E-commerce in China

Changing business as we know it

George T. Haley*

Department of Marketing and International Business, School of Business, University of New Haven, 300 Orange Avenue, West Haven, CT 06516, USA

Received 15 August 2000; received in revised form 1 December 2000; accepted 28 February 2001

Abstract

In discussing the future of e-commerce, many experts have assumed that e-commerce in emerging markets will evolve along the same

lines as it has in the US, North America, and to a great extent, in Western Europe. This assumption fails to take into account the

differences that exist between the economic infrastructures of emerging markets and those of the developed markets of the West. This

article considers how China’s economic infrastructure, which like the infrastructures of most emerging markets is much less highly

developed than the industrial West’s, will influence the development of e-commerce in China. By implication, the route of e-commerce

development in China may be a more likely route of development for other emerging markets to follow. D 2001 Elsevier Science Inc. All

rights reserved.

Keywords: E-commerce; China; Emerging markets

1. Introduction

The Internet and other new-economy technologies have

proven to be tremendous sources of economic growth for the

more advanced industrialized economies of North America,

Europe, and Asia. But e-commerce in the West has

developed as it has, and as rapidly as it has, because an

existing distribution, financial, and communications infra-

structure conducive to e-commerce already existed. This

infrastructure has been an extremely influential technolo-

gical externality that has benefited the e-commerce industry

beyond measure. Yet, one assumption made by many aca-

demics and practitioners when they discuss e-commerce in

emerging markets is that the technological infrastructure that

exists in the West’s more developed economies either exists,

or will exist everywhere, and will be the technology that

dominates in all markets. In emerging markets such as China

there are considerable difficulties in implementing the stand-

ard US model that many people in the West assume will

dominate when they discuss e-commerce or make prognos-

tications about it. However, local markets may determine

that, given local conditions, alternative models may be

preferable, especially when dealing with the more rational

and economically driven business-to-business markets.

In more-developed economies, advanced communication

and computer technologies are pervasive, distribution and

warehousing networks are generally extensive, fast, and

reliable, and though exceptions such as Japan exist, fin-

ancial/credit networks are readily available and efficient.

These technologies, and the skilled work forces necessary to

employ them, provide the infrastructure needed to make the

new-economy technologies so powerful. Additionally, this

infrastructure has largely preceded in existence the Internet

technologies that have made such powerful use of them.

Unfortunately, these infrastructural elements do not exist in

most emerging economies (see Ref. [22]). Telephone lines

have a low penetration rate in the market and computer

access even lower penetration rates.

The developed economies’ preexisting infrastructures

permitted the Internet and its related Web-based technolo-

gies to create the fantastic cost reductions, increases in

productivity, and potential for more of the same that it has

in advanced economies. The established infrastructure also

permits the private sector to take the fullest possible

advantage of the new-economy technologies. In emerging

economies, can the same benefits be generated? From our

0019-8501/02/$ – see front matter D 2001 Elsevier Science Inc. All rights reserved.

PII: S0019 -8501 (01 )00183 -3

* Tel.: +1-203-931-6004; fax: +1-203-208-2468.

E-mail address: gthaley@attglobal.net (G.T. Haley).

Industrial Marketing Management 31 (2002) 119–124

perspective, how can the private sector develop the kind

of actual and expected returns in emerging economies

from Internet-based business strategies that it has in

developed economies?

This paper presents evidence that companies can gain

measurable competitive advantages over their competitors

in emerging markets by building their Web-based capabil-

ities. However, the companies cannot simply mimic policies

and strategies employed in advanced economies, they must

adapt their strategies to local conditions. Section 2 explores

local conditions in developing markets that elicit new

strategies from companies. Section 3 sketches some strat-

egies from successful companies in the developing markets.

Conclusions and policy recommendations are offered in

Section 4.

2. Local conditions requiring adaptation

In China, local variations in business conditions span

both public sector and private sector environments.

