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China’s ecommerce boom & the role for western firms

China’s ecommerce boom & the role for western firms

In China today, there are companies which use artificial intelligence to design, order, advertise, sell and ship clothes autonomously to fashionistas around the planet – all in less than a week. This sophisticated technology has been quietly honed by the country’s leading ecommerce firms in pursuit of the ultimate high-volume, low-cost business model.

But despite this, they need input from western firms if they’re to continue their success, opening a host of business opportunities.

Shein – and its followers

Shein (formerly ‘She Inside’ and pronounced ‘she in’) is the pioneer of a highly automated ecommerce approach.

Its critics accuse it of exploitative behaviour - normalising single-use, straight-to-landfill clothes, while underpaying and overworking factory staff.

But alongside this, Shein stands out as the first company to crack the economics of hyper-fast fashion. And it has done this by developing software tools which design and make tens of thousands of products every day and market them, at rock bottom prices, via social media to Gen Z customers.

As a result, the company is expected to generate $30 billion in sales this year. And, in April, it was valued at $100 billion – more than H&M and Zara combined – though this has since fallen.

Given this, and despite the inherent ethical problems, it’s little surprise that Shein’s digitally-driven, direct-to-consumer (D2C) method of global expansion is not a one-off case. It has spurred a generation of copycat Chinese companies seeking similarly rapid growth outside the country’s slowing domestic market.

Examples of such new players include:

  • Cider - a digital native fashion company which has mirrored Shein’s model and built a digitised supply chain that adapts production capacity to match real-time consumer needs. Established in 2020, it has already raised $140 million.
  • PatPat an international child and maternity online retailer which has been dubbed the ‘Shein of children’s apparel’ and received a $160 million investment from Softbank Vision Fund. Just like Shein and Cider, PatPat uses social media and customer data to develop country-specific marketing strategies. It has also built its own digitised, flexible supply chain base in Guangzhou.
  • Samsung Down (no relation to Korea’s Samsung) – a company that historically supplied bedding to multinational hotel chains and department stores including Hilton, Four Seasons and Macy’s. It’s recently launched its own D2C digital brand, Rest Duvet, to target US consumers, borrowing much of its international marketing and logistics strategy from Shein.

Digitally-driven success

Much of China’s cross-border ecommerce growth in the early 2010s was thanks to the country’s classification as a ‘Developing Nation’ under the Universal Postal Union. Before being revoked in 2019, this entitled Chinese companies to pay a fraction of normal international shipping costs.

The sector was also boosted by cheap, targeted advertising on nascent social media platforms such as TikTok.

And Shein and its followers have benefited greatly from a hi-tech business model that distinguishes itself from more typical ecommerce platforms by using AI to:

  1. Design and release thousands of new products every day: Armies of designers use sophisticated tools to crunch hyperlocal customer and fashion data to produce new product designs in real time. Staggeringly, Shein generates more than 9,000 new products daily. Data are collected from social media channels such as TikTok and Instagram and combined with other sources such as user demographics, browsing history and purchase information. Automated marketing tools then place hyper-targeted adverts for the new items in social media to drive web traffic.
  2. Automate purchasing decisions: Factories which make the clothes for companies like Shein are integrated with hi-tech ERP systems capable of automated purchasing. Not only does this reduce the time spent by the retailers’ procurement teams; it enforces Kaizen-style improvements on the manufacturers. Suppliers are then invited to bid in automated auctions for small-volume orders of new designs – often just 100 units. They’re under constant scrutiny by supply chain management firms, like Shein’s ERP provider Singbada, and continually ranked against each other on price, quality and distance from the retailer’s headquarters. Often, these suppliers take a financial hit when accepting small volume runs in the hope the product will ‘go viral’ and they’ll be offered a more profitable mass order.
  3. Sell everything, with nothing returned: It’s common for online fast fashion companies to see 50 - 80% of their orders returned, so Chinese ecommerce companies integrate their logistics portals into their marketing tools to ensure all products which are sold, stay sold. Shein, for example, has bulk shipments constantly moving between markets – with planes flying from China to, say, Dubai, on to the EU, back to Dubai and then back to China. The company reportedly collects returned clothes in one country, bundles them into consignments and promotes them via TikTok adverts and influencers in successive countries along the shipment route until everything finds a customer. If a buyer still can’t be found, items are sold by the kilogram to big box retailers like Walmart or traders in Africa.

International expansion is hard

But despite the power of such an AI-based approach, even for the most ambitious and capable Chinese company, international expansion today is hard.

While early movers including Shein were able to bootstrap their businesses with cheap shipping and advertising, newer entrants require far more investment to achieve global growth.

International shipping and advertising costs, for example, have seen dramatic increases in recent years. They stand five times higher than in 2010 - brought about, in part, by the success of Chinese ecommerce firms, and forcing them to show shareholders ever-increasing returns on capital invested in new markets.

This is driving a need to find technology and operations partners in their target markets which can offer data insights, digital marketing, local logistics, payment processing and other ecommerce optimisation solutions. These would simply be too costly and time-consuming to develop internally.

And this, in turn, is opening big opportunities for western firms in these fields.

Global ambitions require global partners

Indeed, collaborating with western companies is the fastest way for many new Chinese ecommerce companies to play catch-up with incumbents like Shein. And new entrants are spending hard on localised payment processing, logistics and digital marketing solutions in each market.

Many of the larger Chinese players have already developed partnerships or acquired large stakes in western firms: Alibaba has invested in Portuguese-British online retailer Farfetch, for example; TikTok is building hyperscale data centres in Ireland to improve its local advertising capabilities and ensure GDPR compliance; and Shein is signing up western partners such as Swedish payment provider Klarna.

But, while one option for western tech companies is to wait for Chinese ecommerce groups to knock on their doors, a proactive approach to meet them on their home turf is much more likely to yield results.

So, despite all the complexities of doing business in China, there’s a lucrative opportunity for western firms to sell into the rapidly-growing Chinese ecommerce unicorns. And they can do this without even having to establish a local operation, as most services such as logistics, data processing and payments are delivered directly in western markets.

At the same time, commercial discussions in China are always best conducted face-to-face. So, you’d be wise either to appoint a local sales team or to sign up a Chinese partner who can take your solution to market.

 

To discuss the opportunities for your business with China’s ecommerce giants, you can contact Paul at paul.dupont@intralinkgroup.com

Paul was supported in writing this blog by research assistant Shuyan "Faye" Fu.

Paul Dupont
About the Author

Paul Dupont

Paul has extensive experience of doing business in and with Asia, having lived and worked in China and Taiwan for 10 years. Now based in London, he helps western tech companies to expand in China, Japan, South Korea, Taiwan and Southeast Asia. He’s fluent in Chinese, French and English and has an MSc in optical physics & nanotechnology.

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