Although Chinese tech giant NetEase is technically based in the southern metropolis of Guangzhou, its founder and CEO, Ding Lei, has long preferred to work out of the company’s office in Hangzhou, in eastern China’s Zhejiang province. According to a recent report by e-commerce market research company iiMedia, online shopping platform Kaola.com — a subsidiary of NetEase — has grown rapidly to claim a lead over its direct competitors and a nearly 25 percent market share.
However, Ding’s ambitions are not confined to producing a clone of Taobao or JD.com. While both companies are prominent players in the current Chinese online shopping landscape, Ding is looking to win over a different market: emergent middle-class shoppers looking for a premium consumer experience.
NetEase got its start as an email provider before growing into one of China’s largest internet portals. While cellphone games currently make up the majority of its business, the company has also expanded into online education, blogs, and music streaming. In 2015, it moved into e-commerce with the launch of Kaola.com and, later, its sister site, Yanxuan.
That year, the company’s e-commerce division accounted for just 10 percent of NetEase’s total revenue. Yet according to its recently released earnings report, the email and e-commerce division brought in 3.35 billion yuan (around $503 million) during the second quarter of this year alone, a nearly 70 percent increase from the previous year and the first time the division has accounted for more than 25 percent of total revenue.
While the figures suggest that Ding is one step closer to achieving his dream of remaking NetEase, he has a reason to be thankful to Hangzhou, an ancient city located along the lower reaches of the Yangtze River and now the de facto capital of e-commerce in China. In addition to hundreds of thousands of Taobao shops and tens of thousands of Tmall stores, the city is home to longstanding Chinese e-commerce giant Alibaba, NetEase’s own pair of startups, and much of the slowly expanding wanghong e-commerce industry. The latter got its start when internet celebrities began opening their own retail platforms to sell products to their fans directly.
Hangzhou has a wellspring of innovation and openness that makes it a perfect e-commerce hub. Not only does it play host to the largest such industry in the world, but it has also managed to foster a mature e-commerce culture, with almost 100 e-commerce industrial parks of all sizes. More than half of the city’s startup founders are involved in the industry.
Hangzhou and the Chinese e-commerce industry more generally are currently going through a third major transition. The first saw the emergence of online shopping and the establishment of Chinese online platforms modeled after eBay. The second period saw a motley militia of hundreds of thousands of shops slowly develop into a standing army of mature, independent brands on Taobao and Tmall. Now, a new transformation is playing out: Online shops are going from providing cheap, poor-quality commodities to selling premium goods and experiences.
As one of China’s tech giants, NetEase has natural advantages in resources and branding, but this doesn’t mean that Hangzhou hasn’t impacted its e-commerce operations. Kaola built its first duty-free storage warehouse in the city and has a complete storage and logistics chain stretching from Hangzhou to several major Chinese cities. According to the iiMedia report, Kaola is focusing its energies on directly sourcing products from overseas instead of going through intermediaries, a tactic that cuts costs and shortens logistics time frames. From there, the company believes it can rely on a reputation for quality products to seize a commanding position in the market.
NetEase’s move toward cross-border e-commerce as a way to break into the market has benefitted from increasingly refined consumer tastes and a rising middle class. The company’s cultivation of high-quality, tasteful products and high-end services has paid off thus far. It’s also been helped by the creation of two pilot zones fostering cross-border e-commerce in Hangzhou and nearby Ningbo.
According to iiMedia’s report, Kaola currently controls 24 percent of the cross-border e-commerce market, followed closely by Alibaba’s Tmall, VIP.com, and Jingdong’s JD Worldwide. In its survey of consumers’ favorite sites, 34 percent of respondents listed Kaola as their platform of choice, while 32 percent chose Tmall.hk, 26 percent chose JD Worldwide, and 22 percent chose Xiaohongshu. (The survey permitted respondents to choose more than one preferred platform, meaning the final tally exceeds 100 percent.) The market coverage of these four entities indicates that the sector is growing increasingly concentrated.
According to finance writer Wu Xiaobo, members of China’s rising middle class, having already fulfilled their basic and low-end needs, are now willing to pay more for products that promise quality, health, and aesthetic satisfaction. In other words, they are open to paying a premium for a higher quality of life.
At present, most cross-border e-commerce platforms stress the importance of meeting the needs of this new middle class, from which the majority of their customers are drawn, and they eagerly anticipate a shift toward more refined consumption habits. Leading cross-border e-commerce platforms have already started to view the new middle class as their core market: In addition to focusing on brand marketing, Tmall.hk is also attempting to adapt to the consumption habits, product requirements, and service expectations of middle-class consumers. In the same vein, Kaola emphasizes individuality and specialization in its product offerings as it caters more and more to the needs of the middle class.
In its 2016 Global Wealth Report, financial services giant Credit Suisse estimated that, of the 200 million people expected to join the ranks of the global middle class by 2021, half will come from China. Jack Ma, the founder of Alibaba Group, is even more optimistic, saying that he expects China’s middle-class population — currently numbering over 300 million — to reach 500 million in the next decade or two. If iiMedia’s data is anything to go by, the e-commerce market is far from saturated, and the purchasing power of the middle class is potentially immense. On an industry level, the battle for the middle class’s hard-earned yuan has already begun.
From the 2011 craze for buying products overseas, to the rise of cross-border e-commerce platforms after 2014, to today’s increasingly concentrated industry, the market’s evolution over the years has been inseparable from the need to cater to middle-class consumers. In developed countries, living an Instagram-ready lifestyle is already a middle-class consumer trait, a kind of spiritual necessity for those whose basic life needs have already been met. In a sense, cross-border e-commerce is the model most closely aligned with this trend, offering consumers not just products but also the lifestyle associated with them. Whether it’s cross-border e-commerce or “new retail,” whoever wins the middle class wins the world.
Translator: Kilian O’Donnell; editors: Lu Hongyong and Matthew Walsh.
(Header image: Moment/VCG)