Rapid Growth in E-Commerce, Whether B2B, B2C, or O2O

For the American Chamber of Commerce Taipei 

But a big share of the business is being captured by mainland Chinese companies.

BY JENS KASTNER

Given that the Taiwanese love English-language abbreviations, bargain buys, and convenience in general, it is no surprise that the terms “B2C,” “C2C,” and “O2O” have penetrated the local parlance as e-commerce reshapes the island’s retail landscape. Facilitated by home delivery, convenience store pick-up service, and attractive group deals, Taiwan’s business-to-consumer (B2C) and consumer-to-consumer (C2C) online shopping markets registered revenue growth in 2013 of 18.2% and 12.3% respectively, bringing total revenue to NT$764.5 billion (US$25.5 billion), according to the Institute for Information Industry. The institute predicts growth in 2014 by another 15% to reach NT$879.4 billion (US$29.3 billion) and forecasts revenue topping NT$1 trillion in 2015

But it would be premature to pop corks to celebrate the performance of the local e-commerce platforms, as a large portion of the business is being captured by China-based operations. “Taiwanese consumers last year bought 8 million items on mainland China’s Taobao, which has a whopping 900 million products on offer,” says Alvin Bor, secretary-general of the Non-store Retail Association of the ROC, referring to Taobao Marketplace (淘寶網), an online shopping website run by Alibaba, China’s largest e-commerce company. “Taobao calls itself C2C, but some of it is actually B2C, while its offspring Tianmao (天猫) aims to provide higher quality products.”

Bor notes that since Beijing views Taiwan as one of its provinces, parcel postage rates from China to Taiwan are artificially low. In addition, Taiwan does not impose import duty on items valued below NT$3,000. Adding to Taobao’s attractiveness for Taiwan consumers is that payment on cross-Strait transactions is facilitated by China’s AliPay, which has established connections with numerous Taiwanese banks. As a result of all these factors, Bor says, AliPay has become the dominant force in Taiwan’s third-party payment market, for which a regulatory structure was officially finalized last year, 15 to 20 years after China. “Most merchandise sold in Taiwan’s night markets is now sourced via Taobao, causing a major headache for Taiwanese platforms, as well as for the tax collectors,” he notes.

In its 2013 ranking of sales by Taiwanese internet retailers, U.K-based market research firm Euromonitor placed Yahoo! Kimo first with a market share of 11.4%, followed by PChome (8.4%), Fubon Group’s Momo (6%), PayEasy (4.8%), and Rakuten Taiwan Ichiba (3.5%). According to local market researcher EOLembrain, PChome’s site saw the most traffic in 2013, followed by Rakuten.

Other major players operating popular B2C platforms in Taiwan include the United Daily News (UDN) Group, President Chain Store Corp., Far Eastern Retail Group, and Dongsen TV’s ETmall, as well as Gomaji, whose primary focus is group buying, similar to the United States’ Groupon.

The business model of Japanese-originated Rakuten, which is aiming for 50% revenue growth in Taiwan this year, is labeled “B2B2C.” Under this approach, merchants open a virtual shop on Rakuten’s platform with an initial one-time payment of NT$27,000, followed by monthly rent of NT$1,000 and a 3% to 5% commission on each deal. Currently, Rakuten Taiwan has 2,500 of these shops and educates their owners in e-commerce strategies through courses held in Taipei by its “Rakuten University.” Each shop is also coached by an “ECC” (e-commerce consultant), who provides guidance on such aspects of the operation as target setting, pricing strategies, and customer communication.

Grace Lo, Rakuten’s general manager for Marketing & Business Development, says the platform got a huge boost last year from its revolutionary “picture search” feature, which works similarly to face recognition software. “People no longer have to key in words to search a product, but instead take a picture of something they desire in the real world, upload it, and let the system find such a product in one of our shops for a good price,” she explains.

 

A key trend is mobility

Another current major trend shaping the market is mobility. Lo notes that new apps have made it convenient to use a smartphone instead of a PC for many activities, with consequent changes in the time of day when transactions take place. “Increased use of mobile devices means that more purchases are made while commuting and before bedtime, which is a shift that demands our attention,” she says.

UDN Shopping – a genuine B2C model where merchants pay a settlement of 10% to 15% per deal – confirms this strong trend toward mobility. General Manager Apollo Sun reports that while just 2% to 4% of clicks on the UDN shopping site were made with mobile devices in early 2013, the rate had reached 12% by the end of the year. UDN Shopping’s total revenue doubled in 2013 to reach NT$1.5 billion (US$50 million), with a target of NT$3.5 billion set for this year, Sun says. One advantage over the B2B2C model is that the merchant incurs no costs if the merchandise doesn’t sell, he notes. “But more importantly, if you cooperate with us, you have the UDN group’s whole media range – with websites, TV news channel, and newspapers – as your partners.”

