Morgan Stanley
  • Research
  • Mar 13, 2015

China’s eCommerce Revolution

China now boasts the world’s largest eCommerce market, the rise of which could power domestic consumption, creating a new engine of economic growth, just as stalwart industries such real estate and infrastructure have begun to struggle.

Morgan Stanley Blue Papers, a product of our Research Division, involve collaboration from analysts, economists and strategists across the globe and address long-term, structural business changes that are reshaping the fundamentals of entire economies and industries around the globe.

A generation ago, most households in China relied on ration coupons to buy everything from rice and woks to shoes and bicycles. Today, China boasts the world’s largest eCommerce market.

In 2013, the country racked up $314 billion in online sales, easily surpassing the US, which tallied $255 billion. Globally, China accounted for 35% of eCommerce. “As the country’s consumers embrace the channel and incomes rise, we expect China’s share to expand further,” says Robert Lin, Morgan Stanley’s Greater China eCommerce and retail analyst.

Such market growth promises to add more momentum to already established online retail juggernauts, while opening up new inroads for other players—both large and niche, domestic and international.

The eCommerce revolution has also become a dynamic engine of China’s long-awaited shift from a heavy-industry, export-oriented, semi-command economy into a consumer- and service-driven market, where private companies large and small have direct access to domestic consumers. This demand, in turn, could fuel stable, sustainable, long-term growth, perhaps marking China’s ultimate arrival among developed markets.

Rebalancing Act

When China began opening its doors to the world in the 1980s, every company dreamt of the vast potential of its market with its billion-plus population. Imagine, went the old sales pitch, selling one pencil to every student in China. Now extrapolate for detergent, TVs, cars, cellphones, and so on.

It didn’t take long for China’s leaders and economists to dream the same dream. Even as China transformed itself into the so-called factory floor of the world, it was preparing for the day when it could rely on its domestic consumers to power most of its own economy. After all, developed markets such as the US derive 60% to 75% of GDP from domestic consumption.

A consumer-centric economy doesn’t happen overnight. The scale of such an economic rebalancing act usually takes generations. In China, as with so much else, it has been on a fast-track.

Engines of eCommerce

Still, eCommerce might have taken far longer to grow without a catalyst: the smartphone. In the first half of 2014, on average, 26% of China’s online purchases were made via its 780 million active mobile devices. Of those, 58% were registered in lower-tier cities, where users likely first experienced the Internet on a cellphone. Indeed, data bears out the strong correlation between online shopping and smartphone penetration since 2011 (See below). Faster and cheaper 4G network connections should help accelerate mobile usage.

Mobile Penetration Has Been and Will Be Leading Driver of Online Growth in China

Sources: Gartner (PC data & estimates), OVUM (smartphone data & estimates), CNNIC (online shoppers penetration), Morgan Stanley Research (online shoppers penetration estimates)

Another driver of eCommcerce growth in China: rural consumers hungry for goods. China’s megacities teem with shopping centers and retail markets both real and virtual. Not so much in the countryside—until every smartphone became a mobile mall. “Online retailers see the opportunity and are expanding in rural China, creating value,” says Lin.

China is aging and so are its consumers, with broad implications. Lin says companies need to align themselves to capture the needs of that “older” China. “We estimate the number of online shoppers will exceed 660 million by 2023, with half of the 330 million incremental online shoppers over 40 years old,” he adds. This class of “digital hybrid” consumer will account for a third of China’s online shopping population and potentially more than half of the spending.

To be sure, many challenges remain. Regional gaps can present logistical issues. Slow delivery, uneven service and substandard products could erode consumer trust. High costs and competition may mean low profits initially. Also, any extended macroeconomic slowdown could hit consumer demand more broadly.

Yet the opportunities for eCommerce abound. With China still in the midst of a digital revolution, leading companies can drive mass consumption, bridge cross-regional labor and income gaps, streamline supply and distribution value chains, use Big Data to manage logistics, provide sustainable growth for small-to-midsized enterprises and rural markets, and integrate online and offline commerce to accelerate an omni-channel retail experience.

Indeed, China’s eCommerce revolution is just beginning.

Morgan Stanley Research has reported extensively on the development and potential for eCommerce in China in its Blue Paper “eCommerce: China’s Consumption Growth Engine” (Nov 6, 2014). Explore more Ideas and Research, or contact your Morgan Stanley representative for the full report. Find a Financial Advisor to discuss your investment goals and strategy.