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E-Commerce opportunities in Modern Business China

   As the world’s most populous nation with approximately 1.3 billion people, it is no doubt that China has a huge market potential for e-commerce. The large absolute gross domestic product of US$1305.9 million seems encouraging. Apart from that, the main indicators for e-commerce imply a rapid growth[1]. These indicators include number of internet users, personal computers as well as telephone lines and cellular subscribers. The number of internet users stand at 59.1 million which is approximately 2.8 times the size of the total Australian population. However, when compared to the total Chinese population, these numbers become relatively small.

   As China is a large country with a low population density, distribution and delivery problems are rampant (Gibbs, Kraemer and Dedrick 2003). This is due to underdeveloped infrastructure in the central and western inner regions in particular. Currently, delivery of goods purchased online is done only in urban areas through postal parcel and home delivery[2].

   On a brighter note, it is said that there is a high level of IT literacy in China amongst the younger generation. This provides ease of access to technology. On the other hand, the resistance of the older generation towards the use of computers and the Internet might prove to be a major challenge for e-commerce as China experience the aging population phenomenon in the near future. This is due to the prevalence of the one child policy and the increased life expectancy along with higher standard of living.

   For a country which has only gain internet access since 1994, China has been achieving superb growth in this area due to strong support from the government. The speed of China’s internet infrastructure has been improving rapidly in terms of international bandwidth to the internet and domestic connections between China’s internet backbone providers (Clark 2000). This is mainly due to the emergence of competition as the government gave approvals to two new internet backbone providers – UniNet and CNCNET.

   On the other hand, Chinese companies are not doing much to improve their technological infrastructure, Amongst the 15,000 Chinese enterprises, there are only approximately 10% that has basic IT capabilities for conducting e-commerce; 70% are half way while the remaining 20% are just disqualified (Lu n.d.). A major US consultancy echoed this view by adding that Chinese companies including large Multinational Companies (MNCs) spend less that 1% on IT per year (Sliwa 2001). This is a major reason for the lack of successful e-commerce corporations in China. The high cost of implementing technological infrastructure is seen as a major hindrance for many local companies.

   part from that, banks, merchants and a new breed of payment intermediaries have started to utilize the inter bank online payment based on the Golden Card Project (The integration of payment system launched in 1994 by the People’s Bank of China). Larger banks are still reluctant to participate in this system although smaller banks are starting to do so. The participation of all financial institutions are crucial towards the implementation of a more uniformed online payment system for e-commerce.

Economic and Financial Resources
China will not be able to support e-commerce solely through its domestic market due to the relatively low GDP per capita of US$1,017. However, due to the stringent government controls, the availability of financial resources is fairly limited in China. The good news is that, foreign investment has started to roll in upon China’s accession into World Trade Organization (WTO) in 2001. In 2002, contracted foreign direct investment increased by 19.6% to US$82.8 billion. Foreigners are allowed to obtain a 49% ownership in a Chinese internet related company while the remaining 51% is to be held by Chinese investors (Dembeck 2000). The availability of financial resources to support online businesses and startups is an enabler of e-commerce.

Business Culture
China is best known for its relationship based management in business – Guanxi which comprise of both interpersonal and inter-organizational networks (Lo, Everett and Wong 2002). As a key element in doing business, Guanxi with government and firms is vital in the providing of information and cooperation in business. Guanxi is often built up through face to face relationships as Chinese place strong value on personal relationships. Thus, e-commerce posed a major threat as anyonymous online relationships threaten to undermine established interpersonal networks (Gibbs et al. 2003).

   Due to this reason, many of the traditional retail networks in China are resisting to go online. However, many of them are utilizing click and mortar hybrids which integrate real world bricks and mortar establishment with strong online presence in order to keep up with the latest trends while maintaining good customer rapport.

   On the other hand, some of the successful e-commerce industry pioneers anticipates that this modern and non-traditional industry might change business practices in China to a certain extend.

Consumer Preference
As the world’s largest nation, diversity is inevitable and satisfying consumers according to their preferences might pose to be a major challenge for e-commerce companies in China.

   Firstly, variability of online payment methods exists in China. Due to the lack of affluent consumers with credit cards, online merchants are accepting other payment methods including debit cards, bank transfers as well as post office transfer. However, the traditional method processed offline in the form of cash on delivery posed to be the most popular amongst Chinese consumers[3]. A lot of successful e-commerce companies in China such as BOL China, GE China and Sohu.com have been practicing this method although it is not very cost effective (Sliwa 2001).

   Secondly, consumer reservations about online purchase also differ. Major concerns are in regards of quality of products, after service and credit of the producer as well as security and privacy issues[4]. These concerns might be due to the fact that consumers are already used to traditional brick and mortar retailing methods. However, these concerns are also caused by the lack of e-commerce legislations in the areas of consumer protection and privacy. On a positive note, more than 60% of the survey respondents plan to make an online purchase in the next year[5].
Another major consumer preference in China is in terms of local content and language. This is exemplified in the success of many local Chinese websites such as Eachnet.com-China’s biggest online auction site, sohu.com- Web portal and meetchina.com –B2B site.

National Policies
China’s key policy factors in this analysis are market liberalization after its accession to the WTO, e-commerce legislations as well as overall government intervention.

