Here is the original article by IDG “Wal-Mart steps into China’s e-commerce market“.
Below is the uncut version of a recent exchange on e-commerce in China.
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Both Gap and WalMart stepped up their game in China with online stores. Here is my take on it.

It is a logical step for mature brands to create an online store, especially so in China.
Offline retail channels are limited – how many cities can Gap open a store in? Reaching the 100+ cities with over 1M inhabitants will take a long time. In addition, logistics costs in China are quite low and an advantage for such premium brands as delivery is at a marginal cost. Even MacDonald’s does delivery for no extra charge!

Also, many e-commerce sites in China have a trustability issue: how can you know if the product is
- real
- fake
- real but “grey market”, i.e. extra inventory or “night shift” from the official factory
- stolen goods
The official store would offer a very trustable channel.

It is possible that online retail might overtake offline retail for successful brands – the apparel retailer Vancl started purely online,
saving on commissions, logistics, etc. I believe new brands might replicate this success and China could be a fertile ground for “retail leapfrogging to digital“. It is likely local players are better equipped for that and nimbler than foreign ones.

For Walmart who already retails offline, it makes sense to offer what is essentially low-priced commodities, while it would not for pure online retailers. Actually, their online store pushes rather pricey items, many over 100 RMB. Best items are likely items like wine, tea or appliances.

The business of large retailers like Walmart is in finance: get cash upfront, pay suppliers late (generally 3 months later) enjoy the interests and cash flow. In China it’s even better as delivery costs are low and online users enjoy the larger variety of products online, and trust the Walmart brand enough to buy.

For pure online “e-commerce” players it would not pay off so well as they would have to figure out logistics, would not enjoy the cash flow advantage as a main business model, would not have simple ways to promote their service, and would only make little money per product.

Hence: a good move for Walmart – to be followed by other large retailers if things work out.

The interview covers innovation models and the “Digital Silk Road” – how the West is importing ideas from Asia in the digital space. The magazine’s articles include great pieces about architecture, the art scene, publishing, etc.

pp. 108-110
> Can we talk about “Asian” or “Chinese” innovation, especially in the Internet and telecom fields?
> Can you give some background on digital innovations from Asia?
> How about China?
> What can explain the innovation boom in China?
> Are those innovations adaptable outside China? Do they have influence overseas?
> What is the cultural part in those successes?

This interview was inspired by our “Digital Silk Road” talk at the Open Web Asia conference.

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+8* | Plus Eight Star looks at history and know what? It repeats itself, with the world now importing not only Asian products, but also ideas. We’re on Twitter too.

The global research network ESOMAR (“The world organisation for enabling better research into markets, consumers and societies.”) interviewed us on branding and innovation in Asia

Among our quotes:

“Imagine you have 100Mbps Internet, while Google is optimized for ‘early broadband’. In both Japan and Korea, Google doesn’t look simple; it looks simplistic.”

“In China, many entrepreneurs have a kind of attention deficit disorder when it comes to business – seeing so many ideas passing them by that they can’t focus on any of them long enough to make it succeed. Indeed, the founder of Tencent, China’s largest IM and Internet company, has said he made instant messaging work in part because so many of his competitors found other things to move on to, and quickly abandoned it. He, in the absence of a better idea, stuck with it until he found a business model that worked.”

“As reassuring as it might be for the consumer to put a face or a flag onto a product or service, the reality is that it is increasingly irrelevant in today’s world: Innovation does not have a nationality.”

Enjoy the read!
@benjaminjoffe – speaking at eComm and Inside Social Apps.

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+8* | Plus Eight Star finds out for you what works in Asia and could work elsewhere. Follow us at @plus8star.

In addition to our quotes in the column, you will find below the extended version of our views on this topic.

