B2B eCommerce Series Part 1: Digital Transformation in China

Rick O'Neill Rick O'Neill

The B2B eCommerce market in China has grown significantly in recent years, and it is showing no signs of slowing down. Indeed, there has no better time to enter the market.

As a digital commerce solution provider. TMO Group has more than 10 years of experience in helping companies implement eCommerce. We have discovered from our experience in many projects that, unlike in the business-to-consumer field (B2C), most business-to-business (B2B) companies in every industry will face similar difficulties and common misunderstandings. This is why we have embarked on an eight-article series on best practices on conducting B2B eCommerce in China. This will also form part of a white paper, in collaboration with Adobe Commerce. 

In this first article of the series, we look at how companies can embark on digital transformation.

The Current State of China’s B2B eCommerce Market 

The COVID-19 pandemic that struck the globe throughout the early stages of 2020 caused companies worldwide to press the pause button on their operations. In China, however, its effects were not as stark as elsewhere. Generally, things were up and back running by the spring of that year, with just the occasional localized lockdown occurring since that time. 

What it did do though was accelerate a trend that was already well underway: the growth of eCommerce markets and the move towards the shopping for goods being done more and more online.  

China’s booming digital economy is a testament to the success of the eCommerce market. It was estimated to be worth 39.2 trillion CNY in 2020, accounting for 38.6% of the value of the country’s GDP.

Statistics from the 2020 China Industrial eCommerce Market Data Report released in May 2021, show that the domestic B2B eCommerce market is in a period of unprecedented development and growth. 

The report states that the value of China’s B2B eCommerce market on the whole reached 27.5 trillion CNY in 2020, compared with 25 trillion in 2019.

Among the main markets mentioned in the report, the size of the bulk commodity eCommerce market amounted to 22 trillion CNY, accounting for 80% of the entire market. This market includes eight major industries that have undergone major digitalization in recent years: chemical, energy, rubber and plastics, nonferrous metals, steel, textiles, building materials, and agriculture.

The market size of the corporate procurement market was valued in the report at 1,155 billion CNY, a year-on-year increase of 58.21% from its 730 billion CNY valuation in 2019

The industrial product eCommerce market was valued in the report at 765 billion CNY, a year-on-year increase of 17.69% from the 650 billion CNY in 2019. As we’ll look into later in this section, this market has particularly high growth potential in the coming years. 

The pharmaceutical market was valued in the report at 190 billion CNY, a year-on-year increase of 58.33% from its valuation of 120 billion CNY in 2019. 

The below model on the right shows the results of a survey from 2019, with the proportion of Chinese companies who solely procured online being 24.2%. 41.8% of the respondents made both online and offline purchases, while 34% procured solely offline. On the left are the results of a survey of B2B brand suppliers in China. 

It shows that in April 2020, 54% favored the online sales model, but in April 2021 (by which time China had largely got back to normal after the COVID pandemic), this had increased to 83%. This is a clear indication of the increased confidence that there is in the online sales model post-pandemic.

Source: (left) 2019 enterprise purchasing channel survey by iiMedia Research, (right) analysis of changes in supplier attitudes towards online sales models by Makenzie, iiMedia Research 

The pandemic expedited the general trend towards online shopping habits. With no other options to shop when the pandemic first struck, more people became accustomed to the convenience that online shopping brings and many haven’t changed back to their old ways. 

Other Contributing Factors Accelerating the Trend of Online Procurement 

However, as we’ve already established, the general trend towards online procurement was already well underway before COVID struck. 

Other important contributing factors include:

(1) The favorable policies of the Chinese government towards online procurement

(2) The rising costs of running a business (with eCommerce and its decreased overheads being one way to reduce them)

(3) The development of online purchasing habits, with more companies now choosing to purchase through contactless payment methods (something which the pandemic has also accelerated)

(4) The advancement of new technologies that facilitate online procurement such as cloud computing, big data, the Internet of Things (IoT), and AI (artificial intelligence)

(5) Improvements to industry standards in the infrastructure of the eCommerce industry, which has led to a general improvement of the online user experience

(6) The digitalization of Chinese Internet users, especially the entry of those born in the 80s and 90s into the job market. This means there is now a whole generation of people with disposable income that have digital habits.

However, there are still some drawbacks and difficulties for companies when looking at whether to shift to online channels. In some industries (such as the chemical industry) sales rely heavily on their distributor networks. These distributors have often built up long-standing relationships with customers by offering a variety of offline services. Therefore, there may be a reluctance to disrupt a model that has worked so well for both parties for a long time.  

B2B eCommerce Platforms Landscape 

When it comes to B2B eCommerce retail platforms, what are the main ones used in China?

