Chinese e-commerce's growing markets in US and beyond: Opportunities and challenges
While Chinese e-commerce platforms like Shein and Temu have been doing well in achieving fast and high growth in the US market, they face commercial and regulatory challenges too and would need to undertake several risk mitigation strategies.
While decoupling in supply chains of semiconductors and technology is making the news, in the e-commerce of consumer products, the opposite seems to be taking place. Chinese e-commerce companies such as Shein and Temu have been growing rapidly in the US and taking on entrenched e-commerce and retail companies.
According to Statista, the market share of Shein in the US fast fashion market grew from 18% in Mar 2020 to a whopping 40% in Mar 2022, taking market share from traditional players such as Zara, H&M and Forever 21. Temu, the US subsidiary of Pinduoduo, a group purchasing aggregator in China, launched in the US in September 2022 and reached 44.5 million unique visitors in just four months.
... leverage low-cost production and low-cost online retail to consumers.
The Chinese value proposition
The value proposition for these companies has been providing low-cost products, usually made in China, to price-conscious US consumers using an online, direct-to-consumer model, while using warehouses in the US to store and supply the products.
On the front end, there is the usual app and online shopping storefront which provides consumers with a broad range of products and recommendations based on data analysis. On the back end, orders are integrated with factories in China for order processing and fulfillment. The high degree of automation using information technology lowers operational costs, while the use of e-commerce avoids the costs of running retail stores.
Clearly, the Chinese newcomers have tapped into pent-up demand amongst consumers for lower-cost products to cope with high rates of inflation. Their innovative business models combine the fast fashion (frequent new product introductions to encourage return purchases) pioneered by Zara, and the direct-to-consumer model pioneered by Amazon, to leverage low-cost production and low-cost online retail to consumers.
Impressive start but slowing growth
Nonetheless, after the blistering start and explosive growth, growth rates have started to slow. The companies face commercial and regulatory hurdles which they would need to overcome in order to make their growth and market share sustainable for the longer term.
During the Covid period in 2020 and much of 2021, retail operations in much of the US and the world were affected by lockdowns, with a corresponding increase in the use of online shopping. According to a United Nations Conference on Trade and Development (UNCTAD) report on e-commerce, global online transactions grew by 50% to 100% in 2020. Such trends were likely to benefit e-commerce companies, including the Chinese ones, and could partly explain their growth at the expense of brick-and-mortar stores.
While still extremely impressive and enviable, Shein's growth has slowed from its eye-popping 250% growth in 2020 to 57% in 2021, 45% in 2022, and an expected 37% in 2025.
It is also not clear whether the low prices can continue. Low prices may also be meant to get market share and prices may eventually increase as the companies try to increase their profit margin. This would make the price gaps with their competitors smaller as well.
Wish.com, which started in 2011 and has a similar business model of matching buyers with low-cost sellers based primarily in China, has seen its share price drop by 98% from its peak after its IPO in 2020. Ironically, it has also lost market share to the likes of newcomer Temu.
While still extremely impressive and enviable, Shein's growth has slowed from its eye-popping 250% growth in 2020 to 57% in 2021, 45% in 2022, and an expected 37% in 2025.
Reflecting the cut-throat nature of the retail business, while Shein has surpassed Zara and H&M, it has itself lost in sales to Temu in the US in May this year, which is now seen as its biggest competitor.
Commercial and regulatory challenges
Moreover, with greater consumer awareness of environmental sustainability and the need to reduce a use-and-throw short product life cycle that has historically underpinned consumer product marketing, the fashion industry has also been adapting to circular economy trends. These trends include the use of recycled fabric materials, creating marketplaces for second-hand clothes, and making it more socially fashionable to be using the same wardrobe for longer periods of time.
These trends towards sustainable shopping are likely to reduce consumer demand for fast fashion, affecting the fashion industry as a whole. According to a UBS report in 2021, fast fashion retailers could face a 10% to 30% decline in revenues over the next five to ten years.
Other factors include regulatory concerns and ethical issues. Amid the rapid growth of these Chinese e-commerce companies, there have been calls for government regulation and hearings in the US to protect against the possibility of data security risks or unfair competition.
For example, just as in the case of TikTok, concerns have been raised over the China-backed brands' access to user data, and their possible engagement in unfair market practices. In the case of Shein, there have also been allegations, which Shein has denied, of using forced labour to reduce costs, and the use of cotton from the Xinjiang region in China.
Risk mitigation strategies
To address the regulatory concerns, the apps could probably do something like what TikTok has proposed - to allow for regular third-party audits on privacy and to set aside data and data centres in the US, separate and independent from China operations. However, it is not clear whether such privacy concerns can be assuaged as they stem from non-commercial considerations.
Shein has also put more emphasis on sustainability, pledging to reduce its carbon footprint and plastics usage. It has also introduced an online second hand marketplace in the US for its customers to buy and sell their used clothes.
In April this year, Shein announced plans to invest nearly US$150 million in Brazil, making the country its manufacturing and export hub for Latin America.
Another measure these companies have taken as part of their risk management strategy is to diversify outside of the US market into other countries. Shein is one of the most downloaded apps in Brazil and according to Statista, global downloads of the Shein app are highest in Brazil, with the US at number two.
In April this year, Shein announced plans to invest nearly US$150 million in Brazil, making the country its manufacturing and export hub for Latin America. This is not only based on importing from overseas, but also sourcing from local manufacturers in Brazil to create a faster response to consumer demand and reduce inventories. This will also help to reduce wastage, in line with the sustainability trends.
Temu also announced plans to expand into six countries in Europe - France, Italy, Germany, the Netherlands, Spain and the UK, as it aims to catch up with Shein and Bytedance.
Regardless of the challenges, it is clear that companies such as Shein and Temu have pioneered a new business model with a focus on technology integration, consumer data, and operations. This will force retail and e-commerce companies in the US and everywhere else that compete with these companies to adapt and improve their technology and operation strategies, balancing the need for low cost and efficiency with environmental sustainability. This would ultimately be beneficial for consumers.
The opinions expressed are those of the writer and do not represent the views and opinions of NUS.
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