Hello, this Jim Tompkins, President & CEO of Tompkins International. I am pleased to be back with you today as it has been quite awhile since I have had a chance to chat with you on this podcast series. Today I am very excited to welcome a very special guest from our Asian office, Jim Serstad. Before I introduce Jim, I want to touch a little bit on what’s going on with China.
China today is the second largest market in the world for e-commerce. In year 2015, it is predicted that the total e-commerce in the world will be 1.4 trillion (380 billon of which will come from China and only 260 billion will be coming from the US). So we’re talking about an explosion of e-commerce in China as well as the explosion across retail.
I’ll be coming back to you in a few weeks with a presentation on retail at a crossroads. It’s really exciting to see what’s going on in retail. And today we’re just going to talk about what’s going on with the e-commerce portion in China.
So I’m very pleased to have Jim Serstad with us today. Jim is a fellow Boilermaker, being an electrical engineer and having a master’s in business administration from the Krannert School. Jim has spent 10 years in China and has worked in a variety of supply chain activities. So Jim is here today to give us a perception on this tremendous explosion of e-commerce in China.
Jim, welcome, glad to have you with us. Can you comment on the impact that the growth of e-commerce is having on distribution in China?
Yeah Jim, there are about 9 large online retailers in China who are all fighting to stay in the game, and that is leading to some extreme efforts at client satisfaction. They can’t compete on price, because they are all offering basically the same low prices, so they have to differentiate on service. And, the key measure they are looking at is delivery frequency.
One e-retailer we visited recently is delivering 3 times a day from their distribution center to their “depots” that they have around the city. What that means is if you order something in the morning, you’ll get it in the afternoon. If you order something in the evening, you’ll have it in the morning.
In fact, a friend of mine was on his way to his computer one time to see if he could cancel an order when the door rang with his delivery.
Of course there is only so much they can do to deliver faster, so they are looking for other ways to differentiate the experience such as allowing the buyer to cancel an order. One e-commerce site will hold an order for a half-hour in the warehouse to allow the customer that half-hour to cancel an order.
The goal in all of this hyper-competition is to be the first and biggest open platform; that is, to have a distribution network that other smaller e-retailers can use for a fee. And, whoever can build this sort of nationwide logistics platform with all the warehousing and logistics in place — They will be holding the holy grail of e-commerce.
So there is a lot at stake here, and that’s what the competition is all about.
Jim, you mentioned bicycle delivery; describe how they handle the “last mile” of delivery.
This last mile of delivery, it’s fascinating in China. In North America we are accustomed to seeing the UPS person come to our door, or some similarly recognizable delivery person. But logistics in China is extremely fragmented; perhaps the largest logistics provider has less than 1% of the market, so the e-retailers have had to develop their own distribution network.
It might involve a large warehouse for a metropolitan area. It might then have several small depots within that area, maybe a couple 100 km radius. Deliveries are made to the depots regularly throughout the day, maybe twice or three times a day where orders are then taken by bicycle, motorcycle or 3-wheeled carts or whatever means they have.
So with a system like this, there are huge differences in service levels throughout the country, if there is any coverage at all. There are a lot of areas in China that aren’t covered. They will typically build their network and outsource their logistics in 3rd or 4th tier cities, but the outsource part is actually a small part of their business.
360buy.com says they do 70% of their deliveries within their own network. That’s really the only way they can get the service level they need — is to do it themselves. In the 3rd & 4th tier-city, logistics providers are very fragmented and inconsistent, and so the service levels are very poor. Wherever they are, they are developing some services which are unique to e-commerce. In fact, some are doing a try-on delivery. You get the clothes, they don’t fit and you send them back with the delivery person or night delivery or whatever other service is unique to e-commerce that would qualify them to be a service partner with somebody like 360buy.
How sophisticated are these distribution centers in terms of automation and technology?
Naturally we’re going to see a pretty low level of automation because of the low cost of labor in China. One warehouse we visited was operating just fine with operators using shopping carts for picking and people were on rollerblades and they had a self-developed warehouse management system.
It was working fine, right now for where they are, and they actually like to develop things themselves. They have a strong IT department, so they’ll develop a warehouse management system that they feel has specifically the capability they need even if they don’t have logistics or process expertise. They have IT expertise, but they still feel they can develop better themselves.
