China business


Online adspend on a roll

China’s fast-growing Internet population offer advertisers more attractive prospects than traditional media channels

China’s traditional media companies are losing advertising share to new-tech players. While television remains dominant, the Internet is gaining ground and may well overtake the print media in advertising expenditure (adspend) in a couple of years, as advertisers pay more attention to online consumers. Advertisers are also favouring specific channels, such as direct marketing.

China’s online adspend surged by 79.3% year on year to Rmb27.9bn (US$4.4bn) in 2010, according to Analysys International (a local research firm), and is forecast to reach Rmb91.2bn by 2013. Online adspend continued to rise strongly in the first quarter of 2011, with iResearch, a local consulting company headquartered in Shanghai, estimating a growth of 28.4% year on year to around Rmb11bn. A Chinese ad agency, Charm, however, estimates that online adspend climbed 35.5% year on year to Rmb3.76bn in the first quarter of 2011. The different estimates are largely due to a difference in methodologies used and areas of coverage.

Adspend in China’s search-engine market climbed 67% in the fourth quarter of 2010 to Rmb3.2bn—Baidu had a dominant market share, followed by Google. In the first quarter of 2011, the top three search engines were reported to be Baidu, Alibaba and Google China, with 27.4%, 18.1% and 7% of the mainland’s online ad market respectively.

China is following a global advertising trend in favour of online adspend as the Internet expands, dwarfing some traditional media markets, such as radio and outdoor. China’s Internet population grew by 6.1% year on year to 485m by end-June 2011, according to the China Internet Network Information Center (CNNIC), which tracks users from the age of six. The CNNIC gives some significant figures in new areas:

  • The group-buying user base increased by 125% to 42.2m at end-June 2011, compared with just 18.8m at end-December 2010.
  • The micro-blogging (weibo) population increased by more than 200% to 195m, from 63.1m—roughly one-third of users accessed microblogs by mobile phone, prompting a US fast-food brand, Pizza Hut, to become the first major brand to advertise on a microblog site.
  • The social networking population shrank to 230m at end-June 2011, from 235m six months earlier. The top local sites are: weibo.com, Renren Inc, kaixin001.com, douban.com and pengyou.com.
  • The Internet population is forecast to reach 500m by end-2011—an increase of approximately 10% on 2010.

Regulating the Internet

Although the government is keen to improve conditions for Internet growth it fears uncontrolled development. There is, therefore, no shortage of official bodies seeking to regulate the sector. Apart from the industry regulator, the Ministry of Industry and Information Technology (MIIT), several other ministries, commissions and departments are also involved. The state council’s Information Office is responsible for “guiding and co-ordinating” news content on China’s hundreds of websites, while the General Administration of Press and Publication Administration (GAPP) is tasked with monitoring content. Advertising on the Internet poses new problems. The State Administration for Industry and Commerce (SAIC) retains overall regulatory control over advertising on the Internet, while its local units are also guided by local laws. Other official bodies are involved as well.

The Ministry of Commerce (MOFCOM) is also involved through the China Advertising Association (CAA), a grouping of advertising companies which operates under MOFCOM’s auspices. China’s first trial standards for online advertising came into effect on January 1st 2009. The new standards apply to formats and sizes for 25 kinds of online advertisements, including banner ads, full screen ads and text link ads—all based on a lengthy survey of websites. The industry has welcomed the move as a step in the right direction towards establishing a set of national standards for China, which is besieged by a bewildering array of online advertising formats estimated at some 130,000—compared with just 200 in the US.

Current regulations require Internet companies already engaged in online publishing to re-register with their local press and publication administrations within 60 days. The “Provisional Regulations for the Administration of Online Publishing”, which came into effect on August 1st 2002, define Internet publishing as posting “any creative work or edited material” on a website or delivering it to users through the Internet for viewing or downloading. It also covers electronic versions of published books, newspapers, periodicals, and audio and video products.

China classifies both Internet service providers (ISPs) and Internet content providers (ICPs) as value-added telecommunications services, which are subject to gradual opening to foreign investors. Immediately upon China’s accession to the World Trade Organisation (WTO), foreigners were allowed 30% ownership in joint ventures in value-added services, including paging, ISPs and ICPs in Beijing, Shanghai and Guangzhou. Foreign ownership was allowed to rise to a maximum 49% at end-2002, with the geographic area expanding to 14 other cities. The cap on foreign ownership rose to 50% at end-2003 and all geographic limitations were scrapped. The WTO agreement indirectly gives foreigners access to the Chinese e-commerce market because of the opening up of the wholesaling and retailing sectors.

E-commerce

Business-to-business (B2B) e-commerce turnover reached Rmb3.8trn in 2010, according to the China E-commerce Research, with more than 43m local companies using e-commerce, mainly through specialist industry websites. B2B revenues in the second quarter of 2011 climbed 41.3% year on year to Rmb3.4bn, with Alibaba.com maintaining its top ranking with a 55% market share.