2.1. Public sector conditions

China’s economy faces two substantial problems. First, it

does not have sufficient Internet-capable communications’

infrastructure and skilled personnel to implement the same

Internet strategies as the more advanced economies have

done [2,4,14,16]. Second, it does not have the supporting,

service-industry infrastructure to maximize the benefits of

Internet tools [2,4,6,14,16]. For example, China’s Internet-

based vendors can only accept credit card payments when

the credit card is issued by a bank located in the same city as

the Internet vendor [14]. Additionally, China’s business

culture does not adapt well to the impersonal characteristics

of the Internet [7].

Developing countries have faced recently the imbalance

in development caused by the fascination investors have had

for Internet-based investments and start-ups. China’s dot-

coms, the darlings of the foreign investors, also created

difficulties for the Chinese government’s privatization

efforts by making it impossible for the government to attract

private funds for the acquisition of government-owned

companies in other, more-traditional economic sectors.

Finally, China’s Communist Party is struggling to avoid

any loss of power and/or influence over the nation’s

economic, political, and social environments while still

acquiring the benefits of the Internet and its related tech-

nologies for China’s economy [7,14,15]. ChinaOnline [7]

noted that five significant threats exist to a successful Web

in China:

� Commercial — the government owns many of the

players and could interfere with private parties’ access.� Corruption — this increases operating expenses for all

business, Internet-based or brick-and-mortar.

� Security concerns — especially dealing with encryp-

tion, where government regulators at one time insisted

all encryption codes’ projected uses and copies be

handed over to government regulators.� Ideology — will content providers have freedom to

operate?� Enforcement — the lack of an adequate tradition of

rule-of-law.

This list makes it plainly obvious that the government is

a major element, if not the only element, in each of the five

threats to the Internet’s success in China.

2.2. Private sector conditions

Though successful companies have difficulties changing

their operating procedures, many overcome these difficulties

to attain new success in their Internet environments. Though

these companies’ strategic changes include field sales-force

reductions, development of new channels of distribution and

industry-wide e-trading organizations, they have usually

depended on many existing infrastructural systems, such

as their established delivery and financial infrastructure for

their success. In China and other emerging markets, how-

ever, the infrastructure that made their success possible in

advanced economies often does not exist, and companies

have to develop entirely new ways of doing things all over

again [14].

China also presents companies with tremendous uncer-

tainty regarding the government’s regulatory posture with

respect to e-commerce [15], the local business culture’s

resistance to adopting Internet-friendly practices [4], and

intellectual property rights [11], and a scarcity of qualified

personnel. Additionally, companies will face many of the

same problems in China that they face elsewhere, such as

the increased competition made possible by the Internet [18]

and the huge amount of information and disinformation that

spreads like wildfire over the Web [23].

Herbert Simon once stated that, ‘‘What information

consumes is rather obvious: it consumes the attention of

its recipients. Hence, a wealth of information creates a

poverty of attention and a need to allocate that attention

efficiently among the overabundance of information sources

that might consume it.’’ When the recipients receive large

quantities of both information and credible-sounding dis-

information about a hugely complex and relatively unknown

business environment, like China’s, the demands on the

recipient’s time can be overwhelming. In a provocative

article, Berkman [1] questioned whether the masses of

information and disinformation found on the Web might

eventually destroy information’s value as a critical resource

in decision-making. Given Haley et al.’s [12] discussion on

the importance that overseas Chinese place on the control of

‘‘high quality information,’’ Western business practices may

give way to the traditional Chinese practices they high-

lighted. The next section explores some strategic solutions

implemented by companies.

G.T. Haley / Industrial Marketing Management 31 (2002) 119–124120

3. Strategic solutions

Many reports on companies’ investments in China speak

about the need to accept difficult times and early losses in

order to invest in China. The difficulty with this piece of

accepted dogma is that losses do not generate strong

support at headquarters or among important corporate

stakeholders. To be successful, investments must be pur-

sued with intense commitment, and intense managerial

commitment is developed through generating profits [24].

