An Uphill Battle

China faces diffusion of Internet and ecommerce technologies in the new millennium.

2005 Volume 8 Issue 2

If your company is interested in expanding its operations to China, are you aware of the existing e-commerce development challenges that await you? If partnering with a Chinese firm is in your company’s future strategy, does your management team understand the contractual pressures of partnering and setting up business in China? Because of the government’s intention to control its country’s e-commerce growth and economic development, conducting business in China can be challenging and complicated. Identifying and understanding these challenges are important for companies hoping to implement partnership strategies that will aid in their business development.




Bank of China Photo: Karen Winton




e-Commerce Development and Evolution in China

In recent years, China has been faced with the advent of the World Wide Web, use of the Internet by its citizens and businesses, and the implications of e-commerce business transactions. China has benefited from much foreign direct investment, particularly in the high-technology industry.[1] World competitive pressures have also forced enterprises with foreign investments to bring global best practices and cutting edge technology into China. Such economic inroads have led to an improved national innovation system and technology absorbing capability.

China has recognized the need to employ e-commerce as a vehicle for surviving and remaining competitive within the global community. In an effort to maintain control over the use and development of China’s Internet, the government has acted as the driving force behind Chinese Internet development and promotion, “unlike developed countries where individual entrepreneurs and private companies are the driving force behind the Internet and e-commerce development.”[2]

When China regained control over Hong Kong in June of 1997, after more than 150 years of Commonwealth rule by the British Empire,[3] Hong Kong had enjoyed several decades of commercial success and was an established leader in global trade and commerce. Its products were competitive with those produced in London, Paris, and New York. Although China could learn from its prodigal “westernized” child, since Hong Kong’s success serves as an example of the region’s economic possibilities, the Chinese government has worked to maintain potentially stifling control of China’s development, including that of the Internet and e-commerce. Unfortunately for China’s economy, foreign direct investors, and would-be entrepreneurs, China’s protective policies have the potential to restrict immediate future growth.

The Chinese government has devised a comprehensive plan that would incorporate the strengths of information technology (IT) with the governmental agenda of implementation through regulation. Goals include economic growth; improved communication, distribution, and network infrastructures; and enhanced political monitoring and control. This top-down, one-way approach was orchestrated in the belief that if e-commerce were engaged, “at an early stage … China would be able to potentially ‘leapfrog’ stages in traditional economic development.”[4]

China launched several “Golden” programs to develop China’s infrastructure and to augment the country’s technological presence and its ability to transact business on the Internet. More specifically, the Golden Bridge program was developed to aid in the physical construction of the infrastructure needed to transmit information throughout China. The Golden Card program was developed to aid in the advancement of China’s credit card and bank network. The Golden Gate program was initiated to assist with the administration of foreign trade and the exchange of information globally.[5] China’s means for facilitating international Business-to-Business (B2B) e-commerce, as demonstrated by these programs, are consistent with its long running reputation for maintenance of protective control.

An Uphill Battle: China’s Six Challenges to e-Commerce Adoption

As China has acknowledged, through its aggressive initiatives for “leapfrogging” stages in technological development, e-commerce possesses great potential for economic growth in China. However, China has many hurdles to overcome. Those who are considering doing business in China, particularly with transactions involving e-commerce, should give careful consideration to the following six obstacles. They represent the main areas that will likely hinder China’s ability to advance its e-commerce initiatives.

  1. Supporting and related e-commerce industries in China are relatively poorly developed.
  2. China lacks an infrastructure to support credit card transactions for Internet purchases, despite its Golden Card program.
  3. The Chinese government’s current e-commerce restrictions hinder development of a lively e-commerce environment.
  4. China’s telecommunications network and high installation and connectivity rates prevent mass penetration of the Internet into homes in China.
  5. China lacks reliable couriers for distribution of goods throughout the country.
  6. Chinese businesses lack strategic partnerships.

