China Compass, Winter 2023

It’s not the “e” – it’s the “commerce”

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  • Newsletter
  • 4 Minute Read
  • 29 Nov 2023

While some still consider e-commerce a stand-alone component, an addition to traditional business channels, many Chinese companies have for some time been transforming away from that perspective.

Instead, they are embracing a new and more holistic approach to selling products and services in China – an approach in which e-commerce is merely one element.

This push is being driven by a broader understanding of e-commerce, one that no longer perceives it merely as a stand-alone operational feature or sales channel but embraces it as an integrated component of a new business model. All commerce starts from understanding a specific audience’s needs and a business’s ability to fulfil them. It’s not the “e” that’s important – it’s the “commerce.”

Needs, not channels

Previously driven primarily by technology (the “e”), China’s frontrunner businesses are now focusing on making their products and services available anywhere customers want to engage with them. Some touchpoints may still be what we today categorize as e-commerce, but many are not. That’s why China is witnessing a creative revolution in physical retail and social selling simultaneously. Users’ needs and preferences are more important than the technological platform. It’s the fulfilment of needs that makes businesses relevant – not the channel, according to this logic.

Direct-to-consumer

This represents a transformative development away from a focus on e-commerce towards direct-to-consumer (DTC) – a rethink of business models that to a much greater degree embrace in-house ownership of full lifecycle customer engagement. DTC models generally take ownership of a significant part of – if not the entire – relationship and engagement cycles with customers.

That means companies running a DTC model own and manage operational components that many enterprises – especially multinational corporations (MNCs) – outsource to partners or third-party vendors. This may include (but is not limited to) retail operations, hiring, training, and management of frontline staff, customer-reward programs and communities, after-sales services, and other elements of the full engagement lifecycle.

Despite the added complexity of DTC operations, the clear benefits are what has inspired this move away from a single-minded e-commerce approach. Those benefits include:

  • Increased long-term revenue, despite heavy initial investment
  • Leaner and better operations
  • Better data access and ownership – critical aspects for a modern business
  • A greater presence in those locations where a company’s users want to engage with it
  • A better, more homogeneous user experience
  • More robust delivery of brand and key messages

These are some of the reasons why Chinese e-commerce companies were among the first in the world to expand into physical retail, and physical retailers are leading globally in offering digital in-store shopping as part of their model. A trend that is of course spreading outside China as well.

Like their international counterparts, the Chinese companies all want to build more substantial ownership and control over the engagement cycle in their domestic market. For MNCs with headquarters far from China, it’s an additional bonus that the DTC model offers greater access to data and better tracking of developments in the Chinese operation. Especially after a long period with longer breaks between market visits and with fewer international staff in China.

DTC Light

Not all transformations toward DTC are equally successful. While many companies benefit tremendously, we have recently witnessed a Chinese electric vehicle brand change from DTC to a combined operations model. DTC may have proved too costly or too complex to manage – or both.

For the majority of MNCs – the exception being the most established market leaders – claiming ownership of the entire customer engagement lifecycle is not a realistic solution in the current operational environment.

A selective, pragmatic approach

For both Chinese and foreign companies, the best approach may no longer be to simply adapt a traditionalistic perception of e-commerce as a stand-alone package in the evolution of an enterprise’s China business if the full-scale DTC model is unrealistic. Instead, it’s worth considering a pragmatic approach to DTC, i.e. developing hybrid models, adopting the best elements from more traditional solutions and the new DTC models, and merging these into one offering that enables the company to reap the benefits of DTC while controlling risk and investment levels. Since a complete transformation may be too tall an order in the current environment, a more realistic approach might be to look to the DTC leaders for inspiration and select suitable elements from their models and adapt these to support the current operational approach.

Even if an MNC doesn’t adopt a full DTC model, its business will most likely still benefit significantly from implementing certain elements of it, especially in a company’s approach to digital commerce in China.

Such a process doesn’t start with evaluating digital platforms or data alone. It begins by getting closer to the end customer to understand how e-commerce can better serve the business as an integrated component. Combining that approach with a willingness to adjust and adapt the global model, some MNCs will find their competitiveness improved – including in the field of e-commerce.

Jacob Johansen is a Principal with Strategy& and head of the user-centricity practice in China.

Jacob Johansen

Jacob Johansen is a Principal with Strategy& and head of the user-centricity practice in China. He has been serving German and other European clients on the ground in China since 2003. The author of the book From Customer to User. His areas of expertise include business concept innovation, China consumer market insights and international brand strategy. He supports MNC initiatives xLoS at Strategy& China.

Tel: +86 15800761226
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