Is E-Commerce Ready for China?

Headlines and airwaves crackled with hyperbole following the U.S. House of Representatives vote last week to extend permanent normal trade relations to China, as analysts peppered their discussions with enthusiastic speculation about how a new era of international trade could help keep the high-tech juggernaut alive.

Technology companies are already unveiling plans to tackle the world’s largest market. Within hours of the House vote, Network Solutions announced that it would offer 300 free and thousands of discounted Web domains to the Chinese government. Although Network Solutions said it was making a gesture of “goodwill,” the move clearly sticks the company’s proverbial foot in the suddenly ajar door.

Not missing a beat, Microsoft said it would sink $90 million (US$) into marketing in the country this year, evidently in the hope that expanded sales in China will boost its bottom line and bolster company stock under pressure from the Justice Department’s heavy boot.

There is no question that the Chinese market is an awesome opportunity. However, the rush to pour marketing and sales resources into the country, and even to construct new manufacturing facilities — as computer company Dell plans to do — seems to be based on the flawed assumption that China is essential to support adequate growth for the new economy in the United States and Europe. That is a short-sighted view.

Blinded by Opportunity

There is an ocean of evidence showing that e-commerce has yet to make a significant dent in existing markets where the Internet infrastructure is already in place.

This week, the U.S. Department of Commerce released figures showing that while e-commerce continues to grow — reaching $5.26 billion in the first quarter — it still makes up less than 1 percent of all consumer sales.

That means 99 percent of sales in the United States alone — or more than $700 billion a year — are still untapped by Internet firms. Yet many companies are essentially reallocating assets away from the domestic market, viewing it as a slow-growth proposition.

Part of this trend is based on the desire to re-experience the meteoric growth that shareholders and venture capitalists enjoyed in the early days of the high-tech revolution. When e-commerce was new, triple digit annual sales growth was common for the flashier startups. Now, as the industry begins to mature, and some of those companies are experiencing a mere 10 percent or so of growth, their backers are asking tough questions.

Clearly, China can and will provide some firms with eye-popping quarter-to-quarter growth stats in the next few years. Opening up any new market can do wonders for top line growth. And China is no ordinary new market, by any stretch of the imagination.

No Easy Road

There are plenty of drawbacks to doing business in China, though. Most of the country’s one billion-strong population is scattered across remote, agricultural areas that are years or even decades away from being wired. In essence, they are light years away from taking part in the new economy.

Still, it seems to me that the e-commerce companies that go after Chinese sales may be choosing a relatively easy, if misguided, route. No — it will not be easy to untangle governmental red tape, to overcome language barriers, or to clear the technological standards hurdles that are currently impediments to doing business in China.

But the problems that threaten the growth of e-commerce in established markets are even more vexing. There are many complicated issues, but for business-to-consumer (B2C) sites, the thorny twins of security and privacy top the list.

Even if all available resources were laser-focused, it would probably still take years and millions of dollars to satisfy regulators and the online public that the industry has a solution in hand for either of these conundrums.

Then there is the gap in access to the Internet. Even the governments and businesses that are now declaring the digital divide to be a top priority are hard-pressed to solve this problem. If it slips in importance, forget it.

Tackling the Tough Issues

I am not arguing against investing in China. The long range prospects are impossible to ignore and the Internet can only benefit by including another huge segment of the planet in its embrace.

But think of the upside to wrestling just one of the existing e-commerce problems to the ground first. A $700 billion carrot should be incentive enough for companies to defeat the menaces at home before they rush to China, where the same persistent problems will almost certainly rear their heads again after a couple of honeymoon years — as bigger, more dangerous threats.

The honeymoon is over in North America, and maybe in Europe too. Now the real work of the e-commerce relationship with consumers begins. It would be easy to be distracted by China and all that the country seems to offer. But remember what happened to those sailors who followed the songs of sirens instead of pushing on to their voyage’s original destination?

They crashed on the rocks.