Online shopping in China, including the business-to-consumer (B2C) segment, is naturally less exposed to global fluctuations than B2B. Chinese consumers spent more than Rmb500bn in 2010, according to MOFCOM. The number of online shoppers climbed 50% to 160m during the year, according to CNNIC.

Strong growth continued into 2011, with B2C transactions jumping 172.6% to Rmb54.3bn in the second quarter, according to Analysys. Research published in 2010 by Nielsen Online, the online division of international research firm The Nielsen Company, indicates that Chinese consumers generally spend 6-25% of their average monthly budget online. B2C growth has led to a surge in dedicated websites: some 80% of all e-commerce websites set up last year were B2C-focused.

Online retailers have started to team up with domestic portal sites, such as Sohu.com or Sina.com, which act as “shopping intermediaries”. These symbiotic relationships allow a retailer to tap into a portal’s huge traffic flow and database of members to establish a stronger customer base. Even traditional retailers are getting involved: Suning Appliance Co, the largest domestic appliance retailer in the country, announced in June 2011 that it was considering a partnership with New York-listed E-commerce China Dangdang Inc (known simply as Dangdang). Another leading B2C player, 360buy.com (Jingdong Mall), raised as much as US$1.5bn in venture-capital funds in April 2011—its third round of fund raising. Investors in the B2C website now include Russia’s Digital Sky Technologies and the US’s Walton family (which controls Wal-Mart).

More specific regulations governing online stores have been issued recently. The “Interim Measures for Network Behavior of Commodity Trading and Related Services” (SAIC Decree [2010] No. 49), which took effect on July 1st 2010, require online store operators to meet business-licence requirements and register their real names and addresses with e-commerce agents, such as taobao.com and paipai.com, before launching their businesses.

C2C transactions, such as those between two consumers via an auction site, saw revenues reach Rmb347.5bn by the end of the third quarter of 2010, accounting for 3.9% of total retail sales during this period, according to Analysys. Products sold were largely books, audio and video products, cosmetics, household products and women’s clothing.

Taobao, a wholly-owned subsidiary of Alibaba, claims to be Asia’s largest online C2C marketplace with more than 50m independent visitors each day. Taobao accounted for 75% of online sales in the first three quarters of 2010. In June 2011 Alibaba’s president, Jack Ma, announced plans to split Taobao into three units: Taobao Marketplace (or Taobao.com) for C2C services; Taobao Mall (or tmall.com) for B2C; and a search engine (etao.com).

Other providers are also expanding their operations: an Internet portal, EachNet.com, has introduced various improvements; a gaming provider, Tencent Holdings, has set up Paipai.com; together with Taobao, these companies have an estimated penetration rate of 25% of the online populations of Beijing, Shanghai and Guangzhou.

Yet e-commerce continues to present a number of obstacles, such as:

* Few payment options. The Chinese credit-card market continues to grow, complemented by a government programme to build a national Interbank electronic-payment network. But most online buyers still do not have access to electronic-payment options and must pay either on delivery or at their local post office. However, increasingly reliable online-payment schemes, such as PayPal and Alipay, are helping to ease consumers’ security concerns. * Distribution problems. Fulfilment is a major obstacle to doing any kind of business in China. In the B2C sector, this is gradually changing as more domestic companies specialise in delivering goods ordered online. Foreign participation will also facilitate distribution as market-opening measures are implemented. For now though, the distribution channels are still far from reliable. * Shady operators. According to CNNIC, around one in eight online buyers have ordered and paid for online goods that never arrived. This has created a culture of mistrust, which major players are trying to dispel.

Cash bias

China remains a largely cash-focused society. Even when buying goods online, consumers prefer a cash-on-delivery system. Payment by credit card has not fully taken off because of customer concerns over Internet security.

China UnionPay, the only national payment network in the country, was established in Shanghai in 2003 by domestic financial institutions for commercial purposes. UnionPay began to roll out an online credit verification system for credit card transactions before partnering with the People’s Bank of China (PBC, the central bank) in 2006 to launch the first nationwide credit verification database for use in checking personal credit ratings for credit- and debit-card transactions.

Other systems, such as PayPal and Alipay, are also growing in scale and sophistication. Alipay, which claims to be the country’s largest third-party payment platform, issued its first debit card for the south-west region in 2006 in partnership with the China Construction Bank in Sichuan province. Sichuan-based Internet users can use the card to shop online, instead of the previous method of transferring funds into dedicated Alipay accounts at banks to pay for online purchases made on its website.


Key points

  • China’s online spend may overtake print media spend within two years.
  • China is gradually opening its e-commerce market to foreign investors in a climate of heavy internet regulations.
  • Online credit card payment companies have to overcome customer concerns over security and a cultural preference for cash.
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