China's cross-border e-commerce in a bottleneck

Release Date : 2024-10-15

To-hai Liou,Adjunct Distinguished Professor of Diplomacy and Director, Center for WTO Studies,College of International Affairs,National Chengchi University, Taiwan, ROC

E-commerce refers to the sale of goods and services remotely over a computer network. Cross border e-commerce refers to cross-border retailing via internet, a new form of international trade. Through the internet, internet of things (IoT), big data, financial technology (FinTech), robotics, artificial intelligence and the application of various digital devices, the traditional international trade activities are digitized. Moreover, it has gone beyond the traditional trade in goods and combined with trade in services into innovative business activities through digital technology and electronic communications.

E-commerce started in the United States, but has since boomed in China, largely due to the country's favorable environment (5G networks and mobile payments), and today China's cross-border e-commerce platforms have become the biggest challenger to U.S.-based e-commerce giant Amazon. Another major reason for the rapid development of e-commerce globally was that people were forced to stay at home during the COVID-19 epidemic, and e-commerce became the only way for people to get supplies for their livelihoods, which led to a boom in e-commerce, most notably in China and India. The biggest difference between the two is that Chinese e-commerce companies were able to go overseas, while India received massive investment from American e-commerce companies, with Amazon rising to become the leading e-commerce company in India, and the second e-commerce platform, Flipkart, whose main investor is Walmart. China now views cross-border e-commerce as a new engine of economic growth as it promotes domestic and international trade and investment, and China's cross-border e-commerce industry has grown rapidly in recent years.

According to German analyst firm e-commerce DB, China's e-commerce market was nearly $2.2 trillion in 2023, followed by the US with $981 billion in sales, the UK with $157 billion, South Korea with $140 billion, Japan with $124 billion, Germany with $113 billion, India with $88 billion and Indonesia with $73 billion. China has been the world's largest online retail market for 11 consecutive years. It is worth noting that these Chinese e-commerce platforms are not just modeled after Western e-commerce giant operations such as Amazon or e-Bay, but also innovations such as live streaming sales, TikTok's unique video and audio clip marketing practices, and new business models such as Temu's full-managed consignment and half-managed consignment models. Under the full-managed consignment model, manufacturers agree on a price to supply goods to Temu, and the platform does all the rest from marketing, operations, fulfilment to customer service. Then, to increase customer satisfaction through faster delivery and alleviate merchants' pressure in marketing and customer service, Temu later introduced a refined new model, namely half-managed consignment model allows those merchants with goods outside China to process orders and arrange for fulfilment by themselves. To be more specific, merchants will be in charge of warehouse management, delivery, and reverse logistics (returns etc.), while the platform provides flexible delivery options, including order stacking.

In 2023, Temu has become the largest advertiser on the U.S. social media platform Meta (the parent company of Facebook), with a yearly advertising investment of US$2 billion. Nikkei Asia Chinese Daily reported that Temu has been growing rapidly since its launch in September 2022, and data analysis by Sensor Tower found that in August this year, Temu's users ranked No. 3 in the world, and reached 91% of the number of Amazon users, and it is expected that within a year, it may overtake the U.S.'s Amazon, which has been established for 30 years.

Although China's e-commerce platforms have been expanding exponentially around the world in recent years, they are now facing a difficult situation with internal and external problems. Some foreign markets see this trend as a threat and a way for China's e-commerce platforms to penetrate their markets. For example, the Federation of Korean Industries(FKI) warns that Chinese cross-border e-commerce is eroding the Korean market. According to the FKI statistics, the global e-commerce platform sales of the top 5 three from China, Korean consumption in those China's cross-border e-commerce platforms is now even more than in local platforms for the first time. According to the “Analysis of Global E-commerce Market Status in the Past 5 Years” released by the FKI, the global e-commerce market size grew from US$2.9 trillion in 2018 to US$5.8 trillion in 2023, which is a one-fold growth in 5 years. The average annual growth rate is 14.6%, which is more than three times of the overall retail growth rate of 4.4%. The growth trend is most impressive on the Chinese platform, with the three Chinese e-commerce giants Jingdong(京東), AliExpress (阿里速賣通), and Pinduoduo(拼多多) growing at an average annualized rate of 41% over the past five years, which is 2.8 times higher than the global average. Among them, Jingdong's annual growth was 18%, Alibaba's 26%, and Pinduoduo's 79%. In terms of global e-commerce sales in 2023, the No. 1 e-commerce company is U.S.-based Amazon, followed closely by China's Jingdong, Alibaba, Pinduoduo and South Korea's Coupang.