Thus, a key strategic element for foreign direct investment

into China’s rapidly evolving economy is to generate short-

term profits in order to build the critical mass of benefits

that will generate management commitment to their Chi-

nese investments [24]. To generate short-term profits,

companies must employ all their best technologies, such

as Internet-based marketing and research technologies, but

they must also remember the basic tenets of appropriate

technology. The best technology for an emerging market is

not always the same as the best technology in a developed

economy [10]. Indeed, older technology may often prove

more appropriate for emerging economies than the latest,

cutting-edge technologies. Managements should consider

these possibilities when developing their strategic responses

to the Chinese business environment’s specific conditions,

which include a dearth of skilled personnel, insufficient

service-industry infrastructure, WAPs, and the five threats

to success.

3.1. Scarcity of skilled personnel

Managers in the Chinese business environment often

confront a lack of Internet-savvy or trained personnel and

have to develop them through certification programs. People

can receive certification of e-commerce capability either

through training or through examination [8]. Additionally,

Schmit [20] reported of raiding practices undertaken to

recruit Internet-capable employees; and Haley and Low

[13] discussed Singapore’s effort to acquire immigrants in

strategically important technologies. This scarcity of trained

personnel will continue to affect China’s Internet-based

commercial activities for years, and likely decades, to come.

3.2. Insufficient service industry infrastructure

Insufficient service-industry infrastructure includes poor

transportation and credit facilities, and possible solutions.

3.2.1. Transportation

Until recently, the operations of courier services such as

Federal Express ended once they got their packages across

the Chinese border. Federal Express can now provide

service within China, but its penetration of the Chinese

market remains limited. No other courier service has yet

obtained permission to transport packages within China.

Internet vendors usually depend on the Chinese postal

service to distribute their products. Though reliable by

emerging markets’ standards, China’s postal service is slow

and costly, and represents one of the major complaints that

customers have about e-commerce in China.

Though consumer e-marketers have to live with this slow

and expensive distribution system, ingenious business-to-

business marketers have overcome it. For example, one

caterer that services commercial sites takes orders over the

Internet and contracts with taxis to deliver his food, hot and

fresh, to his customers [14]. Similarly, a bottled water com-

pany operating in several major cities uses the Internet to

receive orders from its clients at its headquarters where it

maintains centralized order-processing and inventory records.

The company then e-mails orders to regional warehouses in

the various markets it serves: bicycle and human carters

subsequently deliver bottled water. In both the above exam-

ples, a little ingenuity and technological compromise enabled

companies tomaximize efficiency provided by Internet-based

communications, inventory control, and order processing.

3.2.2. Credit facilities

Payment constitutes the greatest e-commerce problem in

China. Internet growth is doubling every 6 months [19] but

credit cards are only useable in the city where the issuing

bank is located. For Internet vendors to accept credit card

payments they must have offices located in the same cities as

the banks that issued the credit cards; no nationally accepted

credit cards exist in China. Consequently, Internet vendors

cannot take advantage of many of the benefits of the Internet,

especially in B-to-C businesses. The results of a survey taken

by the Cheskin Research and Chinadotcom are presented in

Fig. 1; not having a credit card and difficulties with payment

were two of the most important reasons for not purchasing

online. One adaptation for this condition, as mentioned

earlier, includes Internet portals and Internet vendors main-

taining offices in all of China’s major cities to process orders

through their offices in each market. When this solution

becomes financially practical, vendors can build market share

today rather than waiting until conditions are ideal.

The Chinese preference for face-to-face negotiations and

personal relationships extends to the Internet and affects

not only payment, but also negotiation of deals. Cheskin

Research [4], among countless others, reported that even

businesses purchasing Internet services insist on personally

meeting with the service providers’ representatives for

negotiation and signing of contracts. China’s most success-

ful Internet auction site holds its position primarily because

it provides a user-friendly site where vendors and potential

bidders can locate one another; and comfortable, centrally

located physical sites for the buyers and sellers to meet and

negotiate price, payment, and the physical transfer of the

good being sold [14]. These services appear crucial in a

country where credit cards are only good within the city in

which they were issued, transportation is a major issue

with Internet transactions, and the business culture prefers

G.T. Haley / Industrial Marketing Management 31 (2002) 119–124 121

face-to-face negotiation: the services have been the site’s

key to success.

