Chinese Middle Class and Millennials Driving Meteoric Growth in E-Commerce Market

In the past few years, China has surpassed the United States as the largest e-commerce market in the world. The Chinese e-commerce market is the fastest growing in the world (around 20% annually), meaning it is growing at roughly four times the rate of the market in the United States. Current data for the total annual size of the e-commerce market in China varies from around $400 billion to over $600 billion, and based on data from Statista, the retail e-commerce market in China could top $800 billion by 2021.

What Is Causing This Growth?

In China, 13.5% of all retail spending takes place in online marketplaces, a higher share than any other country in the world other than the United Kingdom. A recent study by McKinsey explains that e-commerce penetration beyond first-mover product categories, such as apparel, is a large contributing factor to e-commerce growth in the country. In addition, the rise of the middle class in China and an increase in the willingness of Chinese millennials to spend money have caused the e-commerce market to flourish.

Rising Middle Class

China is home to the most internet users in the world, a number expected to surpass one billion by 2020 according to a recent publication by China Daily. The Chinese middle class now constitutes around 300 million people and online shopping has led to a surge in demand for foreign products. This emerging consumer base has created huge opportunities for foreign exporters, with the value of cross-border products expected to exceed $150 billion by the year 2020. One of the largest growth areas has been in the smaller Chinese cities (Tier 3 and below). These cities now collectively spend more money online than the Tier 1 and Tier 2 cities due to their larger total population and are increasingly being targeted by online retailers. In response to this demand, the large online retailers are working to expand and improve distribution to these smaller cities to better capture the growing markets.

Chinese Millennials

The younger generation in China, particularly millennials, is significantly more active online than the older population and the more recent prosperity in China has changed the way these consumers evaluate and buy products. Consumer habits in China, which previously emphasized saving due to a more difficult economic and political landscape, have dramatically shifted as the younger population now find themselves with significant disposable income and an almost unlimited marketplace for products at the tip of their fingers. Social media has also shaped the way new Chinese consumers spend online. WeChat, one of the most popular social media platforms in China, is largely responsible for this shift. According to a recent survey done by McKinsey, “half of the digital consumers we surveyed use social media to do product research or get recommendations.” The widespread adoption of smartphones also means that Chinese customers can buy products almost instantly, not only through traditional internet sites but also directly through social media platforms. Of the WeChat users surveyed by McKinsey, 31% reported that they initiated a purchase through the WeChat platform.

Recent Political Impact

Recent political shifts by US president Donald Trump toward more amicable relations with China have alleviated some fears that the e-commerce market could suffer from trade restrictions or increased tensions between the two countries. President Trump recently met with the founder and CEO of Alibaba, Jack Ma, to discuss allowing small and medium-sized firms to sell through the Alibaba platform, hoping to create up to one million jobs through the partnership. Additionally, e-commerce tends to experience fewer licensing requirements and quicker customs clearance than traditional retail products. In a country with a growing middle class and number of millennials willing to spend money, it seems that the e-commerce market will continue to rapidly grow and will provide huge opportunities for vendors and distributors both domestically and abroad.

Matthew Kinney

MBA Candidate 2017