Source: 2020 Chinese enterprise procurement eCommerce market industries, by iResearch

  • The first category is procurement platforms derived from traditional B2C eCommerce, such as Taobao, Tmall, and JD.
  • The second category is B2B eCommerce marketplace platforms. This type of platform can be further subdivided into one-stop B2B eCommerce platforms, such as 1688.com, and various industry-vertical platforms including those that focus on industrial products.
  • The third category is platforms created by brands themselves, such as Gree, Haier Group, Schneider, and 3M. More and more brands have built their own platform in recent years. With the entrance of numerous new players into the market, companies are realizing the need to have their own eCommerce platform in order to stay competitive. Directly handling customers enables them to obtain real-time customer data, which was difficult to achieve in the past by relying on distribution models. This collected data can help companies provide customers with personalized services, improve product quality and sales, as well as customer satisfaction and loyalty. 

The below model shows the service providers of the B2B ecosystem in China in different areas (payment, logistics and financial):

Source: 2020 Chinese enterprise procurement eCommerce market industries, by iResearch

Growth Potential of Industrial B2B eCommerce

The value of the B2B eCommerce market is projected to see significant growth in China in the coming years – across multiple industries. The B2B landscape can be categorized into downstream (near-customer products such as fast-moving consumer goods, clothing and medicine), midstream (products close to the point of production such as auto parts, textiles and smelting), and upstream (products near the upper end of production such as non-ferrous metals, steel, petroleum, and other bulk commodities). 

Among all these categories, industrial product B2B eCommerce (in the midstream of B2B) shows perhaps the most growth potential. According to forecasts from Alibaba and consulting firm Bain: By 2024, online transactions in the industry is projected to reach 2.3 trillion CNY, with a penetration rate of about 5%, and a compound annual growth rate of about 25-30%. Among them, the growth rate of online transactions in the MRO (maintenance, repair and operations), electrical engineering, mechanical auto parts, and chemical sub-industries is projected to be around 40-50%.

Among the above four sub-industries, the penetration rate of MRO online transactions is expected to be the highest. MRO products are “supplies utilized in the production process, that is not ultimately seen in the end products themselves.” This includes products such as gloves, safety equipment, computers, and industrial consumables. The wide variety of products that this incorporates means that an MRO company’s product range may have a huge amount of SKUs, with the sales process being complicated and inefficient. Therefore, they have more to gain by shifting online than some of the other sub-industries listed. Also, as MRO products are not related to the production line, it is easier to make the shift online than some of the other sub-industries too. 

Growth in electrical engineering is expected to be mainly driven by low-voltage electrical equipment, cables, and other products; while products such as bearings, fastenings, valves and pumps are expected to drive growth in the mechanical parts sub-industry. The chemical industry will be driven by downstream products such as painting and plastics.

Common Branded eCommerce models of B2B companies

Branded B2B Platform Model (B2B)

The branded B2B model involves companies directly selling products to other businesses via the official website of the brand. Companies take care of every step of the eCommerce process, such as logistics, customer service, and product information. An advantage of this from the company’s point of view is that service levels to the customer can be ensured.

Distribution Model (B2B2C)

This model sees companies cooperate with distributors to sell products using their distribution channels. The company will take care of the production of the product itself, while the distributor will take care of fulfillment and customer relations. It can be a ‘win win’ situation for both the company and distributor, with the company having the opportunity to enhance the value of their brand, and the distributor being able to share profits or receive commission from sales of the product. 

O2O Model

With the O2O model, companies take advantage of their distributor’s geographic advantages. Companies will take care of the production of the product, while distributors will offer local offline services such as maintenance and installation. These services can be offered as part of the product catalog. Distributors also take care of fulfillment and customer relations.

Digital Transformation

Since around the turn of the 21st century, companies worldwide have been placing an emphasis on digitalization as part of their growth strategy. In more recent years, digital transformation has also come to the fore. In his 2019 Amazon best-seller book Digital Transformation: Survive and Thrive in an Era of Mass Extinction, Thomas M.Siebel describes digital transformation as the “fourth industrial revolution, where cloud computing, big data, IoT and AI are converging to drive network effects and exponential change.”6 

Traditional Industries at the Crossroads of Digital Transformation 

China is at an important turning point in the digital transformation of traditional industries.  In B2B, this is especially true for the manufacturing industry. 

In the coming years, the consumer to manufacturing (C2M) model is expected to become more widely adopted. This model, coined in China, is when the end customer connects directly with the manufacturer to place an order for a product. By adapting the C2M model, manufacturers can cut out middle levels of distribution, thus allowing them to increase efficiency and reduce costs, as well as reduce production waste. 

Another advantage of the C2M model is that manufacturers can, thanks to their direct contact, forge long-standing relationships with their customers, who are looking to be supplied with their desired goods quickly and efficiently. However, this is only achievable if they embrace digital transformation. 