3.3. The Wireless Application Protocol (WAP)

The WAP may offset China’s poor infrastructure and

limited penetration of PC-based Internet services. Though

very few private PC connections exist, cellular phones

have become ubiquitous in China and no longer appear as

conspicuous consumption [4]. Chinese cellular phone

subscriptions are presently growing by 1,000,000 new

subscribers a month; their growth is projected to be

37%, compounded annually, through 2006 [21]. Chinese

consumers have not responded well to the WAP due to its

limitations [5]; but in China, where infrastructure hinders

economic growth and development, the WAP’s usefulness

to businesses should overcome its limitations until its

technology matches its potential. Most PCs owned by

businesses in China have multiple users. In a survey, 70%

of Chinese cellular phone users considered their phones

primarily or exclusively business tools [5]. Consequently,

the WAP’s unpopularity among consumers should have

limited affect on the development of wireless e-commerce

in business-to-business markets. B2B e-commerce is

forecast to be 10 times greater than B2C e-commerce in

Asia [17]. The Chinese business culture also favors the

development of B2B e-commerce. Chinese businesses

tend to form long-term relationships and use established

channels of distribution for their products. These factors

tend to diminish the importance of face-to-face meetings

once the relationship is established. Additionally, because

B2B exchanges tend to use established credit lines, many

of the payment problems associated with B2C e-com-

merce do not seem relevant.

3.4. The five threats to success

The five threats to success in China include issues

dominated by the government: commercial factors, enforce-

ment, corruption, ideology, and security concerns. Three of

these threats, commercial factors, corruption, and enforce-

ment, are already under withering attack by a government

that seems seriously divided on the desirability of the

Internet, free markets, and private business.

The commercial factor, governmental participation in

Chinese industry, was and is so tremendous, that though

privatization proceeds, the Chinese government will have

a significant presence in industry for the foreseeable

future. This holds true for all business segments —

manufacturing, agriculture, services, and distribution. Out-

side of the postal service, the military provides the sole

transportation and distribution of resources that can reach

all areas within China. The military also remains the

largest industrial concern in China, including within its

dominion companies that produce consumer goods. Con-

sequently, companies that wish to serve some of China’s

more remote or less populated regions frequently find

themselves competing against the military, their only

option for transporting their goods.

The controversy over protection of intellectual prop-

erty rights provides an excellent base to consider the

problems China has with respect to enforcement. The

Chinese government is making strides in improving the

protection of intellectual property rights [11]. Indeed,

Chinese intellectual property rights laws appear on the

books as stringent enough to satisfy any MNC’s man-

agement. However, Beijing has not yet been able to

impose its will over local governments when it comes to

enforcing these laws [11]. Provincial governments in

recent years have asserted their authority by ignoring

Beijing’s edicts in many commercial arenas. For this

reason, at least in the short to medium terms, companies

must protect their own interests by developing relation-

ships with, not only the central government, but also

with the provincial and municipal governments. Com-

panies must also decide which technologies they can

afford to risk; and which technology have such strategic

importance and centrality to their competitive positions

that they cannot risk exposure in China [11]. China

exhibits strong economic growth and, historically,

Fig. 1. Barriers to e-commerce in greater China.

G.T. Haley / Industrial Marketing Management 31 (2002) 119–124122

enforcement of intellectual property rights has followed

economic development. But China has not enjoyed

uniform economic development: income in urban centers

averages three times the income in rural areas [4]; and in

some rural regions and regions dominated by the old

government-owned heavy industries, average per capita

income levels have fallen over the last decade. Hence,

unless Beijing can reassert its authority over the provin-

cial governments, significant difficulties will continue

regarding enforcement of the laws in the books.

The government is also tackling corruption, but as with

the previously discussed problems, no victory appears in

sight. The potential misuses of the fight against corruption

add to the difficulties in rooting it out. Many feel that political

motivations and tensions between China’s economic reform-

ers and its Old Guard drive some charges of corruption.

However, legitimate anticorruption efforts are also underway.

As the government continues its efforts to harness corruption,

companies’ profitability should be enhanced.

