Podcast host Kavita C Budhraja interviews Jialu Shan, a researcher at the International Institute for Management Development (IMD) in Switzerland. Shan studies China’s consumer behavior and trends and recently published an article on how China is revolutionizing e-commerce with an injection of entertainment in The Conversation.
KCB: I read your report on how China is revolutionizing e-commerce with an injection of entertainment. And this, of course comes on the back of people staying home due to lockdowns caused by the coronavirus outbreak. You particularly talk about innovation in China’s e-commerce sector during this unprecedented time. I would love to hear more.
Jialu Shan: Sure. So, in that report, we basically talked about two key innovations in China’s e-commerce sector — social buying and live commerce. Social buying in China is largely driven by an e-commerce company called PDD, or in Chinese, Pinduoduo. And if you haven’t heard about PDD, don’t worry, it was only founded in 2015. But it is now the second largest e-commerce company in China by most measures, just behind Alibaba.
And yet today with the valuation of US $46 billion, it is worth more than eBay or Twitter, just to give you some idea as a reference. So in China, PDD’s meteoric rise has taken many by surprise. The PDD business model is very similar to US-based Groupon. Basically, the more people sign up for a deal, the larger the discount will be — sometimes the discount could be as high as 90%. This kind of buying model relies heavily on social networks, particularly WeChat, whose owner Tencent happens to be a major PDD shareholder, and I think this is a very important partnership. As you may know, Groupon, by contrast, has fallen on hard times as it struggled to convert people to register and download its app.
The second innovation is live commerce, or some people call it livestreaming e-commerce. You may think of it as a form of television commercial that used to be quite popular once upon a time, but live commerce is different in a way that it is kind of a convergence of livestreaming and e-commerce, and often with the fun and engaging element.
So here is how it works: It allows merchants to speak to shoppers in real time, answering questions about products, their details, like size and materials, and even how it smells. Viewers can see what products actually look like rather than photo-shopped photos and they can also directly purchase the item being shown without ever leaving the stream.
And the result? Chinese consumers just love it. Data shows that Alibaba’s Taobao Live streaming platform contributed about 7.5% of the company’s total sales on Single Day festival last year. And that is about nearly $3 billion within 24 hours. So behind China’s booming e-commerce sector, evolving tools and services are radically changing online shopping by making it more exciting, or more fun, or more engaging for the Chinese buyers. The coronavirus outbreak just gave an unexpected boost to China’s social buying and live commerce industry.
KCB: Before I talk more about the growing e-commerce platforms and the appetite for online shopping, I am more curious about what Chinese consumers are buying these days?
Jialu Shan: You know, the first thing that comes to my mind is probably not interesting at all as a product per se, but Chinese consumers adopted a new shopping habit — they are buying fresh food online.
You know how frozen food consumption is the norm in the US and Europe? For the Chinese, especially the elder generation, they still prefer live seafood and fresh meats from local wet markets or from supermarkets to ensure freshness. During the coronavirus outbreak, locals preferred to order online to reduce going out and stay at home.
So, the sales on those fresh food e-commerce platforms surged. I can quickly show you some data: daily new users to major fresh food e-commerce and online to offline platforms have increased by 50% to 200% on a year-on-year growth, and transaction volumes on these platforms have risen three or four times.
I think in the long run, some consumers may return to their old buying habits as China has now started to reopen its wet markets. However, it is likely that many, especially young and middle income groups, will continue to purchase fresh food online.
Another interesting phenomenon is that Chinese consumers are spending more on the category of online personal training or fitness since the coronavirus outbreak. According to a recent McKinsey survey, almost half of the respondents said they are using more online personal training and fitness. I guess the young generation is more health conscious.
Yesterday I saw a news that that PDD sold over 60,000 Nintendo Switch controllers in the first three months of 2020, and its fitness ring was the most popular switch accessory. So I think, people are really looking for new ways to entertain themselves.
Overall, I would say, this kind of stay-at-home economy thrives in China.
KCB: It’s amazing the way the digital economy is working. You did mention livestreaming. And, we’ve seen a surge in livestreaming, particularly in China, where now it’s not just the key opinion leaders, or KOLs, speaking to an internet savvy audience, but you also have the common man — the farmers and the business men — who are talking about their products directly to the consumers. Where do you see this trend of livestreaming, or live-commerce, heading?
Jialu Shan: Live-commerce, or livestreaming commerce, is really a huge and growing chain in Chinese e-commerce. Taobao Live so far, the dominant live commerce platform in China, reported that their gross merchandise volume (GMV) generated on the platform to grow by 150% per year, for three years in a row. And that growth is just amazing.