The Korean e-commerce market has also seen dramatic changes in line with global trends, with Korean consumers' total spending on Chinese e-commerce platforms increasing 121.2% year-on-year last year, surpassing U.S. platforms for the first time. Korean users of Chinese e-commerce platforms have also increased at an astonishing rate, with the number of Korean e-commerce users ranking Coupang, Alibaba's AliExpress, 11th Street, Pinduoduo's Temu, and Gmarket in May this year, compared to just over a year ago, when the top four were all Korean companies. The top 4 rankings in January last year were all Korean companies, but in just over a year, Chinese platforms have climbed to 2nd and 4th place. Last year, Korea's e-commerce market reached an all-time high of 228.9 trillion won, ranking No. 5 globally after China, the U.S., the U.K. and Japan. According to app and retail analytics service providers Wise App, Retail, and Goods, the number of monthly users of Korean e-commerce apps in March this year was 8.88 million for AliExpress and 8.3 million for Temu, which ranked 2nd and 3rd after Coupang, the largest local shopping giant with 30.87 million users. Shein's user base also hit a record high of 680,000 users. The Chinese e-commerce trio is stealing market share from Korean rivals Naver and Kakao by offering ultra-low prices. AliExpress was also the mobile app with the most new users in the Korean market last year. No wonder the South Korean media are clamoring for the government to tighten regulations on foreign e-commerce companies and loosen restrictions on local e-commerce companies in order to cope with this enemy. In response to the massive invasion of Chinese e-commerce, South Korea has stepped up testing and recently found that Shein(希音) has been selling apparel products with excessive levels of hazardous substances, such as the lead content of sandal insoles that exceeded the standard value by 11 times, and it has been asked to stop selling the related products.

Recently, the U.S. Congress enacted legislation mandating that audio-visual software TikTok (抖音) divest itself of its Chinese parent ByteDance(字節跳動), citing security concerns. Before that, the Indonesian government, which market has 125 million TikTok users, the second largest TikTok user base in the world after the U.S. market, banned TikTok from participating in e-commerce services in the country, forcing TikTok to invest in a joint venture with Tokopedia, largest local e-commerce company, at a heavy loss. This was because most TikTok webcasters had been hired by various corporations to insert e-commerce transactions into their broadcasts, and the prevalence of online shopping had severely impacted brick-and-mortar retailers. In addition, the French parliament passed a bill banning low-cost super-fast fashion, and Shein was the first to be hit. Worse of all, the European Commission is working on a plan to scrap the 150 ($162) duty-free threshold that would impose tariffs on goods from Chinese e-commerce firms such as AliExpress, Shein, and Temu in an effort to curb what the European Union calls an influx of substandard goods from China. The U.S. has also suspended six customs brokers' $800 “small value exemption” and stepped up inspections of packages from China to prevent e-commerce firms from taking advantage of trade loopholes to make “unfair profits.

On the domestic front, in July 2024, hundreds of small merchants protested in front of Pinduoduo's Guangzhou office, accusing its overseas e-commerce platform Temu's penalty policy was unfair. The newly introduced after-sales service of "full refund but no need to return goods if not satisfied" can be enjoyed for 90 days. As a result, these merchants cannot get back the returned goods and have to deduct several times the compensation.

The recent surge in global downloads of e-commerce apps such as Chinese e-commerce platform giants AliExpress, Temu and Shein is a reflection of the fact that inflation has continued to widen the gap between the rich and the poor in recent years, with the poor in particular suffering the most. South Korean statistics show that teenagers and seniors in their 60s and 70s are the most frequent buyers of ultra-low-price products on Chinese e-commerce platforms. They have relatively weak financial means to survive. Same thing happened in America, over 44% of Temu's sales in the US came from earners making over $130k per year. SmartAsset, a financial planning information website, points out that according to the MIT Living Wage Calculator, a family of two adults and two children living in a large U.S. city will need to spend an average of $117,500 in 2024 to maintain a basic standard of living.

As a result, not only does it show that ultra-low-price products on Chinese e-commerce platforms meet the needs of consumers and makes products affordable for the world's inflation-plagued masses, but it also provides a platform for small and medium-sized enterprises (SMEs) at home and abroad to sell their products across borders to other countries. The salient example is that AliExpress announced in March 2024 to invest US$1.1 billion in South Korea over the next three years to build a logistics center and expand its business. It is expected to create more than 3,000 jobs in South Korea. At the same time, Alibaba also plans to invest US$100 million to help South Korean SMEs sell their products overseas. AliExpress is scheduled to set up a sourcing center in June to discover outstanding Korean products and open up a global sales channel to serve as an export platform. In addition, AliExpress plans to sell Korean products on a number of its e-commerce platforms, such as “Lazada” for Southeast Asia and “Miraviafor the Spanish-speaking market, with the goal of supporting 50,000 South Korean SMEs to realize global exports within three years.

In sum, China's main markets for cross-border e-commerce are the U.S. and the European Union, but due to rising trade protectionism, these Western countries have been increasingly resistant to China's e-commerce, China's e-commerce companies are trying to respond to the restrictions of different markets on the one hand, while on the other hand, they are also diversifying the market, such as strengthening cross-border e-commerce relationships with the Belt and Road Initiatives (BRI) countries. Thirty BRI countries have already become China’s e-commerce partners. Given its 1.4 billion population, Africa is also a major target for China's e-commerce giants to tap in. However, most of them are developing countries with a lack of infrastructure. And their people’s purchasing power can hardly compare to that of developed countries, coupled with a lack of local e-commerce talents.  In other words, the cost of China e-commerce platform's adjustments will be relatively high.