Webinar Transcription Josh Halpern: Welcome, everybody, to another version of “Conversations from the Field – China.” We’re here today with Tony Shan from Alibaba talking about all things China market entry through ecommerce. Tony Shan is the head of Tmall Global & Kaola, the Americas and Alibaba Group. Tony, thanks for joining us. Tony Shan: Hi, Josh. Thank you for having me. Hello, everyone. Josh Halpern: We want to just talk to you about a few very tight topics, starting with, how does the Chinese market differ from the U.S. market? Tony Shan: I think I would like to set the stage to talk about the China market and tell you a little bit of the differences and key characteristics of the Chinese market and how it’s different than the U.S. market. First, in terms of retail market size, China is estimated to become the largest retail market, surpassing the U.S. in 2021 at 5.8 trillion USD. In terms of online, ecommerce, specifically, the online penetration of the China’s retail market is estimated to reach 44% by the end of this year. Comparatively speaking, in the U.S., it’s currently around 16% for the online penetration to total retail market. Josh Halpern: Just so I understand that, Tony, so you’re saying 44% of Chinese consumers will be buying things online versus about 16% in the U.S. Tony Shan: Yes, that’s correct. Josh Halpern: Now, obviously, a lot of this is changing during the current post-COVID dynamic, but it obviously shows there’s a definite difference in penetration. Tony Shan: For sure. And I think, given the current situation, it’s probably going to even increase more as customers feel more comfortable shopping online instead of going to offline stores. Josh Halpern: What are you seeing in terms of brick and mortar? Is there a big challenge right now with an overcapacity of retail that’s not being used in brick and mortar, and what China is planning to do about that? Tony Shan: In the past couple of months, definitely, because a lot of the offline channels have been closed. But at least from a China market perspective, it’s starting to reopen and recover. So, we don’t see a huge decline in terms of offline retail. We do think that the percent of ecommerce sales will continue to increase from an overall perspective. But I think from a brands perspective, China market sales should be a more omni-channel approach, thinking about both online and offline together. But I think in the near future, the offline channels are also recovering as well. Josh Halpern: Okay. So, how does the Chinese market differ from the U.S. market? Going a little deeper, could you talk to us about some of the trends you’re seeing? Tony Shan: Yeah. From a global ecommerce perspective, China is definitely currently the top ecommerce market in the world. This is the data from 2019. Total ecommerce sales in China was 1.9 trillion USD, and that is 3x of the U.S. ecommerce market. And then in terms of the number of internet users, there’s currently 840 million internet users in China, keeping in mind that the Chinese population is around 1.4 billion. So, there’s a lot more customers to get online as well. So, there’s more opportunities for ecommerce sales there. And then in terms of mobile penetration, we’re seeing that for ecommerce sales, 80% of people are actually buying on their phones, on their mobile phones. And that’s because people are just used to being able to buy anywhere, anytime. So, we’re seeing a huge increase in terms of online sales being generated on mobile. And then from a customer age perspective of internet users, I don’t think this is unexpected, but 72% of China internet users are aged 39 or under. These people are definitely more tech-savvy. They’re used to using mobile and going online and more in tune with different social media apps and channels as well. And then lastly, 400 million Chinese middle-class, that’s the largest middle-class in the world, and that is expected to grow to around 700 million. This is important because these people have more disposable income now and they’re looking for what we call consumption upgrades. So, they want to buy more global brands to showcase their individuality and also to be able to improve their lifestyle consumption as well. Josh Halpern: Now I remember Tony, when we used to do this analysis at the embassy in China and people would say, “Well, yeah, but their total income is not that high comparatively to other markets when you talk about middle class.” But what people need to realize is that they’re also not paying housing, they’re often living with their parents for a longer period of time. They’re not paying the schooling and the socialized medicine. So, a lot of that income that they have is expandable or is extra income on top of that. Correct? Tony Shan: Yeah. I think per capita it’s definitely lower compared to the U.S. market, and the U.S. population by, I think, in terms of spending, you know, things are also at a different level as well. So, just because they have more disposable income comparatively within the Chinese population to be able to buy more things and better things. Yeah. So, let’s talk a little bit more about the consumer profile. This is not specific to the current pandemic situation. This has been an emerging trend for a long time, especially for cross-border ecommerce. We’re generally seeing younger customers, still 55% of consumers of overseas products are born post-1990s. They’re the younger millennials and the generation Zs, they’re generally more in tune with global cultures, they’re social media savvy so they know what’s going on. They know what the newest trends are, and especially, like, the new hip and hot global brands they are definitely following and want to be able to buy them first to show that, you know, they know what’s going on, right? And then looking at penetrating into more areas. Traditionally, cross-border ecommerce has been heavily focused