Challenge #1: Developing Supporting and Related e-Commerce Industries

One of the most significant limitations of China’s ability to fully utilize e-commerce and the Internet is the relatively poor development of the industries that support such expansion.[6] In order for e-commerce to flourish, China’s businesses must develop strategic relationships with other businesses to increase their effectiveness and service to consumers.[7] The development of these strategic relationships is very important during industrialization, particularly during e-commerce development, “which relies on the coordination of activities of many industries such as software, hardware, telecommunications, information, and distribution.”[8]

Growth of such related support industries can be seen in the United States through the high profile website Amazon.com. Amazon has partnered with many companies to increase their product offerings to e-consumers, and these partnerships in turn offer retailers additional online exposure. For example, Amazon is able to offer an extensive array of apparel through its strategic partnerships with such companies as Nordstrom, Foot Locker, Lands’ End, Eddie Bauer, Guess, and Nicole Miller. Conversely, these partnerships have enabled such companies to reach out to consumers who frequent Amazon, but who may not have otherwise visited their independent retail websites. China’s lack of partnerships of this nature is one key reason that the country’s e-commerce growth has not met market projections.[9]

Challenge #2: Building an Infrastructure for Internet Credit Card Payments

The lack of clearing houses and credit evaluation programs in China creates much skepticism about the utilization of credit card transactions for Internet purchases.[10] China’s e-commerce businesses have begun to address the issue of its cash-based culture by hiring hourly paid workers to deliver the purchased items and collect buyers’ cash. Although this method of delivery and payment works and assists in building customer satisfaction, it does not demonstrate to the executives of these businesses that e-commerce can help cut costs and increase revenue over the long term.

Further troubling is China’s lack of infrastructure for Internet credit card payments.[11] Unlike China’s neighbor Japan, which has built an impressive infrastructure that communicates payment information from partnering businesses to payment stations and back to the businesses from consumers’ purchased products, China has not developed an effective alternative that encourages B2C e-commerce. Japan’s methods for transacting payments not only keeps consumers happy, but it also enables online transactions to take place efficiently and effectively. China needs more than a government controlled infrastructure to make a network like Japan’s come to life. In addition, if the infrastructure were built, China would need to market credit cards as a secure and acceptable method for payment. Because of Chinese skepticism surrounding the use of credit cards, simply building the infrastructure to support such payments will not guarantee Chinese cultural buy-in.

Challenge #3: Guiding and Protecting China’s e-Commerce Development

The third challenge facing China is the government’s wish to “protect” (control) local producers’ interests. The regulations in place are likely meant to protect domestic producers.[12] However, they actually constrain e-commerce development and only reinforce centralized control.[13] What China’s government fails to acknowledge is that e-commerce encourages global opportunities, economic growth, creativity, and innovation, all made possible by means of a robust infrastructure. By limiting transactions, communication, and partnerships that can take place through e-commerce in China, the government limits opportunities, growth, creativity, and innovation.

Developing a solution for this challenge is not so easy. China is influenced by its record of thousands of years of governmental domination. One alternative would be for the government to develop controls that can be instituted on the economic periphery, such as tariffs for goods purchased and sold through international e-commerce. Such methods would assist in the protection of China’s producers without limiting the flow of information and commerce through the Internet.

Challenge #4: Establishing Connectivity for e-Commerce Communications

The fourth constraint that China faces is the high cost of telephone installation and connectivity to the Internet.[14] Despite growing numbers of users, Internet use in China is significantly concentrated in urban areas with very little access in rural areas: “The Internet penetration in most of these (Chinese) provinces is less than 0.05 percent. The imbalanced development is mainly due to lower level economic development and lack of telecom infrastructure.”[15]

In Japan, where “urbanization, industrialization, and modern transportation and communication rapidly changed the Japanese way of life, the effect of these developments is being keenly felt not only in cities, but also in the countryside.”[16] Japan worked to decrease the challenge of high connectivity charges by installing kiosks in convenience stores to encourage Internet use at no cost to the consumer. In addition, Japan has focused on use of the wireless market for connectivity. Although it does not appear that China has addressed this issue yet, China might benefit from the alternatives utilized by Japan. Wireless Internet access could reduce connectivity charges and address the lack of Internet access in Chinese rural areas if cell phone reception were available.

