China's e-commerce juggernaut

SG Hiscock & Company
Hamish Tadgell
Hamish Tadgell
SG Hiscock Portfolio Manager and Head of Research
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With an unparalleled penetration of e-commerce, there’s no doubt that China’s influence will continue to be significant.

There’s an apocryphal Chinese curse: “May you live in interesting times”. This could well be the mantra applied to China in the current market, albeit carrying more positive, optimistic sentiment than the saying otherwise implies. 

Despite geopolitical tensions from the ongoing US trade wars and the fierce tension stemming from the Hong Kong protests, China has been quietly working to further advance its burgeoning e-commerce capabilities. 

China’s e-commerce ecosystem continues to evolve rapidly, requiring brand owners to be agile and experimental to adapt and evolve with the market. Underpinning this is the fact that the Chinese government is not just a policymaker, but also an investor, innovator, and consumer. 

A research trip to China was undertaken with the objective of better understanding the rapid development of its e-commerce market. 

Meetings took place with a wide variety of consumer brand companies, e-commerce platforms, Chinese consumer and online marketing consultants, regulatory specialists, and foreign government trade representatives, to ascertain how e-commerce is evolving and identify any emerging trends. 

From the state closed-circuit video surveillance system capturing your every move to Tencent, which provides a transaction record of human behaviour through Chinese super apps such as WeChat and Alipay, it’s painfully apparent China is one of the world’s largest investors in and adopters of digital technologies.

The sheer scale of the Chinese market and its digital consumption is hard to comprehend. The Chinese population – approximately 1.4 billion people – includes 820 million mobile internet users, more than the US (260 million) and Europe (340 million) combined. Mobile-internet-only users account for 20 per cent. 

A staggering 70 per cent of internet users also use mobile payments (compared to just 15 per cent in the US) and the total value of mobile payment transactions is a staggering US$40 trillion, 250 times that of the US.

WeChat has 1.1 billion active daily users and its mobile WeChat app can be used to buy almost anything by simply scanning a QR code. Astonishingly, China’s homeless use WeChat-supported QR codes to accept mobile payments when panhandling.

More recently, Pinduoduo, founded in 2015, has become the third-largest Chinese e-commerce platform with approximately 500 million active users and a market capitalisation of US$25 billion (listing just 18 months ago and rising US$1.6 billion). 

Pinduoduo offers a value-for-money proposition with a team purchase function, focused on the lower-tier cities and less affluent consumers. It allows multiple buyers to leverage their buying power to gain discounts which, in some cases, can be material. 

The platform has been able to build scale and provides delivery direct from the manufacturer to each individual consumer, cutting out the middleman and saving distribution costs. 

The level of information Pinduoduo has on its consumers and their buying habits has allowed the company to create sociograms. These aggregate data to illustrate links between buyers and buying habits, creating a system to understand preferences and who is influencing consumer behaviour. The algorithms are able to help predict and drive future sales (an impressive development, if somewhat alarming). 

The next level of digital innovation is already evolving where artificial intelligence is being used to scan crowds walking down the street and identify who has not paid their bills. It’s a chilling development in terms of consumer privacy but highlights how the Chinese government is actively involved in helping facilitate digital investment.

The Chinese government has moved to regulate the digital sector, albeit after a delay. Weak enforcement of intellectual property rights in the early days allowed innovators plenty of space to experiment. But today, the government is playing a much more active role in building world-class infrastructure and acting as developer and consumer. 

For any Australian or international brand businesses, the more active role being played by the Chinese government at one level increases the risk around the licence to operate. 

However, it also highlights that to succeed in China requires not only an understanding of the commercially dynamic and fast-changing e-commerce and consumer trends but also the importance of government-to-government relations and the need for good corporate stakeholder relations.

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We believe in buying great companies at good prices. We are firm believers in co-investment, demonstrated by our significant investment in our own funds. Our confidence in our investment approach means we always seed new funds with our own money. We have made the decision to cap our Funds Under Management at modest levels, to ensure that the funds retain greater flexibility to generate strong investment returns across varying market conditions. In order to identify the best opportunities for our clients, we undertake a broad fundamental research program which incorporates an extensive company visitation schedule. With an experienced team of investment professionals, our approach to analysing companies is designed to ensure no stone remains unturned.

We engage with a hand-picked team of external research providers to complement our insights in the macroeconomic landscape (both locally and abroad) and general investment trends. We also have an exclusive joint advisory arrangement with one of the world’s largest commercial real estate investors; LaSalle Investment Management Securities, LLC is a subsidiary of global property giant, Jones Lang LaSalle. This provides our property team access to LaSalle’s research capabilities.

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We engage with a hand-picked team of external research providers to complement our insights in the macroeconomic landscape (both locally and abroad) and general investment trends. We also have an exclusive joint advisory arrangement with one of the world’s largest commercial real estate investors; LaSalle Investment Management Securities, LLC is a subsidiary of global property giant, Jones Lang LaSalle. This provides our property team access to LaSalle’s research capabilities.