Market Liberalization
Prior to WTO, foreign investment in e-commerce is prohibited in China. Therefore, it is said that the accession to the WTO opens doors to direct foreign investment in the Internet. Foreign Service suppliers may hold up to a 30% foreign equity share upon accession, 49% after 1 year and 50% after 2 years (Wang 2001). However, foreign companies will have to joint venture with a local partner. These service suppliers will be able to provide an array of services such as e-mail, online information and database retrieval, Electronic Data Interchange (EDI) as well as online information and data processing (Bath 2000).

   Besides that, accession to the WTO will address a major problem in the areas of distribution and packaging currently faced by internet companies in China. By permiting foreign investment in the areas of distribution, packaging as well as road and rail transport, the efficiency and reliability of distribution will be increased especially in the previously hard to reach areas.

   Another significant event due to the market liberalization in China is the telecommunications reform. China’s WTO offer of 49% foreign direct investment in China Telecom (the largest ISP and backbone operator owned by the government) is seen as a welcoming move by some but others view that strong central government either directly or indirectly will still exist (Clarke, Glinow, Schoonhoven and Mroczkowski 2002).
Apart from that, the telecommunications reform also includes the addition of two new commercial ISPs – UniNet and CNCNET to the existing two- ChinaNet and GBNet[6]. Thus, there is an increase in competition which will in turn lower the cost of getting online while obtaining better connection speed.

E-Commerce Legislation
Currently, the Chinese government has yet to pass any regulations in regards to the five major areas of e-commerce which comprise of digital signatures, consumer protection, copyright, taxation and privacy. The lack of legislation is seen as a major challenge as it might hamper the growth of e-commerce in China. According to an e-commerce survey conducted by Centre for Research on Information Technology and Organizations (CRITO) in 2002, the three significant barriers of e-commerce in China are inadequate legal protection for net purchases; concern about privacy of data and security issues, business laws does not support e-commerce. These concerns are caused by the non-existence of laws in the areas of consumer protection, privacy and digital signatures respectively.

   At time of writing, the nearest to e-commerce is the Contract law (Amended 1999) which lays the foundation for the legal conclusion of contracts by electronic means. Article 10 and 11 of this law includes that “electronic messages including telegrams, telexes, faxes, electronic data interchange (EDI) and e-mail qualify as written instruments that parties may use to enter into contracts” (Bath 2000, p.10). Nevertheless, it is expected that the E-Sign law which recognizes digital signatures as legally binding will be passed by the state council by the end of 2003 (Healy and Duke 2002). This new e-sign law will be the first of the series of administrative regulations that will cover a broad range of e-commerce activities. The important areas identified include electronic payment, electronic data messaging, electronic evidence, privacy, electronic information transactions as well as jurisdiction and transnational disputes.

Government Intervention
Although the State Council holds overall authority over the Internet in China, various authorities govern different aspects of Internet related business. The authorities and their responsibilities are listed in the table below.

Regulatory Authorities Responsibilities regarding E-Commerce
State Council
- Overall authority
Ministry of Information Industry - Regulates and oversees China’s information industry including E-Commerce

Ministry of Public Security
- Responsible for network security, encryption and content regulation to ensure social stability

State Secrecy Bureau - Censoring State Secrets over the Internet

State Administration for Industry and Commerce
- Registration of Internet Service Providers (ISPs) and Internet Content Providers (ICPs)
- Registration of online e-commerce activities

State Encryption Administration Commission
- Oversee the manufacture, use, import and export of encryption products
National Commission on Encryption Code Regulations (NCECR)
- Monitor the domestic use of encryption
China Internet Network Information Center (CNNIC) - Handle all domain name registrations
- Supplies statistical data on China’s Internet use

Provincial and Local Governments - Provincial and local e-commerce policy in their territories
- Beijing Municipal Administration for Industry and Commerce (BMAIC)
- Office of Shanghai National Economy

   However, it is often difficult to sort out which authority is responsible for which aspects of the Internet regulation since the functions of these authorities sometimes overlap and are not clearly defined thus creating inefficiencies. For example, State Encryption Administration Commission and National Commission on Encryption Code Regulations (NCECR) are both in charge of encryption. In another instance, the word “state secrets” is determined by department officials as the 20 articles of law issued did not give a clear definition of the term (Dembeck 2000).On top of that, a significant gap exists between local and national policies where local policies in more developed provinces are often ahead of the central government policy.

   The tight control over the Internet and e-commerce clearly indicates that the government wants to enjoy economic growth brought about by the Internet without risking its socialist objectives (Lo et. al. 2002). This is done by maintaining control the free flow of information through content filtering, monitoring, deterrence and self censorship.

Conclusion
As China’s e-commerce is still in a start up stage, it is no doubt that the challenges posed may seem to outweigh the opportunities. As the Chinese proverb says, the first step is always the hardest. The fundamental e-commerce infrastructures examined shows positive signs towards the readiness of e-commerce embracement especially in terms of the high growth of e-commerce indicators. On the other hand, a more traditional method should be combined into e-commerce as changes in consumer preference and business culture take place gradually. Following China’s accession into the WTO, there will be an abundance of economic and financial resource to further improve existing technological infrastructure due to the opening of e-commerce sector to direct foreign investment. This will address the major problems faced by many local e-commerce companies. Nevertheless, strong government intervention is stifling the Internet growth rather than building a sound basis for its long term development (Wang 2001). Apart from that, the unclear regulatory environment in the area of e-commerce must be solved. A positive step is undertaken with the implementation of the e-sign law later this year. It is anticipated that this is the first of many administrative regulations that will cover a broad range of e-commerce activities. With all the challenges overcome, the potential growth of e-commerce is undeniable. It is anticipated that China will

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