Challenge #5: Fostering e-Commerce Growth and Distribution

The fifth issue that China must address to foster growth of e-commerce is distribution of goods purchased online. China lacks reliable couriers for distribution of goods throughout China. The only viable delivery system to both businesses and homes is the state-owned Post Office, but the Post Office is notorious for being slow and mishandling goods. Foreign competitors such as DHL and EMS are increasing their presence in large cities, “but they are targeting office buildings, and the cost they charge is excessively high for an ordinary online shopper.”[17] Because of China’s courier concerns, the country must develop a method for connecting consumers with their purchased goods in a timely manner to encourage repeat business. Failure in this area could prove detrimental for the future of e-commerce in China.

In contrast, Japan addressed this issue by partnering with convenience stores and designating them as delivery stations at which consumers could pick up their goods. Because the Japanese prefer face-to-face transactions, this process helped limit skepticism regarding online purchases. China may be able to use the same strategy in its larger cities, but would need to employ delivery persons for the rural areas until a sound distribution strategy is developed, possibly through e-commerce partnership with a company such as DHL.

Challenge #6: Developing and Maintaining Strategic e-Commerce Partnerships

The last issue, which is a significant factor in the development of China’s e-commerce, is Chinese businesses’ lack of strategic partnerships. Japan has been recognized for its great success in this area. “A four-year study of Japanese business-to-consumer (B2C) e-commerce initiatives reveals the innovative ways Japanese corporations exploit traditional aspects of Japanese business and consumer retailing—specifically…willingness of corporations to form cooperative alliances (the keiretsu model[18])—to further develop the potential of B2C e-commerce.”[19] This is demonstrated through Japan’s utilization of convenience stores for customer bill payment, product pick up, etc., “all of which depend on robust information systems and logistics infrastructures developed in IT-based alliances that the authors terms e-retsu (the e-commerce form of the Keiretsu system).”[20] China must place greater emphasis on developing and supporting strategic partnerships. Japan’s e-commerce success is a direct reflection of that country’s ability to develop and use such partnerships. If China’s government is truly committed to protecting the interests of its producers, it should encourage such strategic alliances, which could be the jump-start needed for building a more robust infrastructure. If China’s internal e-commerce were strong, it could compete internationally, thereby bringing in more income, which could provide the government with the economic “protection” it seeks.

China can learn much from the success of Japan’s e-commerce initiatives. It is apparent that the two countries have many challenges in common. Both countries have faced high connectivity charges, lack of personal computers in homes, and skepticism regarding the use of credit cards online. The main differences between the two countries, however, seem to be in their respective handling of these challenges, their infrastructures, and their abilities to strategically align businesses. Japan’s e-commerce initiatives have been fairly successful, so Japan has been able to put the Internet to work for its businesses. China, however, has one significant challenge that will be difficult to overcome. China’s governmental control provides a substantial limiting force in the country’s success with e-commerce initiatives. By its very nature, e-commerce is a dynamic, free, and open forum for business. It will be difficult for the government of China to restrict access, control the network, and institute regulations without destroying the fundamental nature of e-commerce that makes it successful in other countries.

Addressing the Challenges and Mitigating Risk

Understanding these challenges is the first step in overcoming them. Many international business transactions fail simply because the participants are not aware of the nuances of doing business in a country like China. Because the U.S. has openly embraced the Internet and e-commerce, and its infrastructure is able to sustain such activity, it is easy to make the assumption that such activities and conditions exist on a global basis. As the foregoing six challenges would suggest, an assumption of this nature could be quite devastating for a developing country to make.

Upon developing the understanding that China’s e-commerce functions quite differently, the international businessperson can begin to investigate various methods for mitigating risk and setting up a successful transaction in China. Table 1 provides a summarized look at methods for addressing various business issues when attempting to conduct business in China. These scenarios will help mitigate risk and will likely improve the opportunity for success.