What is more interesting for live commerce to me is that the conversion rate is usually higher than traditional content driven platforms. And it’s expanding from promotion of regular products like skincare and cosmetics to more sophisticated products, like even automobiles.
The stuck-at-home audience is looking for new means of entertainment. So to me, it totally makes sense that consumers attend livestreaming sessions. Companies like PDD and Kuaishou, a video sharing app, Douyin, China’s domestic version of TikTok, are all broadcasting livestream sessions here and there. And many brands are also doing so in hopes that this emerging medium will save their sales during the crisis.
And today, I would say it is still largely dominated by Key Opinion Leaders, but this will change. Many platforms’ strategy is to allow even more people to make use of its resources. Taobao Live, for example, aims to incubate up to 100,000 emerging presenters, including farmers, to be an effective host with among those with income of over 10,000 Chinese yuan. So I think we will be seeing more small business owners or farmers broadcasting on Chinese live commerce.
KCB: China is way ahead when it comes to e-commerce and constant innovation. What can Western companies learn from how China’s constant changes, and what stops them from doing similar stuff?
Jialu Shan: I think the most important lesson for western companies is achieving innovation through creative adaption. Because what I’ve observed is many innovation successes from players in China come from turning a nuanced understanding of local culture into a creative adaption for a new category for some new consumer need.
As you can see, PDD didn’t create the live business model. Live commerce is pretty much an upgraded version of television shopping. Chinese companies, especially in the private sector, are quite bold and they are not ashamed of imitation, seeing it as kind of learning from others.
I think WeChat is another great example. At its start, WeChat was a simple replication of WhatsApp Messenger. But gradually, it has evolved as a mixture of WhatsApp and Instagram, because people want to share posts, and also Skype, because people want to call each other. And Apple Pay, because people want to pay with their phone, and maybe other apps that you are familiar with. And it is not surprising that now China has the number one app with more than 1 billion users.
The second lesson is to do it fast. You might be still amazed about how one built a hospital in just 10 days. The Chinese tech sector is basically the same — speed is the key. So, western companies need to rapidly explore opportunities before those opportunities are gone.
Last but not least, learn from your competitors. Take e-commerce as an example. We don’t only have Amazon, that dominates the market in U.S. as well as many other places. We’ve seen Pinduoduo’s amazing growth. We also have e-commerce giants Alibaba and JD.com. Both have launched their own initiatives, quite similar like PDD, to expand its presence into lower tier cities and even rural areas where PDD has a good base.
PDD is doing the opposite, by the way, from rural areas to Chinese mega cities. So the message here is Chinese ecommerce companies are fighting very hard with each other. But in the meanwhile, they are just becoming better companies than they used to be. So competition does make you better or at least makes your customers happier.
And then, talking about the barriers, I think the biggest barrier is actually us, I mean, the consumers. Chinese consumers are seen as one of the fastest adapting groups in the world when it comes to new products and applications.
So they are very open and willing to try new things. And unlike them, most western consumers are not that open as they thought. For example, in some Chinese cities, like Shanghai, it’s almost a cashless society, thanks to the mobile payment. While in Switzerland, where I am based, by contrast, cash remains the dominant payment method, not even a credit card, and it is not because we don’t have mobile payment service or payment solutions. We have Apple Pay, we have Twint for years, but people still prefer cash.
I’m not saying cash is not good. But you know, when turning to digital, online payment is a very important part of it. So actually, it’s really about people’s mindset that, to some extent, stops the western companies from doing similar stuff, in my opinion.
KCB: That’s really interesting that you said consumer is the biggest barrier. And you mentioned big players in China, such as Alibaba, Pinduoduo, JD, Baidu, Tencent, and of course globally, the more familiar names include Amazon, Google, Facebook, Spotify, etc. Now have these global names noticed the competitive impact of their equivalents yet? What do you see changing there?
Jialu Shan: That’s a very interesting question indeed. As you said, the tech sector basically has two clusters — the Chinese tech companies that are concentrating on their home market, and others that are taking care of the rest of the world.
So I’m going to start to talk from a little bit different angle. Like, why global companies didn’t really successfully manage their business in China. Many would blame the Chinese government. I think the Chinese government, of course, played a role, but like many of my Chinese friends described — Chinese know better what Chinese wants.
