Reliable system

Next, e-commerce providers must offer secure payment solutions and a reliable system to deliver the products to customers. This generates the second group of winners — those offering mobile and online payment services, the warehousing firms and the final customer-delivery companies.

Indeed, logistics is seen as a cost-centre today, but it could well be tomorrow’s profit driver. All e-commerce platforms are trying to compete on three aspects: price, product offerings and service. Large companies find it difficult to differentiate themselves on product offerings, as brands are willing to list their products on multiple platforms.

However, as the US experience shows, their ability to offer competitive prices and services depend on sound logistics. Although efficient logistics require a large overhead investment, many companies are looking to employ these in-house rather than outsource them. As labor costs rise, they will need to invest heavily in automation to boost productivity. They will also need to spend on technology to leverage “big data.”

That still leaves space for a small group of companies with unique product offerings or services. These are the third set of winners. This group could include companies offering mobile browsers, localized business services focused on specific towns or cities, mobile app distribution and online video services.

In China’s increasingly competitive domestic market, the best path to profitability would eventually be through finding a niche product, increasing productivity through warehousing and packaging automation, selecting the optimum level of service, reducing the rate of return of products, nurturing customer loyalty and reducing the cost of acquiring new customers.

China’s Internet sector is in a sweet spot, with strong growth prospects, as online shopping goes social and mobile. Online retail penetration in the country should go much higher over the longer term than that in the US, due to the fragmentation of China’s overall retail industry and its geographic diversification. Local players dominate the market, but they have the advantage of learning from the US experience both in the business-to-consumer (B2C) and the consumer-to-consumer (C2C) e-commerce segments. The US model shows that both kinds of companies can co-exist over the longer term.

Additionally, online consumption, by its very nature, is non-cyclical.

This bodes well for strong, secular growth of the entire eco-system supporting the e-commerce industry in the coming years. The ongoing consolidation led by the larger players to acquire more mobile Internet users should provide the extra nip to the shares of second-tier firms in the coming year.