Competition in China: why are Chinese companies venturing abroad?

Known for their agility and innovative prowess, Chinese internet companies are beginning to venture into uncharted territories: foreign markets. This article, based on Ed Sander's boardroom session "Keeping up with China," discusses the key factors driving this trend.

1 – Seller surge

The first driving factor is the increased number of sellers on domestic e-commerce platforms. Previously, trading companies played the intermediary role between factories and consumers. However, there has been a significant shift towards a Consumer-to-Manufacturer (C2M) model over the past decade. Factories are now selling directly to consumers. It's a new era where approximately 63% of sellers on Amazon are from China, and approximately 80% are manufacturers.

The escalation in sellers has led to an intensely crowded domestic e-commerce landscape. Chinese internet companies are seeking opportunities in new markets to bypass this saturation.

2 – The great internet plateau

The second reason behind the overseas venture is the stagnation of internet growth within China. even though there is less than 75% of internet penetration in China, the remaining offline population mainly comprises the elderly and those living in rural areas. This limited potential for new online consumers has led to a slowdown in the expansion of the domestic digital market.

Consequently, Chinese internet companies are turning their attention abroad, where internet use and digital market growth rates are more promising.

3 – Clash of the platforms

The third factor is the increased competition among domestic platforms within China. The competitiveness isn't confined to the companies but extends to the merchants using these platforms. High customer acquisition costs and increasing difficulty in attaining profitability are common challenges.

Given the high competition and the complexity of the algorithms used by these platforms, smaller sellers often struggle to gain visibility. Therefore, many merchants find selling on international platforms like Amazon more profitable.

4 – Rising costs, regulatory pressure, and subsidies

Skyrocketing domestic labor costs and regulatory changes also push Chinese internet companies to explore foreign markets. In comparison to countries like Vietnam, and even Mexico, the labor costs in China have grown very steeply. 

Additionally, the Chinese government has begun to take a more critical stance on counterfeit products. This is partially because it recognizes the importance of enhancing the reputation of Chinese production quality abroad. As a result, the government has started to crack down on some counterfeiting factories, which were initially crucial for building the economy. That being said, Small and Medium Enterprises (SMEs) play a significant role in the Chinese economy. The National Development and Reform Commission is urging major internet platforms to assist SMEs in expanding overseas.

Conclusion: a new direction

In response to domestic market saturation, slowed internet growth, and intense competition, Chinese internet companies are shifting their growth strategies to focus on overseas markets. This significant change signifies an exciting new phase in the global e-commerce landscape. The impact of this shift promises to reshape the dynamics of the digital economy worldwide.

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Although it’s great to talk about how they do e-commerce in China, many cultural, political and geographical differences make it complex for Western companies to copy-paste these learnings. Then again, we can clearly learn some lessons in Western retail from China. 

That’s why we’re here. Our consultants are tried and tested when it comes to implementing digital commerce operating models that deliver. We build the digital backbone of leading omnichannel players so that consumer brands can win in the digital age and help investors check the state of technology before they buy.

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