China is the world's largest e-commerce market, with a total gross merchandise value (GMV) of RMB13.1 trillion (approximately USD2.06 trillion) transacted on e-commerce platforms nationwide in 2021 (National Bureau of Statistics of China). The country's e-commerce landscape has grown and changed drastically over the past two decades, capturing the rise in consumer income as China's economy boomed following its accession to the World Trade Organization (WTO), the resulting shift in consumer preferences as previously price-sensitive middle class residents grew increasingly wealthy, as well as the emerging income disparity and divergent preferences between China's higher and lower income consumers.
In this article, we examine the evolution of China's e-commerce sector over the past 20 years from inception to the present, as well as discuss key future trends that we think will shape the country's e-commerce landscape over the coming years. We also introduce China's three dominant market incumbents - Alibaba, JD, and Pinduoduo - in the context of these past and future developments.
Alibaba is China's largest e-commerce company in terms of GMV, and is known for its consumer-to-consumer (C2C) Taobao platform and more premium business-to-consumer (B2C) T-Mall platform.
JD is the only major e-commerce platform that engages primarily in direct selling, especially for higher-value goods and consumer durables. JD also has its own logistics infrastructure and delivery company, JD Logistics (HKEX: 2618) which went public on the Hong Kong Stock Exchange in May 2021.
Pinduoduo is a relative newcomer in the e-commerce sector that was only launched in 2015 but has experienced rapid growth from targeting China's lower income consumers who do not typically purchase from Alibaba or JD.
We recommend reading this article as a prelude to the more detailed information provided in each of our company analysis series. For a financial comparison for the companies, see Comparing Alibaba, JD, and Pinduoduo.
Click here to subscribe and stay tuned for future updates!
The Dawn of Chinese E-Commerce (2003)
Surprisingly, or perhaps unsurprisingly, just as the COVID-19 pandemic boosted the popularity and growth of the e-commerce industry over the past two years, it was actually the SARS epidemic during 2002-2003 that spurred the launch of consumer-facing e-commerce in China. Prior to 2003, JD only had a single physical store selling electronic devices in Zhongguancun, what was then China's largest electronics retail mall in Beijing. In contrast, Alibaba did have a small e-commerce platform, but this was a business-to-business (B2B) wholesale website (what is now 1688.com and Alibaba.com) that allowed domestic and foreign companies to purchase Chinese-manufactured goods.
With the outbreak of SARS in late 2002, China entered a near-lockdown state by early 2003. Without customers being able to shop in physical malls, JD was forced to adapt to the epidemic by accepting orders by phone and email, then subsequently mailing the goods to customers to fulfill their orders. Eventually, an online retail platform that is the precedent of what would become the current JD was launched in 2004. At the same time, Alibaba saw an opportunity to expand their business model by leveraging the company's existing connections with Chinese sellers to found Taobao in 2003, a primarily customer-to-customer (C2C) oriented third-party e-commerce platform where individual sellers and small merchants could sell their products directly to retail consumers.
The Era of Price-Sensitive Consumers (2003-2010)
Since China joined the WTO in 2001, the country entered a rapid growth phase that tripled the average citizen's annual disposable income in just a decade. Both Alibaba and JD targeted their efforts on the residents of China's coastal first and second tier cities that benefited the most from the country's rise in manufacturing and trade, although during the initial years of economic growth, even the average first and second tier middle class Chinese consumer still had relatively low purchasing power.
The Expansion of Taobao and the Launch of Alipay
During China's first decade of rapid growth, Alibaba expanded its newly founded Taobao platform to offer a wide range of low-value, low quality products manufactured by factories in villages that either didn't have a brand status or were meant to duplicate products from established brands. Most purchases made on Taobao were for daily household essentials and fast-moving consumer goods (FMCG) that were cheaper online compared with at a physical retailer.
Note: the price discrepancy arose for two main reasons: (1) consumers could easily compare prices online so merchants selling on Taobao had to set more competitive prices to attract customers, in comparison to many physical retailers who preferred to set higher prices for customers to bargain down, and (2) many of the sellers on Taobao were family members of or had personal connections with factories in villages that produced cheap goods and could thus source products without going through many intermediaries.
To complement its e-commerce business and promote consumer trust in the platform, Alibaba launched Alipay in 2004, an escrow service that takes payments from customers and distributes the money to sellers after customers confirm receipt of their ordered goods. Of course, Alipay has expanded to be much more than an escrow service, and was spun off in 2011 and developed into what is now Ant Group.
JD Stays Focused and Launches JD Logistics
During the same time period, JD continued to focus on the first-hand selling of authentic, branded, primarily 3C (computer, communication, and consumer) electronic products. The company initially faced frequent problems with third-party delivery couriers damaging delicate electronic appliances during the delivery process, leading JD to develop its own logistics infrastracture and delivery arm, the predecessor to what is now JD Logistics. JD's relatively reliable delivery system and emphasis on overall better service translated to a higher premium in prices.
Since JD did not support third-party selling, the company did not develop and still does not have an in-house developed escrow payment platform.
Looking at the earliest available information till the end of the decade, we see that Taobao's annual sales grew from RMB34 million in 2003 to RMB400 billion in 2010, in comparison to the growth of JD's RMB10 million GMV (which is more or less equivalent to revenue since JD was direct selling) in 2004 to RMB10 billion in 2010. One reason for Taobao's significantly faster growth is that Alibaba already had an existing network of partner merchants selling products on the company's wholesale platform that could easily extend to selling to individual consumers.
