does not receive payment until the buyer confirms receiving the goods. Besides, low credit card penetration, Chinese consumers also prefer to examine what they're buying before transferring cash.

Buyers may also opt to receive their shipments via EMS or regular post, but couriers are preferred as they are usually quicker and lower-priced.

Ivan Walsh March 4, 2010 at 3:34 am

Hi Annie, we tried to get setup with Alipay but it didnt work out. 'with one major difference: when the buyer makes a purchase, the funds are put in escrow so that the seller does not receive payment until the buyer confirms receiving the goods'

It’s interesting to have this option, isn’t it?
I wonder what % of goods are returned to the seller, i.e. after they are checked by the buyer.
I've found that the quality of the goods I've bought online to be quite good, though I've avoided making high end purchases and electronics.
Gadgets may work when you open them but then fall apart after a little while…
I've heard that Alibaba are opening offices in the UK.
Maybe they have some plan to roll out alipay across Europe and challenge PayPal.

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