Digital transformation needs to form part of a company’s long-term business strategy.  It requires company-wide planning, and just like any element of a business strategy, a clearly laid out long-term vision of where the company should be heading. 

The World Economic Forum (in collaboration with Accenture) presented the stages of digital transformation in a white paper on the topic in 2016, and its findings can still be used as a useful reference. Below we lay out what important elements of eCommerce companies should focus on as they go through the different stages of digital transformation. 

The time required to complete these steps will vary from company to company as it depends on the industry as well as location.

Short-Term 

* This stage focuses on data collection, and user adoption and education (in all aspects of the business – customers, partners and employees)

(1) Collect eCommerce customer data

In the early stages of eCommerce, companies should collect as much customer data as possible in order to build up data sets. Also by increasing the amount of customer touchpoints on different channels, companies can start to build up a picture of a customer journey.

(2) Integrate customer feedback

Instead of being a process where departments do this separately, there should be cross-departmental collaboration to collect customer feedback in an integrated manner. By doing this, each department can gain a better sense of customer preferences and expectations. 

(3) Integrate data flow on the supply chain 

Real-time data integration of the whole supply chain can give companies the flexibility to respond to changes in customer demand. This can improve the logistics efficiency of suppliers and distributors, allowing them to manage effective inventory more effectively, and optimize levels of production. 

(4) Promote the benefits of going digital to the customer

Sometimes, companies may be reluctant to shift from traditional sales models. Both the company and customer may not see the immediate benefits of making the shift to digital (online purchasing). This may be especially true in industries that are less digital than others, such as construction. But promoting the benefits of online purchasing to the customer (such as the ease to make repurchases), will ultimately be beneficial to both parties in the long-run. 

Mid-Term

* This stage focuses on data management, user personalization and user activation. 

(1) Make data-driven insights 

Companies that have built up relatively comprehensive data sets can start to go beyond making intuitive assumptions of the data they have collected.  They can make insights based on big data analysis that can help to drive the direction of various aspects of the company, such as marketing, or the development of the eCommerce website. 

(2) Provide a personalized customer experience 

Companies become user-focused in their business approach, to offer a personalized customer experience. The nature of B2B eCommerce makes this particularly important, because customers will differ in their payment preferences and purchasing patterns. Moreover, companies will have different relationship levels with customers, meaning that the price seen onsite that a customer sees may differ. 

(3) Adhere to data privacy and transparency regulations

Adhering to data security and data transparency regulations becomes important as companies grow. One way to win trust is to promote the transparency of information and data by disclosing product and supply chain information, such as providing the traceability of product raw materials.

(4) Digitalize the workforce

A digitalized workforce can help a company to improve cross-departmental communication, increase employee productivity, and allow for the integration of workflows.

(5) Move from product to product-as-a service (PaaS) business model

This goes beyond focusing on the product, but rather the solutions and outcomes that can come from it. Companies will charge for the services that come from the product, rather than the product itself. Although not a new business model, it has in recent years become more prevalent due to IoT technology. 

One example of a company looking to use this model in China in the coming years is Cao Cao, a ride-hailing service from car manufacturers Geely. Although the scheme is still in its early development, they plan to roll out autonomous driving cars across the country. The customer won’t actually pay for the car itself, but rather they will lease it from the manufacturer for the self-driving service it will provide. 

Long-Term

* This stage focuses on smart technology and the complete digitalization of all aspects of the company. 

(1) Usage of smart factories

Smart factories operating under the Industry 4.0 model leverage IoT technology to operate smart sensors. The real-time data gathered by these sensors can be used to manage processes and workflows in the manufacturing process. Additionally, manual processes are now to a large extent done by robotic machines which can be adapted to different product flows & the production of customized products and services. 

(2) Implementing a culture of corporate digital responsibility

As a company becomes more digitalized, they need to think of the ethical aspects of their digitalization. As well as data transparency, this may extend to producing products which fit in with the ethical concerns of their customers – for example, by using environmentally friendly raw materials. Ethical concerns may also extend to the handling and analysis of data. 

If you have any questions about this article or would like a consultation, our team of experts are on hand to help you with your business needs. 

B2B eCommerce Series 2: Assessing Digital Maturity for B2B eCommerceWant to assess where your company's digital maturity is right now? Look no further than part 2 of TMO Group's 6 part series on B2B eCommerce.In article 2 of the 8-part series of B2B eCommerce in China, we look at how companies assess can assess their digital maturity.

Contact UsWant to know more about our E-Commerce solutions? Interested in creating a multi-channel strategy? Contact our E-commerce agency in Shanghai Hong Kong AmsterdamContact TMO Group now

Subscribe to our newsletter

News of the eCommerce world, best practices to use in your eCommerce platform, insights and analytics of Chinese and South East Asian eCommerce markets - all that and much more in our monthly newsletter.