The question that we would have is whether these systems will be able to sustain the growth they are expecting. If they are looking at a 200% growth in orders in the next couple of years, they are not going to be able to handle the throughput just by putting more operators in the warehouse. They physically won’t be able to have all of them picking at the same time and will need some major redesign, which perhaps their home-grown WMS might not be able to accommodate. If they need to do wave picking or batch picking or some combination, their systems may not be prepared to handle that.
On top of that, this one e-retailer that we were talking about 200 percent growth in the next couple of years, they were also talking about expanding their number of SKUs from 6000 to 20,000 in the same period of time. But right now they don’t have effective inventory policies for fast-moving and slow moving inventory, and they’re going to need that if they’re going to experience this kind of growth.
In terms of material handling equipment (MHE), we see almost none in e-commerce warehouses; what is going to give rise to more MHE will be their concern for customer service. It’s probably not going to be a cost savings calculation. They want to be able to deliver things on time and the right product so that will be the driver of MHE in the near future.
What are some of the strengths and weakness of e-commerce in China relative to more developed economies?
We can already see that China has some advantages for e-commerce such as the denser population which allows for shorter delivery routes and therefore more frequent deliveries. What this has done is actually raised the consumer’s expectations of delivery service; they are actually much higher in China. One concept that is not doing well in China is omnichannel. For that matter even multichannel is not doing well.
The few retailers that have both an online and physical presence typically have no integration between the two, at all. In the US, 6 of the 10 top e-commerce companies also have a physical retail presence, whereas in China, there is almost no physical presence among any of the top online companies. This is turning into somewhat of an advantage for them as they move into remote areas, because they are actually able to move in areas where the goods they offer are not found in any stores there. That allows them to be the first in the market with particular goods and allows them to get market share before the physical retailers arrive.
Another advantage in China is that new entrants of e-commerce find it easier to get in using the services of established providers. In the US, your top player is B2C, but in China it C2C: it’s Taobao, and Taobao has over 70% market share. It’s unique to start using Taobao, anyone can do it from the comfort of their living rooms, and businesses when they’re ready to move into B2C find it very easy to use Taobao — not highly regulated at all, they don’t have to pay taxes, so actually barriers to entry are quite low.
They also have a B2C business called Tmall, but it is much smaller business than their C2C business and it is technically B2B2C. So companies that use their products use Taobao warehouses and have a web presence there. So there is an evolution from C2C to B2C; the point being that the barriers to entry into ecommerce are relatively low. It’s easy for someone to start as a consumer, move into it and for small businesses to use others’ platforms to enter into e-commerce. That’s creating a lot more e-commerce activities in small start-ups.
How is e-commerce changing that perception?
E-commerce is a complete game-changer for customer service in China. Customer service has always lagged in China and has seen only incremental improvement over the years up to now. But, e-commerce is a different game, because the stakes are very clear: people will hop to a different web site if they are unhappy at all. And usually the last web site they ordered from will be the one they go back to. And you have the ease of rating vendors online, and ease of switching websites. It elevates the importance of customer service to levels we have never seen in China.
One particular area of significant change is customer returns. Not too long ago returns were unheard of in China. When I first moved to China I was puzzled by people at the stores who would take their product out of the box, plug it in, try it out, look at it, examine it well, then put it back in the box and take it home. If you can’t return something, you learn to examine it, and I of course, learned that the hard way. I brought home more than one defective toaster or whatever appliance before I learned that they wouldn’t take it back even if it was defective.
But online has completely changed return policies. They had to. Returns are still difficult with some items like personal electronics, but simpler items like apparel are no problem to return. So learning to handle reverse logistics is a new thing, but they have to have it and have had to learn it quickly and they’re doing well with it. Customer service, — yes — by all means e-commerce has completely changed the game of customer service in China.
Thank you, Jim. It’s extremely important that we understand that not only e-commerce, but retail across the board is becoming global – so we understand what’s going on in places like China, particularly with the absolute explosion in e-commerce. It’s really important that we factor that into our equation as we think in the future of retail for your company.
Thanks a lot, glad to be with you today. Look forward to speaking with you again real soon.