Regarding the development of e-commerce in China, Anbound’s chief researcher Chan Kung has his own unique opinion. As early as a decade ago, when e-commerce just started, Chan Kung said in e-commerce is an inefficient business model, and he still holds that to be true today.
E-commerce has a lot of hidden costs that are not shown; the first being the labor cost. Currently, the couriers in the franchise stores do not enjoy the insurance they deserve and they are treated as temporary workers; for this reason, they are constantly asking for higher wages. If there is no increase of wages, there will be no basic guarantee for their livelihood, therefore e-commerce’s labor cost will further increase rapidly in the future. Second, institutional costs become higher. Incomplete statistics show that institutional costs have accounted for 12.6% of the logistics industry, far above the normal standard of 4%. This is just the cost that can be seen, and there are more institutional costs that remain undetectable. For instance, there are more than 70 administrative approvals, the costs behind the process can be high. The third and most serious is that the logistics costs are an important part of the commercial circulation, and the costs are rising. The mode of e-commerce itself stimulates consumers and transforms a single consumption into multiple ones, which means that it will also transform a one-time logistics into multiple times. For example, a person might buy underwear, shirts, and pants in different occasions, instead of just buying that all at the same time at once. Other items like office supplies would take up more costs of logistics and this is in fact quite uneconomical; all of this will ultimately be reflected in the total cost of the business model of e-commerce. The seemingly convenient e-commerce will be found out to be not quite an efficient business model, but an unsustainable one.
Why then, is e-commerce still being encouraged now? Why do the Chinese government and the market fail to see the drawbacks of this business model?
First, the Chinese government provides subsidies. Although the logistics cost of e-commerce has risen, it still enjoys the state's logistics subsidies. China's expressways provide a complete transportation network, which is, in fact, a subsidy for business models; the cost of high-density logistics that transport e-commerce goods are the same as other vehicles. Second, the cost of urbanization has devastated street and street businesses; this is an occasional opportunity for e-commerce to be generated on a large scale in China, but it is also a policy subsidy. Unfortunately, this is a marginal effect of a wrong policy. Once this urbanization policy is reversed, for example, housing prices begin to stabilize or even decline, then the so-called “efficiency” of e-commerce will begin to subvert. Third, the Chinese government provides direct policy subsidies. Though this subsidy is not directly handing out money, in reality it is quite similar. Since e-commerce has the characteristics of a natural monopoly industry, it is difficult to compete after a platform is established. The government recognizes this, yet it does not adopt an anti-monopoly policy; instead, it provides various preferential conditions to the major e-commerce platforms. Such treatments are far more favorable compares with the conditions to attract foreign investment. These preferential treatments include land, taxes, and even a high amount of direct investment and financial support. Fourth, other conditions such as labor and taxes will also reduce the cost on the surface.
The current success of e-commerce is because a large number of hidden costs are not shown, and at the same time it enjoys high direct and indirect, superficial and implicit subsidies and support from the government, therefore it appears to enjoy relative cost advantages, making it as if it is the business model for the future. Truth to be told, if the trend is not followed blindly, and the situation being analyzed rationally, those who are business management scholars or real analysts would see this business model has amazing potential costs and great uncertainty in the future; it is by no means an efficient business model.
The last question that must be answered is, can technology solve the problems? Can the consumption pattern be changed?
These are in fact, simple questions. The application of technology to e-commerce is basically a gimmick. Indeed, there are now drones shipping, but the cost will certainly be higher. Would a consumer buy a single pencil that comes with the cost of RMB 300 transportation fee? Will people be willing to support such business? China's urban density is quite high, can numerous drones flying in the sky become a reality?
As for the change in consumption patterns, we can only say that it is probable; under the condition that the e-commerce platform provides incentives, there will be a certain effect though it will not be obvious. This is because the change in consumer behavior must be based on the quality of the culture. The consumption of nouveaux riches has its own pattern; those with bad memory and lack of planning ability, their consumption behavior would be difficult to change.
Therefore, the state's current support for e-commerce is unreasonable. E-commerce itself is not an efficient business model, but rather an unsustainable business model. Smart e-commerce entrepreneurs would seek for transformation, and the transformation, will the policy department still support them? Understanding all of this will have a major impact on the formation of the country's consumption policy. Hence, things should be done with caution. In the future, perhaps in a few years, China's street business will recover. With urbanization and the reality of the aging population, this is very likely.
Final analysis conclusion:
E-commerce itself is not an efficient business model, nor a sustainable one. Smart e-commerce entrepreneurs have begun to transform, and government policies should also be transformed.
