E-commerce in China

New York Times

Commentary

Student entrepreneurs in China are learning the rules of the business world on Taobao.com - "a combination of Amazon
and eBay" that rivals both in sales. A new economy is emerging that uniquely defines the generation of young people in China that is growing up in the Age of the Internet.

The story in New York Times reports that Yang Fugang, a recent college graduate, at age 23, earned $75,000 last year by buying cosmetics and other high margin products wholesale directly from factories, and selling them retail online.

While Craigslist is mired in controversy in America, and eBay executives are denigrating Jack Ma's strategy, saying "free is not a business model", a new e-commerce infrastructure is emerging out of the unique circumstances in China. Those who tell Jack Ma that free is not a business model apparently forgot Linux and open-source software that crushed even Goliaths like Microsoft. China is on the cusp of a unique opportunity during this time, as thousands of factories geared to export high quality consumer goods sit idle in the midst of the financial crisis, and millions of Chinese consumers with new found middle-class expectations are encouraged to spend their increasing disposable income. At the same time, the poor transportation and distribution infrastructure, although sufficient for the wholesale export market, is incapable of meeting the retail challenge. All the while, there is a large cadre of readily available hard-working young people studying in the large number of colleges sprouting up as fast as the skyscrapers, and all dreaming of a better life than the one their parents endured. The unique combination of economic turmoil, poor retail distribution infrastructure, and available motivated talented young people is changing the face of China's commercial model. The large multinationals that dominated the twentieth century need to tab into the small entrepreneurial networks to market their goods. Just as Google is creating new business models to sell high value advertisement using the billions of websites with essentially free content, Taobao is creating a new commerce model to sell value-added consumer goods using the thousands of free websites created by young entrepreneurs.

Excerpts

In the months leading up to his college graduation in June, Yang Fugang spent most of his days away from campus, managing an online store that sells cosmetics, shampoo and other goods he often buys from local factories.

Today, his store on Taobao.com — China’s fast-growing online shopping bazaar — has 14 employees, two warehouses and piles of cash.

“I never thought I could do this well,” said Mr. Yang, 23, who earned $75,000 last year. “I started out selling yoga mats and now I’m selling a lot of makeup and cosmetics. The profit margins are higher.”

Taobao fever has swept Mr. Yang’s school, Yiwu Industrial and Commercial College, where administrators say a quarter of its 8,800 students now operate a Taobao shop, often from a dorm room.

Across China, millions of others — recent college graduates, shopkeepers and retirees — are also using Taobao to sell clothes, mobile phones, toys and just about anything else they can find at neighborhood stores and wholesale markets or even smuggle out of factories.

Internet analysts say this booming marketplace — reminiscent of the early days of eBay, when Americans started emptying their attics for online auctions — has turned Taobao into China’s newest Internet darling.

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Though just six years old, Taobao (Chinese for “to search for treasure”) already has 120 million registered users and 300 million product listings. Its merchants produced nearly $15 billion in sales last year.

The company claims that sales through its Web site are already larger than any Chinese retailer. And, Internet analysts say, sales on its site this year will surpass Amazon.com’s expected sales of about $19 billion.

“This is the next big segment for China’s Internet,” said Jason Brueschke, an Internet analyst at Citigroup in Hong Kong. “It’s their Amazon and eBay combined.”

Like eBay, Taobao does not sell anything itself; it simply matches buyers and sellers. It has a firm foothold in China because many parts of the country still have poor transportation and some local authorities favor their own government-owned outlets, making the retailing system inefficient.

The global recession also left once-booming factories overflowing with goods the rest of the world does not seem to want.

The so-called Taobao addicts are helping to pick up the slack in a sluggish economy. “I can’t live without Taobao,” said Zhang Kangni, a graduate student in Shanghai. “First, it’s cheaper. I found a dress at a store in Shanghai. It’s a Hong Kong brand that sells for $175. I found it on Taobao for $33.”

But skeptics ask: Can Taobao actually make a profit and emerge as a true Web powerhouse?

The company is not publicly traded and therefore does not disclose financial information, but listings are free on Taobao and the company makes no money from online transactions. Almost all Taobao’s $200 million in revenue comes from advertising, which the company says covers virtually all its operational costs.