Table 1: Business Issues and Methods for Mitigating Risk

Business Issues Methods for Mitigating Risk
Setting up a Partnership Invest in a careful partner search. Seek partners who possess knowledge of the country’s e-commerce, business regulations, and processes. Your partner should be a main source of information regarding the nuances of doing business in China.
Balancing the Partnership Look for balanced partnerships. Determine whether the partner “fits” organizationally, culturally, and strategically with your vision for the transaction. Be sure to fully understand your partner’s motives for engaging in the partnership.
Obtaining Counsel Hire an attorney in your home country and in China. Do not assume that your home country attorney will fully understand the risks involved in doing business internationally. There are many factors that may only be fully understood by an attorney who practices in China.
Business Sustainability Look at the partnership as a long-term investment. China’s e-commerce has great potential and is still evolving. In China, much emphasis is placed on building long-term relationships. The idea of a quick business deal is prevalent in the U.S., but will likely “turn off” your Chinese counterpart.
Contractual Obligations Work with your two attorneys to understand how contracting is very different internationally than it is in the U.S. Asian countries tend to be “turned off” by a detailed and lengthy contract, as well as by litigation to enforce the contract. Do not be surprised if your Chinese counterpart wishes to transact business through the use of a brief contract with changing and fluid terms. In addition, be prepared to solve disputes through mediation and conciliation, as opposed to litigation and arbitration.
Business Growth
and Evolution
Look at the partnership as an evolving bargaining relationship. Expect changes to the business and government regulations over time.
Organizational
Learning
Set up internal learning mechanisms. Prior to transacting business with China, make sure that you and your business partners understand the risks and differences involved in conducting business with China, particularly in the area of e-commerce, which functions quite differently in China than in the U.S.
Business Communication Keep communication flowing. A good partnership is a talkative one, particularly in China, which places much emphasis on relationship building practices.
Language
Barriers
Consider the forms of communication utilized during your business transactions in China. Seriously consider the need for translation. It may be necessary to translate your business cards, website, contracts, etc. Discuss with your local counterparts the appropriate dialect(s) to be used for such translations.
Staffing the Business Allocate “good” managers to the partnership and take the time to get to know how they can best do business for you. Keep in mind that China may require that specific positions be staffed by citizens of China.
Best Practices There may be opportunities for your Chinese partnerships to learn and incorporate your company’s best practices, but do not assume that they will always work. Best practices that work in the U.S. will not necessarily be best practices in China.

Conclusion

Each of these methods requires the understanding that doing business and working with e-commerce in China is very different from doing so in the U.S. Not only does China’s government maintain almost complete control over e-commerce, but the government also does not offer the same protections for failed business transactions and unfulfilled contractual obligations as does the U.S.

By understanding the history and current development of China’s e-commerce and Internet infrastructure, corporations can better leverage the many possibilities that the country has to offer. Furthermore, by understanding the status of the Chinese government’s involvement and its plans for e-commerce growth, businesses can make more informed and savvy decisions about how to leverage Internet technologies to conduct business in China.


[1] Chun, M., Clark, T.H., Lovelock, P., and Montealegre, R., “Information Technology Adoption and Interventions in China,” 1999, Working Paper.

[2] Zhao, HongXin. (2002). Rapid Internet Development in China: A Discussion of Opportunities and Constraints on Future Growth. Thunderbird International Business Review, Vol. 44(1): p 122. Retrieved November 25, 2004, from Ebsco Host Research Database.

[3] Selmer, J. and de Leon, C., Culture and Management in Hong Kong SAR: p. 49.

[4] Lovelock, P., “China’s Electronic Commerce Initiative: Leapfrogging Development Stages,” Centre for Asian Business Cases, School of Business, The University of Hong Kong, HKU020, Revised 11/18/99, Ref. 99/27C.

[5] Zhao, Hong Xin, “Rapid Internet Development in China: A Discussion of Opportunities and Constraints on Future Growth,” Thunderbird International Business Review, Vol. 44 (1) 2002: p. 122. Retrieved November 25, 2004, from Ebsco Host Research Database.

[6] Chen, Stephen and Ning, Jian, “Constraints on E-commerce in Less Developed Countries: The Case of China,” Electronic Commerce Research, Jan-Apr 2, (1-2) 2002: p. 36. Retrieved November 25, 2004, from ABI/INFORM Global database.

[7] Ibid. p. 40.

[8] Ibid. p. 36.

[9] Ibid. p. 40.