on the tier-one, tier-two cities because these people, again, have more disposable income and they can travel outside more globally. But now I think with the rise of the middle-class, more middle-class customers in China, and also the development and growth of domestic supply chain logistics services, we’re seeing more customers coming from rural and lower-tier cities. So, 60% of our new active customers, consumers are in these less developed areas. Josh Halpern: Yeah. So, not only are Chinese in the second-tier, third-tier cities not able to travel to the bigger cities to buy their product. Obviously, the people in the tier-one cities are no longer able to take flights and travel overseas. So, if you wanna have these cross-border products that the young consumer already knows about, you’re gonna have to buy them online and likely through a platform like Tmall Global. Tony Shan: It’s also very convenient. Like I said, mobile purchases are, you know, huge penetration, so they can buy it anytime, anywhere. It’s like just at home on their phones, they see what they like, they can shop right away, and then it gets delivered to their doorsteps, like, in a very short amount of time. Josh Halpern: What’s the general delivery time now for domestic and then for cross-border? Do you know? Tony Shan: For domestic, I think, like, if you’re in the tier-one, tier-two cities, sometimes it could be there within hours. But generally speaking, if a product is in a bonded warehouse for cross-border, a consumer should receive it within two to three days. Josh Halpern: Now when you say bonded warehouse, you’re saying, if it’s already in a bonded warehouse, let’s say in Hong Kong, Ningbo, somewhere else in China or in Asia, it’s two to three days. Tony Shan: If it’s in an overseas warehouse, let’s say it’s in a warehouse here in LA, for example, for our technology, logistics services, it’s been somewhere between five to seven days. Currently, it’s a little bit longer just because of reduction in flights, but we’re still seeing, like, on average, seven to eight days if it’s coming from abroad. Josh Halpern: So, if you have a warehouse in LA or if you’re shipping to Alibaba’s warehouse in LA, that’s from LA to the direct consumer’s doorstep, it’s five to seven days on normal circumstances. Tony Shan: Yes. Currently, I would say at least the expectation we’re setting with the customers is between 7 to 10 days, so within 10 days. Josh Halpern: Okay, great. So, it’s moved from at least around five days. It’s almost doubled in terms of delivery time because of the current crisis, but that’s probably gonna be reduced as things start to flow. Tony Shan: And I think it’s also, like, we want to under-promise and over-deliver. So, at least on our product pages we say within 10 days, but it has been much shorter than that. Josh Halpern: Growth categories. Tony Shan: In terms of technology and beauty tools we’re seeing double 11, double 12, this helmet that helps anti-hair loss where you wear to help you keep your hair has been a huge trend in China. And then we’re also seeing men’s skincare. Traditionally more female cosmetics and beauty has been the dominant category within cross-border. But now we’re seeing men’s skincare, people taking care … guys taking care of their skins as well. So, that’s an emerging category. And then maternity products. I think we’re all expecting to see a huge influx of newborns coming this fall and winter, at least first-time parents. So, maternity products are something that we are seeing increased as well. And then pet products too. Now, people during the pandemic have been pulled up at home and quarantined at home. They’re spending more time with their pets, dogs or cats. So, they’re buying dog food and cat treats and supplements for pets as well. So, we’re seeing that as an emerging category coming out of this. And then sleeping products. I’m sure everyone’s pretty much stressed out, you know, with balancing work and with family and the uncertainty of the current situation. So, sleeping aid and sleeping products has been a high growth category as well. Josh Halpern: Very cool. Tony Shan: Okay. And then retail is now entertainment in China. It’s not just transaction-based thing anymore. It’s very engaging. As you can see, like, sharing recommendations and, like, people are posting reviews and telling their friends what’s working and what’s not. And within our apps, you can explore different things. And we have our personalization as well. We show you what you think you would like. And then from a brand and then KOL perspective, doing live streaming and short videos to keep consumers engaged. And that’s also a popular way for people to kind of view the products and learn more about the products, especially now they cannot interact with it personally from an offline basis. So, all of these together, I think, it’s really changing kind of how people are shopping and how brands are engaging with the consumers. And then as you can see is Chinese social media becoming shopping guides, like, people are showing what they’re buying, how things are being used. This is a new way of marketing as well to get more people to know about the brands and the products. A lot of these are influencers or even just normal customers, like, wanting to post about the experience using and buying the products. So, social media within China has been, I would say, very important in terms of how brands are engaging with their current consumers and also new potential customers as well. Josh Halpern: I think it’s important here to note that Chinese consumers, in general, trust each other more than they trust even the brand messaging. And traditionally, that’s been a case where you trust your nuclear family or you trust the people closest to you. Right? So, the manifestation here of social media driving, purchasing, and then micro-influencer/friend in your community certainly