The company has been criticized, however, for contributing to a flourishing trade in counterfeit goods. Taobao brushes aside such criticism, saying it has a new program that is effectively cracking down on counterfeits.

Company executives also say Taobao is poised to earn huge profits, but that their first priority is creating an online community.

“Our vision for Taobao is to build a consumer’s paradise, where people can shop online and have fun,” Jonathan Lu, Taobao’s president, said. “If you make the company better and better, profits will naturally follow.”

His confidence in Taobao’s future comes from the company’s lineage. It is a division of the Alibaba Group, which was founded by Jack Ma. In the past decade, Mr. Ma has created an Internet conglomerate with strong financial backing from Yahoo, Goldman Sachs and the Softbank Group of Japan. Yahoo owns about 40 percent of Alibaba.

Alibaba.com — the conglomerate’s flagship Web site — connects small businesses from around the world with Chinese exporters. Taobao.com does something similar for consumers who want to sell to other consumers.

When Taobao was founded in 2003, it appeared to have no chance. EBay and its Chinese partner, EachNet, controlled 90 percent of China’s online shopping. But Mr. Ma, a former English teacher, quickly undermined eBay’s fee-based service by offering free listings on Taobao, essentially giving away ads to anyone who wanted to sell.

At the time, eBay executives ridiculed the strategy, with many repeating that “free is not a business model.”

But almost immediately, the site took off, and in 2006, eBay pulled out of China, citing dwindling market share and large losses. Today, it is Taobao that commands 80 percent of China’s e-commerce market, according to iResearch.

“Taobao is dominant,” said Richard Ji, an Internet analyst at Morgan Stanley in Hong Kong. “They’re like an online Wal-Mart.” Mr. Ji says Taobao is a threat not only to traditional retailers but also to big Chinese Internet companies, like Baidu, a leading search engine, because they are competing with Taobao for many of the same advertisers.

Taobao has thrived, Internet analysts say, because people do not need much capital to start online stores. This year, Taobao says its site could help create half a million new jobs, mostly among young people opening new online stores.

Bao Yifen, a 23-year-old recent college graduate, opened her clothing shop with a $5,000 investment in 2007. Today, her Taobao store has sales of about $4,000 a month.

“Three times a week I go to the wholesale market,” Ms. Bao said. “It’s a huge market. About 70 to 80 percent of the stuff is factory leftovers. There are even some brands, but they just cut the labels off.”

Items smuggled into China from Hong Kong, Europe or the United States are also sold on Taobao, evading high import duties and enabling sellers to profit by undercutting the prices of merchandise in regular stores. An Apple MacBook Air that sells for $2,225 in Beijing, for instance, costs just $1,508 in Hong Kong, a difference of 33 percent.

Counterfeit goods are also readily available, even though Taobao claims to have removed two million “fake branded goods” from the site.

Nevertheless, many Taobao sellers acknowledge dealing in illegal goods.

“I work in an O.E.M. factory that produces laptops and electronic devices for Sony,” said one such seller, who identified himself Mr. Feng, referring to an original equipment manufacturer that produces goods for global companies. “We have Sony’s core technology and exactly the same raw materials and components, so we set up our own store selling netbooks and laptops on Taobao.”

A spokesman for Sony, Takashi Uehara, said the company had no comment but was looking into the matter.

Here in Yiwu, which claims to be the site of the world’s biggest wholesale market, Taobao has started to change the look of Yiwu Industrial and Commercial College.

The school’s vice dean, Jia Shaohua, points out an area designated as a start-up site for students seeking to get rich. He points to students taking orders by computer, packaging products, sorting inventory and taking photos of the items for display online, then adds, “Around the school now, there is a whole Taobao industrial chain.”

Every afternoon, even this summer, when the school should be relatively empty, one can hear the ripping sounds of tape being wrapped around boxes in a building that could pass for a United Parcel Service shipping terminal.

“The students don’t need a lot of money,” Mr. Jia said. “They just get orders and go find the items at local factories.”

Mr. Yang, the cosmetics seller, has become a campus hero. He operates his own warehouses a few miles from the school, in the basements of a pair of residential buildings.

Standing in his crowded warehouse, near boxes of Neutrogena sun block, hairpins, toothbrushes and a wide assortment of cosmetics, Mr. Yang says business could not be better.

“Soon, I’ll reach $150,000 a month in sales,” he said, flashing a big grin.