[10] Zhao, Hong Xin, “Rapid Internet Development in China: A Discussion of Opportunities and Constraints on Future Growth,” Thunderbird International Business Review, Vol. 44 (1) 2002: p. 131. Retrieved November 25, 2004, from Ebsco Host Research Database.

[11] Stylianou, Antonis C., Robbins, Stephanie S., and Jackson, Pamela, “Perceptions and Attitudes about eCommerce Development in China: An Exploratory Study,” Journal of Global Information Management. Apr-Jun. Vol. 11

(2) 2003: p. 1. Retrieved November 25, 2004, from ABI/INFORM Global database.

[12] Zhao, Hong Xin, “Rapid Internet Development in China: A Discussion of Opportunities and Constraints on Future Growth,” Thunderbird International Business Review, Vol. 44 (1) 2002: p. 129. Retrieved November 25, 2004, from Ebsco Host Research Database.

[13] Ibid. p. 129.

[14] Ibid. p. 128.

[15] Ibid. p. 130.

[16] Japan Britannica Student Encyclopedia: p. 1. Retrieved November 26, 2004, from Encyclopedia Britannica Online.

[17] Bin, Qiu, Chen, Shu-Jen, and Sun, Shao Qin, “Cultural Differences in E-commerce: A Comparison between the U.S. and China,” Journal of Global Information Management. Apr-June, Vol. 11 (2) 2003: p. 1. Retrieved November 25, 2004, from ABI/INFORM Global database.

[18] In corporate culture, keiretsu refers to a uniquely Japanese form of corporate organization. A keiretsu is a grouping or family of affiliated companies that forms a tight-knit alliance to work toward each other’s mutual success. The keiretsu system is also based on an intimate partnership between government and businesses. It can best be understood as the intricate web of relationships that links banks, manufacturers, suppliers, and distributors with the Japanese government.

[19] Smagalla, David, “Japanese Experiences with B2C E-Commerce,” MIT Sloan Management Review. Spring, Vol. 45 (3) 2004: p. 1. Retrieved November, 25, 2004, from Ebsco Host Research Database.

[20] The e-retsu is the ecommerce version of the Keiretsu system (affiliated companies that form an alliance, see #18).

About the Author(s)

Mark Chun, PhD, earned his doctorate in Information Systems from the University of Colorado at Boulder; an MBA from the University of California, Irvine, with a emphasis on business and strategy; and a Bachelor of Business Administration with an emphasis in management information systems from the University of Hawaii. His research focuses on the use of IT to create value and to transform organizations, the integration of information systems, and knowledge management. He has been published in the Communications of the Association of Information Systems journal, the Journal of Information Technology Management, the Journal of Global Information Technology Management, and the Journal of Information Technology Case and Application Research. Dr. Chun has worked for Intel Corporation, Pepsi Co./Taco Bell, Coopers & Lybrand, and the Bank of Hawaii, and has conducted research at Qwest, Honda, Hilton Hotels, Kaiser Permanente, Mattel, and Pratt-Whitney Rocketdyne. He has also researched the diffusion of information technology in less-developed Asian countries.

Gina Honda, works for Primerica, and is an MBA student at Graziadio. Her professional background is split between the hotel and entertainment industries. She was a general manager for Extended Stay America Hotels and is currently a member of the Screen Actors Guild, American Federation of Television and Radio Artists, and Actors' Equity Association. She holds a Bachelor's degree in Theatre Arts, Acting/Directing from California State University, Los Angeles, where she graduated summa cum laude, was chosen Alumna of the Year, and was a member of Phi Kappa Phi. Her MBA focus is Entrepreneurship.

Caroline Schwane, works for Frontier Dental Management as the corporate manager of Training and Human Resources. Her professional experience and areas of interest center on organizational analysis and development, change management, and employee relations. She graduated from the University of Wisconsin at River Falls with a B.S. in Speech Communication (emphasis: Business Communication). She will graduate with her MBA (emphasis: Global Business) from Pepperdine's Graziadio School in August, 2005. Upon completion of her thesis in April, 2006, she will graduate with her M.A. in Communication from Pepperdine's Seaver College.

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