Nevertheless, we think the main reason Taobao could grow so rapidly during this time period (relative to JD) is that the goods offered on Taobao met the needs of the majority of Chinese consumers who were, for the most part, still highly price sensitive and had a significant demand for affordable, value-for-money products. Moreover, Taobao's focus on FMCG and non-durable goods meant that consumers could return to make more frequent purchases on the platform, as opposed to the durable 3C goods offered by JD which only require replacement once every few years.
An Era of Upgrading: China's Increasingly Wealthy Middle-Class (2010 - )
A decade after China's accession to the WTO, Chinese consumers are beginning to show a clear shift in preferences as the price-sensitive early adopters of e-commerce began to want more than just cheap, lower quality goods and started seeking higher quality, branded products with better service.
The Birth of T-Mall
Anticipating the needs of China's growing and increasingly wealthy middle class, Alibaba founded T-Mall in 2008 as a business-to-consumer platform for established and emerging brands to sell their products either directly or indirectly through franchised stores. Products sold on the T-Mall platform are guaranteed to be authentic and are subject to close quality control scrutiny by Alibaba. T-Mall also pioneered the famous 11.11 Singles' Day sale in 2009, which was later extended to become an 11-day sale generating a total GMV of RMB498.2 billion in 2020.
T-Mall did not receive much initial attention from consumers but gained significant traction later on as Chinese consumers continued to grow in affluence. In fiscal 2020, the GMV transacted on Taobao and T-Mall close to converged, with an annual GMV of RMB3.4 trillion transacted on Taobao and RMB3.2 trillion transacted on the T-Mall platform.
JD Broadens Its Scope
At the turn of the decade in 2010, JD opened up its platform to third-party sellers with similarly strict requirements on product authenticity and quality as T-Mall, while also offering a broader range of product categories.
JD's focus on premium delivery and service benefited greatly from the trend of rising affluence, although the company continued to lag behind Alibaba in terms of total GMV and number of active users.
China's Forgotten Market: The Lower Income Consumer (2015 - )
Alibaba and JD continued to grow, as China's e-commerce market gradually became saturated (at least in the country's large, economically prosperous cities). However, as the two incumbents' growth rates started to taper off in line with the market saturation, a new form of commerce was launched in 2015 through the founding of Pinduoduo.
Pinduoduo's Disruption of the Status Quo
Pinduoduo disrupted the Chinese e-commerce landscape by targeting China's lower income and rural area markets with the sale of lower quality and sometimes counterfeit products using the company's self-pioneered concept of social commerce (see here). The general idea of social commerce involves pitching together large volumes of small orders in order for consumers to obtain a lower price for everyday items, in exchange for requiring users to share the products they are interested in buying with others in their social circle. Pinduoduo also subsequently expanded its social commerce strategy to include daily grocery items as part of a community group buying program, where small sites are set up in each community for local residents to pre-order fresh produce and daily household products via Pinduoduo's platform for next day pick-up.
The Era of Convergence, Experimentation, and Diversification (2020 -)
Seeing Pinduoduo's successful expansion in the lower income markets, Alibaba and JD both launched similar initiatives to compete. At the same time, as Pinduoduo's initial rapid growth phase began to taper off, the company also launched various initiatives to attract higher income consumers. The turn of this second decade marks an era of business model convergence in China's e-commerce sector, as the three major incumbents expand beyond their core competencies to compete with one another for market share.
At the same time, we are also seeing trends of experimentation and adaptation, as each company continues to find new ways to attract consumers and boost each user's level of spending on the platform (e.g. Pinduoduo's distinctive marketing strategies and Alibaba's promotion of livestream selling). As the e-commerce penetration rate in China approaches full saturation, we expect the companies to place greater and greater emphasis on increasing monetization, while Alibaba and JD have also expanded to international markets to broaden their user base.
Finally, as the e-commerce market in China continues to mature, we are seeing the three incumbents gradually diversifying their portfolios to include additional related and unrelated tangential businesses. Alibaba has a local consumer delivery business that is one of China's largest alongside food delivery competitor Meituan, in addition to a growing cloud computing business that is currently China's and Asia Pacific's largest provider of public cloud services. JD has spun-off its logistics arm and is continuing to develop its logistics services for third-party (i.e. non-JD) consumers, while also maintaining a related real estate development and management business (JD Property) through logistics investment funds with Government of Singapore Investment Corporation (GIC) and Mubadala Investment Company (MIC), an Emirati sovereign wealth fund. In contrast, Pinduoduo has mostly remained focused on growing its e-commerce business by trying to attract new, higher income users and upgrading the purchases made on its platform (see here), although we expect the platform to gradually make business diversification efforts as it continues to mature.
The past 20 years saw the inception, growth, and rapid transformation of the world's largest e-commerce empire driven at least in part by the business decisions and actions of major market players Alibaba, JD, and Pinduoduo. While the Chinese e-commerce sector has (for the most part) reached a relatively mature stage far beyond the early years of rapid growth, we still anticipate continued changes to take place in this sector as the three incumbents adapt, experiment, and innovate in a landscape of intensifying competition. We also cannot rule out the possibility of further regulatory intervention, especially if any of the companies seek or do attain (from the regulator's perspective) a market monopoly status in related and/or unrelated industries.