translates … not that it doesn’t translate elsewhere, but it’s certainly magnified in China, would you say? Tony Shan: Definitely. And I think Chinese consumers are also more likely to write reviews online as well. I think here, you know, if you’re buying something on Amazon, for example, you get the sellers emailing you, wanting you to write reviews, but I think the engagement is a lot lower, but in China, you don’t even need to reach out to them to write reviews. If they like a product or if they don’t like a product, they would automatically go and share their views. Josh Halpern: And stay away from any politics here, but the reality is if you have the ability to vote with your fingers about what your belief is around a product and you have an ability to express yourself, it’s one of these interesting, almost democratized perspectives where you get to actually say what you feel about something and be heard. Tony Shan: For sure. And then it’s up to the brands to be able to either, you know, continue that opinion and expand it and gain more customers or, you know, if it’s a negative experience, the brands have to engage with them right away to hopefully make up that mishap. Josh Halpern: Sure. My sense is there’s never an opportunity to ignore feedback because you never know who it is and where that growth is. And it can be exponential, right? Tony Shan: Definitely, yeah. Josh Halpern: To that end, how does the U.S. company manage that? Is it usually through a third-party that manages your WeChat or your social media presence? Tony Shan: Within our platform, we have what we call TPs, or trade partners. These are service providers that have local teams in China. They know about the market, they have experience working with the various ecommerce platforms within China. So, this team is really the brand’s local team to be able to manage, like, marketing, messaging, and customer service. Josh Halpern: To find those teams when it relates to Tmall cross-border, how does that work? Tony Shan: We have a list of certified Tmall partners that are on my team here in the U.S., and also we have global teams that can help brands to match various TPs, meaning, we can provide you with 10 TPs that we think would be suitable for your size and your category, and then you can engage with them to see what their experiences are and what they can offer. And then these TPs will be the ones that will ultimately operate your brand within our platform, but it can also help you with the market as a whole because a lot of these TPs also work cross-platforms as well. We talked a lot about influencers and these KOLs. There’s really a new way, I think, in the last couple years in China for these key opinion leaders to have a huge fan followings, like, people have millions of followers in China, and anything they sell, they talk about, they use, there’s a huge following and it has a lot of influence, like, really influencers to be able to get more customers and more consumers to kind of engage in and buy these products. So, they utilize these live streams to talk about the products and sell these products. A lot of times things could be sold out in seconds or minutes. So, it’s really incredible what their impact can be in terms of, like, brand sales. Josh Halpern: And here what I see is the Tmall truck behind this influencer. So, there’s clearly a collaboration actively between the two. Correct? Tony Shan: Yes. So, we have a lot of influencers that we work with closely within our platform. Taobao, which is our C2C platform within Alibaba Group, has a division that is called Taobao Live Stream. So, that’s a platform that we utilize for all of our B2C ecommerce platforms to engage with these influencers to do live streams via this Taobao Live to showcase the products that we sell within the Tmall Global platform. Josh Halpern: How do the economics work on this? If I’m a brand, I go through my TP who has a relationship with you and they pay a percentage out, or how does that work? Tony Shan: Yeah. So, these influencers are sometimes actually very selective in terms of the products that they want to market because they kind of had to fit their image and their audience as well because they are commission-based. And the more popular ones, it’s more of, like, a fixed fee to do a live stream and then they get a commission on top of the products that they sell, the number of units. So, they are selective in terms of what products they want to push. And also these products needs to have very compelling pricing as well for them to be able to generate a lot of volumes through these live streams. So, yeah. So, the TP can definitely manage that with the brand, and then the TP will work with our Tmall Global platform operations team and marketing teams to work with these influencers for specific events. Josh Halpern: Are the final prices to the consumer in China the same as the MSRP in the U.S., higher or lower? Tony Shan: I would say generally it’s similar or higher because we do have to account for this cross-border tax and also the logistics as well. I would say, generally speaking, the MSRP in China is about 20% higher than the MSRP here in the U.S. Josh Halpern: Okay. Very interesting. Tony Shan: We also don’t want to have too high of a price in China because that would also encourage a lot of the gray market activities that you mentioned earlier because people can buy here in the U.S. and then sell it at a lower price in China, then that kind of disrupts the entire market pricing. Josh Halpern: Sure. So, be careful, obviously, for those U.S. brands out there that are thinking of just marking up that product in China. There are virtual mailboxes, people can buy stuff on Amazon and send it to North Carolina and have it sent to their home in China, and all of it looks like a domestic sale and they’re buying it for similar prices plus shipping. So, again, be careful about that.