“Don’t Get Surrounded” – China’s Strategy Against US Online Retail

Chess is the oldest and most popular strategy game in the west. It’s main object is gaining superiority through a decisive move against the opponent. The chess player looks for a decisive action that can lead to victory, in as few moves as possible.

Wei Qi game. Source
Wei Qi game. Source

Unlike their western counterparts, asian states have developed their military strategy around a different philosophy. Wei Qi, or the game of Go (as referred to in Japan) is the traditional game in China. Players use 180 pieces, each having the same value, to build fortifications and capture enemy positions. Unlike chess, the players don’t have a clear view of the competitor’s strategy, as the pieces are continually laid down. Matches are hardly seen as win or loose and the score can be overturned during the match, multiple times.

While chess players look for decisive actions, Wei Qi players use continuos movement to avoid being surrounded. The game, just like its western equivalent, is based on centuries of difficult wars. Due to China’s long and troubled history, its strategic approach has become less about direct confrontation and more about avoiding defeat and gaining relative advantage toward the opponent.

Western countries are playing the wrong game

Henry Kissinger expressed his view that Wei Qi is the path to understanding China’s strategy. In his book “On China” he starts describing Chinese policies through this ancient game. Although Kissinger’s metaphor is aimed at politics and military actions, it can just as well be applied to economics and for that matter, online retail.

When Ebay tried to access the Chinese market in 2004, Jack Ma, the founder of AliBaba Group, has sensed that this move may be detrimental to his own company, then providing internet marketing options to small and medium companies in China. He felt that although Ebay addressed the individual sellers, there was no clear distinction between individual businesses and small/medium companies in China.

Ebay had just laid the first stone on Jack Ma’s Wei Qi board. He decided he had to escape this potentially dangerous situation and launched Taobao, a company directly competing Ebay in China. The companies fought valiantly, with eBay trying to form partnerships against Alibaba and Taobao and investing $100 million in its Ebay EachNet operations.

While Ebay was buying all ad spaces it could find online, in a search for the decisive move, AliBaba bought TV and radio ad space, knowing the Chinese consumers were more influenced by  traditional media at the time. Ebay focused on increasing product listing numbers, while AliBaba focused on customer service. Piece by piece, AliBaba laid down all its advantages and finally pushed Ebay out of the Chinese market, in 2006.

Unfortunately, Ebay was not playing the right game in China. It’s strategy was flawed as it wasn’t able to find the check-mate move. Jack Ma made sure his strategy encircled and captured Ebay’s future earnings. But it was not enough. His game of Wei Qi was not just a timely thing. It was a prolonged campaign.

Chinese online retailers are far from stopping

This year AliBaba decided it will get listed in the United States. After it has managed to grow to handle almost 84% of China’s Ecommerce market, it has now decided to cross the Pacific and try an offensive move inside what is now the second biggest ecommerce market, the US.

AliBaba is not the only Chinese company reaching for the US online retail market. 58.com, a Chinese company dealing with classified ads and listed on the US market, has just received a $736 million investment from Tencent, another Chinese internet company.

Although both these companies are now tapping the capital market in the US, their long term intentions are probably more ambitious. Their presence in the US is a sure way to avoid encirclement. Whenever their position will become endangered, they will push farther.

While the Chinese – US economic dynamics are far more complicated and it cannot all be reduced to a game, one thing is for sure. The Yangtze crocodiles have crossed the Pacific and they are not there to play chess.

China Passes US in Terms of Online Retail. Europe Lags Behind with 12% Growth Rate

China’s Ministry of Commerce released data showing huge growth in terms of Online Retail. Chinese consumers spent $296.57 billion online in 2013, 13% more than their American counterparts ($262.51 billion in 2013). That means China is now the biggest market for online retail.

China showed a 41.2% growth YoY and is now the largest online retail market

Chinese online retail market showed a 41.2% growth rate from 2012, a result of a) an increase in online spending and b) an increase in the total number of internet users. The number of internet users in China grew 8.5% to a total of 618 million users at the end of 2013. As a result, China showed an increase of 52.4 million in online consumers.

Chinese B2C ecommerce expected to grow even faster in 2014.
Chinese B2C ecommerce expected to grow even faster in 2014. Source.

Although China surpassed the US in total online spending, one must not ignore the fact that the US still spends almost twice as much online than China. The total number of internet users in US, according to Internet World Stats is 277 million, 54% less than internet users in China.

As such, American users spend 945$ per year online, whereas Chinese users spend 478$ per year. Moreover, online retail in China is more or less a monopoly ran by the Ali Baba group, a company preparing for an american IPO. With  $248 billion in transactions handled in 2013 through its many subsidiaries, Ali Baba accounts for 84% of all Chinese online retail. That is NOT a balanced market.

Although the numbers amount in favor of Chinese online retail (large growth rates, increased number of consumers and a lot of room to grow) Ali Baba’s dominance does not paint a pretty picture. Whereas US online retail is a competitive and balanced market, the Chinese behemoth has clay legs. Sure – it had a astonishing growth and there certainly is a market there, but can the Chinese leaders take on mature, innovative markets? My bet is on NO. The centralized, planned uber-organization can work pretty well in China but in the competitive world of global markets it might run into trouble.

Europe lags behind and is expected to reach $318 billion in 2018

Europe shows a healthy, double-digit growth rate in terms of online retail, yet still lags behind the US and China. Forester shows that Europe will grow with a CAGR of 12% until 2018, when the market is expected to reach €233.9 billion ($318 billion).

This is neither good nor bad. Europe is still making peace with it’s new-found unity. The European Union still has to battle inequality between countries, has had a rough time battling recession and has just recently considered online retail as a viable alternative to classic retail.

Northern Europe is more mature in terms of online retail development, thus shows smaller growth. Southern and Eastern Europe has increasingly adopted online retail as means to reach its uncovered consumers and shows larger growth rates.

Make no mistake, however. Europe is a large market. It has 518 million internet users and there is still room to grow. There are more money to spend and surely Europeans will get moving soon. Just as soon as they get over this recession thingie.