Taiwanese Eye New Way into China
Oct 15, 2013

Taiwan's online vendors are eyeing China's 1.3 trillion renminbi e-commerce market, but they're finding that it's a challenge to make a name for themselves

Boracay in May, Koh Samui in June, Seoul in July. It's not the schedule of a busy tour guide, but of Wang Rung Shu, the CEO of online women's fashion vendor Lulu's Shop.

The company's 33-year-old boss and photographer is rarely in his Taichung office, spending most of his time in studios taking pictures of his clothing line or traveling overseas looking at products, ordering fabric or scouting potential photo shoot locations.

To get an edge in the fiercely competitive e-commerce world of women's fashion, Wang does a photo shoot abroad every month, accompanied by teams worthy of major fashion magazines – usually three models, two assistants and a designer. He also hires a local fixer and a local guide on site.

"I wasn't interested in photography, but online shopping really puts a huge emphasis on visual effects, and other photographers couldn't meet my standards, so I gritted my teeth and plunged into it," says Wang with a chuckle, his cheerful boyishness belied by the fact that he's been running his online business with his designer girlfriend for nine years.

Wang began buying goods from the Wufengpu Garment District in Taipei and selling them on Yahoo!Kimo while he was still studying engineering at National Formosa University in Yunlin County. Today, his company spans three floors of an office building in eastern Taichung, each about 500 square meters, and employs 50 people.

He also has two brick-and-mortar shops in the city, selling items under the women's fashion brand he created three and a half years ago. Sales last year totaled NT$120 million, of which overseas customers accounted for 10 percent, mostly from Hong Kong.

Wang has long eyed China's giant online shopping platforms Taobao Marketplace and TMall.com as potential sales channels, but he has yet to take action. Yet a fake Lulu's Shop already appears on Taobao, and it has directly pirated information from Lulu's Shop's official website, including photos of a company trip to Okinawa.

Taobao and TMall, both units of the Alibaba Group, have been the online battlegrounds Taiwanese online vendors have most sought to conquer in China. Taobao caters more to C2C transactions and small businesses while TMall offers products from more established Chinese and international brands.

"I thought about getting into TMall because its market is so huge. But I want to wait until we're strong enough and then go in with guns blazing," Wang says.

Like Wang, many Taiwanese online vendors are young and energetic but not impatient and have honed their businesses since online auctions exploded in Taiwan about 10 years ago on the country's two main platforms – Yahoo!Kimo and PChome. These vendors have seen the explosive growth in China's e-commerce market and, no longer content with simply serving the domestic market, are planning forays into new territories.

The 18 Million Egg Dilemma

Some have already taken the plunge. Motivated by the Chinese government's desire to use e-commerce to support private small and medium-sized enterprises (SMEs), the Eastern Multimedia Group decided to bank on its 14 years of experience in the television and online shopping markets and get involved in e-commerce in China.

The overseas flagship store Eastern Exacting Selection created by the Eastern Multimedia Group for the TMall platform opened for business earlier this year on July 15, and the experience so far has been eye opening.

David Li, the president of Eastern Multimedia subsidiary Sen Sen Home Shopping Co. and the person in charge of Eastern Exacting Selection, was at TMall's headquarters in Hangzhou 100 days in advance of Singles' Day (Nov. 11) to discuss how to handle the peak online shopping season.

That was after a visit the TMall team paid to the company in Taipei two months before the Sept. 19 Mid-Autumn Festival. Li will never forget the shocked expressions of his Sen Sen Home Shopping colleagues when the TMall people asked Eastern Multimedia Group founder Gary Wang to prepare 3 million gift boxes of moon cakes for advance sale.

It takes six eggs to make the six moon cakes per box, meaning the company had to find 18 million eggs, a tough proposition considering Taiwan's hens pump out no more than 8 million eggs a month. Without the slightest idea where it could find the eggs required, Wang had to politely decline TMall's request.

To handle similar quantity issues, the Eastern Multimedia Group has decided to search for qualified OEMs and market their products under its own brand. The first item sold under the model was a facial mask marketed under the brand DeMon, launched in September.

In contrast with China's focus on volume, Taiwan's service sector is known for its sophistication. Taobao has a 30 percent return rate compared with only a 3 percent return rate for Amazon.com, and Taiwan is hoping to rely on its high-quality products and service to carve out a niche in China's online shopping market.

Taiwanese SMEs are eager to give China a try, and big corporations are confidently determined to get a share of the pie. In an era where logistics and payment services are highly developed and can help companies easily span the 600 kilometers separating Taipei and Alibaba's base in Hangzhou, optical fiber cables and the Internet have sounded a new call to attack.

The scale of e-commerce in China has soared in recent years, with online sales exceeding NT$1.3 trillion renminbi (NT$6.28 trillion) in 2012. The Alibaba Group accounted for more than 70 percent of the market, and its Taobao and TMall are expected to surpass Amazon as the world's biggest online shopping platform in 2015.

In 2011, 28 percent of Taiwan's online vendors were selling goods across borders, according to a survey by the Market Intelligence & Consulting Institute (MIC) under Taiwan's Institute for Information Industry. More of those online vendors (78 percent) are in China than in any other overseas market. Just over half (51 percent) were selling in Hong Kong and Macau, while 30 percent had made their way into the United States, and 30 percent into Southeast Asia.

Among 96 percent of the Taiwanese online vendors questioned in the survey, overseas sales accounted for less than 30 percent of their total online sales, indicating the huge growth potential that still exists for local online shopping companies abroad.

