Online business in China

Online retailers show no mercy in China

CHONGQING-China’s online retailers and other operators of business-to-consumer e-commerce sites are in the midst of an increasingly fierce price war that is wreaking havoc throughout the industry.

Second-ranked 360buy Jing-dong Mall and fifth-ranked E-commerce China Dangdang Inc. are engaged in a nasty fight that has sucked other companies into the fray. This aggressive atmosphere has been so intense that Japanese online retail giant Rakuten Inc. decided to walk away from the Chinese market after entering it only 18 months before.

The situatiion is being compared to gangland turf wars, but in this instance the muscle is financial and the beatings are to rivals’ profit margins.

These fights are also causing self-inflicted wounds, and it may take the companies that remain standing no choice but to merge or acquire others to heal.

The current fight between Dangdang and 360buy is the most acrimonious ever seen in China’s e-commerce market.

“360buy is spending 4 yuan for every 1 yuan at earns. By August its capital will be exhausted,” boasted Dangdang CEO Li Guoqing.

“We have more than 6 billion yuan in cash in the bank. I’d wager 10 million yuan on that,” retorted 360buy CEO Li Guoqing.

Tit-for-tat discounts

Dangdang began by selling books and has since grown into the fifth-largest online retailer in China. Now it is looking to dominate the consumer electronics field, which is 360buy’s specialty.

To win customers, Dangdang has pledged discounts of as much as 1,700 yuan and it is offering 6,588-yuan flat-panel TVs made by South Korea’s Samsung Electronics Co, for a discounted price of 5,288 yuan.

To add to its strength, Dangdang has partnered with Gome Electrical Appliances Holding Ltd., which is a leading bricks and mortar retailer.

Dangdang is investing 50 million yuan to conduct a half- price campaign focused on consumer electronics. At the same time, Gome’s subsidiary online shopping site is offering a 10% discount on all items it sells.

360buy Jingdong Mall has responded by asserting that it will not be undersold.

This has helped spread the price wars to retailers. Suning.com, which is the online retail arm of China’s largest volume consumer electronics retailer Suning Appliance Co., announced it would drop its prices as far as needed.

And Tmall.com, which is an affiliate of China’s largest e-commerce company Alibaba.com Ltd., has allocated 10 million yuan to lower its online prices for computers.

Pity the small guy

Over the past few years, China’s online retail market has exploded in scale, growing from 3.5 billion yuan in the January-March quarter of 2009 to 76.4 billion yuan in the October-December quarter of 2011, according to a Chinese market research firm.

Rakuten, U.S. B2C giant Amazon.com Inc. and another U.S. online retailers entered China during that three-year period when the market grew more than 20-fold. This year saw the U.S. retail giant Wal-Mart Stores Inc. acquire a 51% interest In Yihaodian, which is China’s 10^th-ranked online retailer.

But now that an all-out price war is taking place, the smaller-scale online retailers in China are beginning to find they cannot compete.

To succeed in the online retail business, a company must supply products immediately after they are ordered into the nationwide goods distribution network. Because China is so huge, the only way to do this is by setting up distribution centers in various parts of the country.

That requires large investments, and when prices are declining and putting a squeeze on profits, even the larger online retailers are feeling pinched.

“In order to survive, we are either going to have to step under the umbrella of a large corporation or merge with another online retailer,” said an executive of one firm, explaining the choices his company is left with.

Resource: The Nikkei Weekly