China's e-commerce market continues to grow by leaps and bounds. The market grew 120 percent between 2003 and 2011 compared with just 17 percent in the US over the same time, according to global consultancy firm McKinsey. It forecast that China's market could be worth between $420 billion and $650 billion a year by 2020.
More specifically, last year online sales revenue in China was put at between $190 billion and $210 billion, only $10 billion behind the US market and growing much more quickly.
This incredible surge has been aided in no small way by the annual consumption bonanza that takes place on so-called Single's Day, Nov 11. E-commerce companies in China have turned it into the world's biggest online shopping day with a plethora of promotional incentives, including deep discounts.
On Single's Day this year the record for e-commerce sales was broken as early as lunchtime. At precisely 1:04 pm on Nov 11, sales on Alibaba, China's largest e-commerce group, had reached $3.1 billion, around double the sales recorded over the whole of Cyber Monday after Thanksgiving in the US last year.
By midnight on the recent Single's Day, Alibaba's sales had risen to $5.7 billion, a signal that China's e-commerce market is well on the way to bypassing the US and becoming the largest in the world.
As China has been rising to become the world's largest e-commerce market, not a single European competitor has surfaced to challenge the Chinese providers. Why not, and what challenges await European e-commerce players if penetrating China's burgeoning e-commerce market is to be achieved?
China's e-commerce market is dominated, almost monopolized, by Alibaba through its Taobao site, which has a 90 percent market share.
However, Chinese online retailers are also in the ascendancy, and competing with Alibaba on discounts. This trend may represent the market opening that European entrants may seek to exploit.
Recent research indicates that four out of five Chinese have increased the proportion of online purchases they made via business-to-consumer platforms over the past two years, further evidence of a decline in Taobao's dominance.
Another challenge to Alibaba's virtual monopoly is the change in online shoppers' buying from desktop and laptop computers to smartphones and tablets. It is estimated that about one-fifth of Chinese consumers now buy things using their smartphones. About half of all shoppers say they expect that to rise.
In this area it is Tencent, China's biggest Internet group with market capitalization of $100 billion, and the third-biggest e-commerce company in China, that represents Alibaba's biggest rival.
It is precisely this more fragmented business-to-consumer market that offers European e-commerce providers quick market penetration if they can take over one or more of China's smaller providers.
Recent announcements by China's central government, following the Third Plenum, should serve as encouragement generally for European competitors' market penetration in China through acquisition. A more liberal, marketized Chinese business environment appears to be an unstoppable trend.
In the business-to-consumer market, even although Alibaba's Tmall site enjoys a commanding 50 percent market share, smaller Chinese players are emerging from its shadow. 360 Buy, also known as Jingdong, is Tmall's closest competitor, with a 20 percent market share in China.
Further competition is forecast, and only Tmall and two of its competitors are profitable at present.
In addition, Alibaba may soon fall victim to its domestic dominance with its market stranglehold loosened as the government seeks to create a more competitive private sector.
As a result, China's smaller e-commerce providers are ripe for takeover - and the government is less and less likely to oppose cross-border acquisitions.
While growth through acquisition is highly attractive to those in the European e-commerce industry, it is clearly not without risk. Not least of the challenges is due diligence, murky at the best of times. Many of China's smaller e-commerce firms may not yet approach profitability, but future earnings potential and established brand awareness levels should combine to justify sizeable financial value. Quantifying intangible brand value is never easy, especially with a new and emerging industry and a very different cultural environment.
Once due diligence is complete and a takeover bid is proffered and then accepted, the real challenges begin to emerge for very different companies from very different national, and quite possibly corporate, cultures.
So if European e-commerce firms are to succeed in buying smaller Chinese providers, they need to carefully screen and financially value potential takeover targets, then meticulously plan and implement cultural convergence between acquirer and acquired.
An ethnocentric mindset, all too prevalent in many European companies, adds to the likelihood of failure and accounts for the single biggest reason behind most failed cross-border takeovers. E-commerce and technology providers generally tend also to be dominated by extremely savvy technophiles who often lack the required communications and cultural awareness skills necessary to succeed in a multicultural working environment.
Expansion of the European e-commerce industry, especially into Asia and China's very different corporate and national cultural environment, therefore require rapid and intensive cross-cultural understanding and communication training and substantially developing the skills needed to work effectively in very different cultural environments
Skills in managing across cultures are key, but so is a decisive and ruthless approach with speed of takeover and the consequent post-acquisition takeover, crucial if European firms are to exploit early-mover advantage in China's e-commerce market. Takeover targets will not remain ripe for much longer, such are the potential spoils for the aggressive and acquisitive new entrants.
Finally and crucially for Europe's e-commerce companies, it is imperative that technology and technological know-how not dominate in recruitment and selection and, above all, elevation to senior management positions. Expansion across different cultural environments, particularly in China, will require an extremely open mind, patience and genuine passion for understanding different national and corporate cultural environments. Development in this direction and technology know-how are often mutually exclusive.
European e-commerce companies must, therefore, move very quickly not just to screen, value and acquire China's smaller industry players but must also move perhaps even more decisively to recruit, train and promote those natural cultural ambassadors into key decision-making positions.
The author is a visiting professor at the University of International Business and Economics in Beijing and a senior lecturer on marketing at Southampton Solent University's School of Business. The views do not necessarily reflect those of China Daily.