In fact, there is also room for online sales growth at home. Taiwan's online shopping market generated NT$660 billion in revenues last year, only 3 percent of the country's total retail sales. But one in three Taiwanese are Internet savvy, and many SMEs engage in e-commerce, meaning that "we are almost at the point where 'everybody can be a soldier,'" says PChome Online Inc. chairman Jan Hung-tze.

But the growing number of online business models and options also means that online platforms are facing greater competition, says Charles Lee, director of Far Eastone Telecommunications' Internet & Commerce business group.

That was evident, Lee says, when Yahoo!Kimo's recent move to increase the transaction fee it charges to vendors by a percentage point did not draw nearly the backlash it had in the past.

"This is actually a warning sign for Yahoo, because when vendors were very dependent on Yahoo, they tried to fight fee hikes as much as they could, but now they may have some other alternatives," Lee explains.

Taobao's Stranglehold on Young Buyers

It's not only companies that originated as online vendors that are crossing territorial, language and market boundaries to vie for supremacy in the world of virtual retailing. Traditional brands have awakened to the reality that they can no longer ignore this new distribution channel.

Luggage maker Crown, which got its start in Taichung in 1952, has been operating in China for 20 years. Focused mainly on the business traveler, Crown had sales of 600 million renminbi last year and is now one of China's top three suitcase brands.

Despite having a strong business base solidified over the past 20 years, Crown general manager Andy Chiang decided to aggressively sell his company's products on TMall beginning this year. He made the move after realizing he could no longer ignore the ballooning online consumer segment that was supporting the rise of young and fast-growing brands on the Internet.

"Young people in their 20s and 30s search for products and get consumer information on the Internet, and they recognize more 'Taobao brands' than brick-and-mortar brands," Chiang says. If these young consumers become business customers in the next five to ten years and they don't know our Crown brand, it will be a big problem.

Chiang hired an outside service provider, Jollywiz Digital Tech. Co., to run the company's TMall website, which pitches a younger sub-brand called Tourist Club. It also collaborated with celebrity Nicky Wu's fashion brand Qi Energy to create hype for the product line. Within its first six months, the TMall site had generated nearly 20 million renminbi in sales.

Because Crown is one of the top three luggage brands in China, TMall also invited Chiang to become part of its "think tank" and attend a TMall meeting to understand the huge platform's next step.

"TMall is aggressive in courting brands they want to support. At the end of the year, they intend to promote O2O (online to offline) and bring in discount coupon promotions to give customers a taste of a brick-and-mortar experience," Chiang says, impressed with the platform's ambition.

The competitive level of TMall and Taobao are similar to that of Major League Baseball, simply in a different league than Taiwan's online shopping market when it comes to speed and strength.

But several Taiwanese brands have chosen, with some success, to market their products through their own official website and hope that overseas business finds them.

Among them is Taichung-based Sugar & Spice, a baked goods specialist that has long been the brand of choice for Taiwanese businesspeople looking for gifts to take back with them to their production bases in China.

Best known for its nougat and pineapple pastry, the company makes it possible for overseas customers to order goods directly from its website and accepts payment through E.Sun Commercial Bank's cross-Taiwan Strait online payment service or Alibaba's Alipay. International home delivery was introduced in 2011, and overseas sales now generate 10 percent of the official website's revenues.

"TMall just came to see us in July because Sugar & Spice was the most searched Taiwanese food brand selling products directly overseas," says Carrie Hsu, the manager of Sugar & Spice's marketing department. The company does not have a distributor or agent in China, but there are still some 10-20 stores on Taobao selling Sugar & Spice products. Hsu said her company was carefully assessing whether to join the TMall platform.

Sugar & Spice's experience is not unique. Many Taiwanese brands with products that are popular in China find that even if they themselves do not market their brand online, small Chinese companies will do it for them. A popular Taiwanese noodle snack called "Chang Jun-ya's Little Sister," for example, is being sold by more than 400 shops on Taobao.

A Closing Window

"Right now, Taobao is encouraging vendors to supply goods to small sellers as a form of distribution," says Wang Yi-chih, the head of MIC's e-commerce research team. The idea is for Taiwanese brands to use this distribution technique to help their products reach a wider consumer base.

"Taiwanese want to do everything themselves, but things don't have to be that way. They should move now and quickly get their brands over there; otherwise, in another two or three years, the Chinese market will be flooded with its own domestic brands, and we'll be out of opportunities," he says.

Taiwan's leading online beauty brand 86 Shop understands the logic. Nick Wang, the company's general manager, opened a shop on Taobao stressing direct delivery from Taiwan. Over 80 percent of what it ships goes to small shops to be resold.

"Doing business online, you have to choose the right platform. Other keys are quality and price. Can the product package a story that meets the tastes of consumers everywhere? If you haven't gained some experience in Taiwan, you definitely should not be so foolish as to go directly on Taobao or eBay," says Tsann Kuen Enterprise Co. vice president Andy Chen. Profits made today on online businesses, Chen says, are derived from an information gap, much like the trading business in the past.

The Internet is a place where Taiwanese businesses in China can get a fair start, and e-commerce is a never-ending marathon, where nobody can stay in front forever even if they started first.

Traditional Taiwanese exporters in pre-Internet days traveled the world suitcases in hand, trying to drum up business. In this new era, anybody can emerge as a star Taiwanese enterprise operating overseas, but the challenges posed by the global e-commerce market are no less daunting than those faced by exporters of the previous generation, even if the tools of the trade have changed.

Translated from the Chinese by Luke Sabatier