Finally, ideology and security concerns will continue to

be problems so long as the Communist party insists on

maintaining social and political control of China. Though

many authors continue to differentiate between China’s

reform and antireform-oriented leaders, management must

remember that all Chinese leaders are first and always loyal

communists. Whatever their economic perspective, Chinese

governmental leaders support policies that they believe will

most likely maintain the Communist Party’s power in China.

The Communist leadership’s economic ideology may vary,

but its ideology of power and its maintenance adheres to

those espoused in this party for almost half a century.

Security concerns appear preeminently on the mind of

China’s leaders and bureaucrats. For example, many mem-

bers of the government seem convinced that Microsoft’s

programs, and all other computer programs produced by US

companies, come equipped with backdoors accessible by

the US government [4] — this is what China’s government

would like to do. To try and combat this danger, China’s

government demanded that companies deposit copies of all

encryption programs with governmental regulators who

could track encrypted communications. The Chinese gov-

ernments’ distrust of commerce and foreign powers has

existed for centuries and has been felt most strongly by their

own businesses [12]. This distrust forms an integral part of

communism, and also of Confucianism, so it is likely to

continue. Business interests must be prepared to fight for

their interests, through any available legal, political, and

social channels, whenever ideological and security issues

arise. Businesses should: (1) Keep scrupulous records and

data to prove the basic honesty and straightforwardness of

their intentions in any and all business dealings; (2) Develop

the strongest relationships possible with both central and

provincial governments, and with private business interests,

to argue their case if necessary; and (3) Remember that

China remains a public law system of justice rather than a

rights-based system. In public law systems, an individual’s

rights originate entirely from the governing authority’s

willingness to recognize and to grant those rights to the

individual, and not on an inherent possession of rights

guaranteed by law [3,11]. The next section offers some

implications and policy recommendations.

4. Conclusions

The future for e-commerce appears very bright in China,

but that future can suffer catastrophically at the hands of a

divided and suspicious government. Present growth rates of

e-commerce-related activities can continue unabated for

many years to come if the government controls the five

threats. This growth potential exists whether one considers

technologies with relatively low market penetration, such as

the PC-based Western-style Internet; or those with relatively

high market penetration, such as in cellular phones. Invest-

ing in China’s communications and other e-commerce-

related businesses appears as a necessity for companies that

hope to achieve globally competitive positions, but it entails

substantial risk. Motorola, currently (February 2001) the

largest single investor in China [9,21], has demonstrated

that its strategy carries substantial risk and uncertainty.

China’s markets possess many problems, but managers

can surmount these if they adapt to the infrastructural,

business, and political situations that they will face. To

enter China successfully, a company must commit to China

for the long-term; but high risks and uncertainty call for

high liquidity and rapid returns. Commitment includes

several variables, and a willingness to stick with an invest-

ment for the long-term forms only one. Another equally

important element includes the strength of one’s commit-

ment. As Yan [24] has pointed out, companies cannot

maintain strong commitments without showing profits for

the effort. As regards profit expectations, managers should

approach China, despite its potential, with the reservations

and cautions of any other developing market.

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George T. Haley, PhD (University of Texas at Austin), Associate

Professor/Director of Marketing and International Business Programs at

the University of New Haven, has also taught on the faculties of the

Instituto Tecnologico y de Estudios Superiores de Monterrey, the

National University of Singapore, the Queensland University of Tech-

nology, Thammasat University, Harvard University Summer Programs.

An award-winning author, George has coauthored the international best-

selling author of New Asian Emperors: The Overseas Chinese, their

Strategies and Competitive Advantages (the top-selling book on Asian

business strategies worldwide in 1999) and is completing two forthcom-

ing books — the first is, Strategic Marketing Management for Asia and

Beyond: Marketing for the New Millennium (World Scientific Press),

while the second is Asia’s Tao of Business: The Logic of Chinese

Business Strategy (Wiley Publishing). Please contact him at gthaley@

asia-pacific.com.

G.T. Haley / Industrial Marketing Management 31 (2002) 119–124124