Amazon, for example, faced very few restrictions when it entered China than other Internet companies face today, but the company struggled to compete with the cost of local competitors. It didn’t adapt well to the unique Chinese market, and finally closed its China marketplace last year.
I think the opposite is also true. Chinese companies may not know well about overseas markets. Plus the competition is very intense internally so many of them are busy fighting with the domestic competitors. Another thing is western people might be less interested in products and services from Chinese tech companies, especially when there exists a western counterpart version.
More Chinese digital companies report at least some overseas revenues. And the top foreign destination for China’s tech companies currently are India and South East Asia where they are competing head to head with US companies. And we’ve already seen TikTok has gained some global footprint. So you know the world outside of your business and you can learn many things from your competitors.
KCB: TikTok, of course, has taken over the new generation by storm. A little known fact that it’s owned by Bytedance, which bought musical.ly and rebranded it to TikTok, and all these are from China. Now what’s specific to TikTok is — and please correct me if I’m wrong — it focuses on a country’s local audience, whether it’s Japan or India, while other social media applications have always gone for global reach and consistency around that. That’s another topic you’ve talked about through your research. Do you feel that’s where the world is heading — keeping it more region-based or country-based, or local, specific to the tastes of the consumer, rather than going global and pleasing everybody?
Jialu Shan: Well, yes and no. So for TikTok, there are two different versions of TikTok, basically a domestic version called Douyin for Chinese users, and TikTok for users that are outside of China. And these two versions run separately. Other than that, there’s only one TikTok for non-Chinese users.
And you’re right, part of TikTok’s success is due to its ability to adapt to domestic markets from content and cultural point of view, and often it collaborates with local influencers to jumpstart their reach. Moreover, it understands each country’s unique norms and trends and I think that’s very important. For example, in Japan, it ran a series of dancing and music campaigns focused on overcoming shyness. This is an issue for many young people in Japan.
And in each country, TikTok has its own local team that plans and monitors content specifically for younger demographics. And this kind of localization has helped a lot for TikTok to attract a high number of active users on this platform. So simply put, TikTok strategy is to go global by going local. And on the technology side, it’s quite universal too. They use advanced AI algorithms to learn users’ preferences as they capture not only the users’ likes and comments, but also how they actually watch each video, and then provide relevant video feeds to TikTok users.
And this AI recipe is so effective that users may watch many videos for hours, including carefully targeted ads and offers. So again, go global by going local — seems a bit contradictory — but it just works in my opinion.
KCB: I’m sure it works. As you can see with how crazy people have become, youngsters, about TikTok. I’m just going to touch on the challenges now faced by Chinese companies in the current environment when it comes to e-commerce.
Jialu Shan: Okay, so I think it’s important to not to go overboard considering the short-term negatives. Some industries such as tourism and travel are taking an immediate hit due to the necessary quarantine measures in order to protect people. Some sectors, such as e-commerce, online education, they’re just benefiting and many will be in-between, meaning that could go either way, depending on how they respond.
So those agile companies, or those who can adapt their business model to take advantage of the new and emerging opportunities, will be more resilient. And for many multinational companies, I think the issue resides in the global supply chain.
A few weeks ago, the world talked a lot about how the coronavirus outbreak is affecting the global supply chain and disrupting manufacturing operations, particularly for those who rely heavily or solely on factories in China for parts and materials. In recent days, while China started to reopen for more business, most of Europe, much of the United States, and many other places are under orders for business to close.
Now for Chinese companies that rely on foreign suppliers, or for those export-oriented companies, this is challenging. So, we are going to see massive restructuring of supply chain after the coronavirus pandemic.
For e-commerce, I think supply chain is also an important part because delivery is key to success in the future of e-commerce. And I think this is not completely bad news for China. As a country, it is trying to transition from ‘Made in China’ to ‘Created in China’, and given China’s market size, it will remain an important part of the global supply chain.
KCB: Thanks so much Jialu. Few takeaways for me — Chinese know better what Chinese want, and the biggest barrier for the success for global e-commerce companies appears to be the consumers themselves. And you also said innovation is all about creative adaption.
Thanks for this and it’s been a pleasure speaking with you.
Jialu Shan: You too. It’s my great pleasure speaking with you. Thank you so much, Kavita.
KCB: That’s it for this episode of Consumer Matters. Please note that the views expressed by our guest do not represent those of PDD, nor does she own shares or receive support from the company. If you enjoyed this podcast, keep a look out for other episodes where we talk to subject experts and people close to the story. We’re available on Spotify, Stitcher, iTunes, Google — basically any platform where you listen to your podcasts.