He does express concern about Chinese competition, however, noting that although Chinese products have an image problem in Taiwan, the fact is that most products sold by Taiwanese platforms also are made in China. Sun considers that Taobao was wise to set up Tianmao, which carefully selects its suppliers to increase its trustworthiness. “But Chinese consumers still cannot access the UDN shopping site due to its connection with the UDN news website, while other Taiwanese e-commerce platforms might be blocked for other reasons, including tax issues,” he notes.

The cross-Strait service trade agreement – signed last year but not yet approved by Taiwan’s legislature – will not provide much of a remedy, in Sun’s opinion. Under the agreement, Taiwanese online retailers can hold a 55% stake in joint ventures with Chinese firms as long as the operation is based in Fujian Province just across the Taiwan Strait from Taiwan. “But you would be competing with China’s top 10 online shopping websites in an environment where Taobao has 75% market share already,” Sun says.

Despite the challenges, some Taiwanese e-commerce firms have already taken up minority stakes in cross-Strait joint ventures, and ETmall and Momo plan to set up subsidiaries in China this year. Market observers believe that demand exists among wealthier Chinese consumers for Taiwan-made cosmetics, health foods, and other products. According to the Non-store Retail Association of the ROC, 2 million items were sold online from Taiwan to China in 2013.

In yet another market segment, online to offline (O2O) e-commerce, Groupon was initially the market leader in Taiwan, but was overtaken in mid-2012 by a local company, Gomaji, according to Rio Chen, Gomaji’s deputy general manager. Gomaji operates in three main channels – travel, food and shopping – with different settlement commissions for each category. “The settlement average could be higher in the beauty segment, as satisfied customers of beauty parlors, spas, and the like tend to sign up for membership instead of again purchasing vouchers with us,” Chen explains.

According to Gomaji’s own surveys, 75% of its customers are female, with the overwhelming majority in the 25 to 45 age bracket. Accordingly, Gomaji’s home delivery focuses on local delicacies in packages suitable for small families. “Housewives love it,” Chen says. “What costs NT$200 elsewhere might be purchased for NT$70 through us.”

Gomaji’s promotion channels include Yahoo! and Facebook, and it engages in cooperative campaigns with movie houses, local governments, and famous brands, most notably McDonald’s. It also publishes a magazine sold at 7-Elevens, is featured on 7-Eleven’s in-shop monitors, and sponsors a weekly TV show where local artists endorse the site.

Chen sees this strong local emphasis as the main reason why the company managed to squeeze Groupon’s share of the Taiwan market. “The O2O business model is inherently local,” she says. “We get the consumer online and bring them offline – to a local restaurant, a local fashion shop, and so forth. Only a local management team will truly understand the local customers’ preferences.” Chen adds that while Groupon does have a local team, “its senior management might be from Hong Kong or Malaysia.”

Acknowledging the strong standing that local players have with Taiwan consumers, eBay Taiwan joined forces with PChome in 2006 to form the joint venture Ruten, which now handles all local transactions. At that point, eBay Taiwan’s business model shifted to B2C exports, enabling Taiwanese suppliers to utilize eBay’s 40 websites across the world as retail platforms.

“Our sellers come from many corners – some are manufacturers, some trading companies, some online sellers,” says Clare Lin, head of eBay Taiwan Marketplace. “We provide open platforms for buyer and seller, and through PayPal we can support 26 currencies and also provide shipping solutions, as well as connecting the sellers to reliable warehouses in the U.S. and Australia.”

Lin adds that since shipping is usually a bottleneck in cross-border trade, eBay’s service includes working with premium shipping providers to obtain efficient and cost-saving packages for the sellers. “For these services, the seller pays us a low-cost insertion fee of US$0.30 or less per item and a final value fee on the transaction of between 9% and 12%,” she notes.

According to Lin, eBay has high hopes for retail exports from Greater China, because the area has very strong supply chains that eBay can help connect to mature consumer bases in the United States, Australia, and Europe. Transactions to emerging markets often go through eBay’s U.S. or U.K. sites.

“Owing to the impressive flexibility of our Taiwanese sellers, they managed to sell to buyers in 200 countries over the past three years,” Lin says. “In June 2013, year-on-year growth in export value to Argentina, Russia, and Brazil reached 162%, 38% and 37% respectively.”

Further, from 2006 through last year, the sales volume of eBay’s Taiwan sellers every year has achieved double-digit growth, with a similar result expected for this year. Momentum was strengthened in 2013 by improved growth in the key corridors of Germany and the U.K., a significant achievement given the language barrier in Germany’s case and the high customs duty in the whole of the European Union. Looking ahead, Lin says, increased export business is likely in the popular categories of “home and garden” and “auto parts,” both of which have a very strong supply base in Taiwan for manufacturing and R&D.

Recently eBay Taiwan has also been putting more emphasis on branding. “Taiwan has many internationally unknown but good-quality brands that eBay can help to step onto the global stage,” Lin says.

In the near future, however, eBay Taiwan may also be among those having to share more of the market with Chinese e-commerce players. Alibaba Taiwan in mid-February announced its intention to launch an e-commerce association on the island to help local small and medium-sized enterprises break into the global market.

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