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While the first wave of Chinese web companies were making fire of all wood and entering new fields a bit recklessly, I think their perspective has changed a lot and that now companies enter fields in which they feel that:

1. There is a valid business case
2. This new field is somewhat connected to their service universe / ecosystem
3. They have a headstart thanks to their media power

Tencent entered only businesses that have proven revenue models. Search, payment, blogging with virtual goods (not blogging with ads), social gaming – all accessible from their IM service. Their focus remains “mainstream entertainment and communication”.

Shanda operates a huge number of servers and correctly identified that Amazon’s cloud computing was bringing close to 1/3 of Amazon’s profits by leveraging existing infrastructure with a service layer.

Taobao is doing the same, for the same reasons. Taobao also launched an e-commerce focused SNS, to encourage interactions between buyers, sellers and among them, to build up trust and “social commerce” – it is like Facebook Beacon done right.

Baidu is entering video now that Tudou and Youku paved the way by spending millions in bandwidth and clarified the IPR issues and the business case.

Sina, Sohu and Netease entered gaming after the mobile content market crashed. They recognized that the business of online ads wasn’t scaling greatly nor being as profitable as online gaming, and that a portal’s media power could be leveraged to promote games. If you are a major portal or email provider, you can promote pretty much whatever you want, event better if it’s your own property – a very profitable and semi-commoditized service like online games!

Eventually, while it might seem that they are doing a bit of everything, I think they are making quite pragmatic business decisions, finding ways to enter proven business fields by leveraging their existing reach and service universe.

It is also interesting to see how another underlying battle is going on as some players try to be the “access layer” of others. Especially, Taobao blocks Baidu from accessing its product pages directly as it would destroy its ad-based business model. Baidu accessing video sites also undercuts those sites’ ability to drive users through their homepage, and forces them to have revenue models that work in a standalone page – in a similar way to Google killing online newspapers by providing direct access. We see today pay walls being erected in the US Internet – as the battle is still on in China, it is likely search engines will pick up the remains unless services providers find sustainable business models.

Tencent creates $35B of wealth in 11 years

Our work is quoted on Tencent’s revenue models and our estimates on the virtual goods market. Of course, Morgan Stanley cannot cover Tencent in details (as we do in our “Inside Tencent” report) as their report tries to cover global trends with some local focus, such as China/Tencent for virtual goods and Japan for mobile commerce. Among interesting factoids, Tencent is recognized as having created $35B worth of wealth over the past 11 years – to compare to Amazon’s $58B over 15 years and Google’s $186B over 11 years. Tencent’s profit margin is 49% vs. Amazon’s 6% – guess digital goods have better margins than analog ones.

Five companies out of “Desktop Internet Winners of the 90′s” are no less than 5 Asian companies

Here is the list compiled by Morgan Stanley:

• Google
• AOL
• eBay
• Yahoo!
• Yahoo! Japan
• Amazon.com
• Tencent
• Alibaba
• Baidu
• Rakuten

If we categorize a bit:

• Search: Google (US), Yahoo Japan (JP – operated by Softbank) Baidu (CN)
• Portal: Yahoo (US), Yahoo Japan (JP)
• E-commmerce i.e. B2B, B2C, C2C and payment: eBay (US), Yahoo Japan (JP), Amazon (US), Alibaba (CN), Rakuten (JP)
• IM/Other: AOL (US), Tencent (CN)

Not bad for Asia. Ever wondered why we focus on China, Japan and South Korea? Strangely, NHN/Naver, Korea’s largest portal and search engine is not included in the list though it passed the $1B revenue mark this year. Naver is totally dominant in its market and pretty innovative: ever heard of “Knowledge Shopping”? It is the combination of “Knowledge Search” i.e. Yahoo Answers, copied from Naver in 2005, and online shopping mall).

Oh, did I mention Yahoo’s hidden treasures were in Asia? It owns large shares in both Yahoo Japan and Alibaba.

Enjoy the read!
@benjaminjoffe

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+8* | Plus Eight Star helps Morgan Stanley make presentations about Asia. Find us also on Twitter!