China 360 Volumes

Selected issues of KPMG’s “China 360” newsletter Content

1.0 E-Commerce in China: Driving a new consumer culture

Edition 15 – January 2014

2.0 The emergence of Chinese multinational corporations (MNCs): Local and global implications

Edition 13 – November 2013

3.0 The rise of the urban ‘post-90s’ generation in China

Edition 12 – October 2013

4.0 Innovated in China: New frontier for global R&D

Edition 11 – September 2013

About “China 360”

China 360 is a monthly newsletter designed to keep readers up-to-date with topical issues in China. Each issue focuses on a separate topic, which may include current economic analysis, analysis of government and policy developments, and tips and practical advice on doing business in China or with Chinese companies.

China 360 provides a well-researched point of view, insights and a ‚drill down‘ into China business topics hard to find elsewhere.

If you are interested to receive new editions of KPMG’s “China 360” newsletter, please e-mail us: [email protected] or visit us online: www.kpmg.de/china ChinaChinaChina 360 360360

E-commerceE-commerceE-commerce in in in China: China: China: DrivingDrivingDriving a a newa new new consumerconsumerconsumer culture culture culture

JanuaryJanuaryJanuary 2014 2014 2014

In China’sInIn China’s China’s e-commerce e-commerce e-commerce 12 12th 12 thFive-Year thFive-Year Five-Year Plan Plan Plan ThisThisThis month’smonth’s month’s China China 360360 360 breaksbreaks breaks down down down China’s China’sChina’s (2011-2015),(2011-2015),(2011-2015), the the theChinese Chinese Chinese government’s government’s government’s Ministry Ministry Ministry explosiveexplosiveexplosive e-commerce e-commerce growthgrowth growth within within within the thethe of Industryofof Industry Industry and and andInformation Information Information Technology Technology Technology unveiled unveiled unveiled business-to-consumerbusiness-to-consumerbusiness-to-consumer (B2C)(B2C) (B2C) and and and consumer-to- consumer-to- consumer-to- policiespoliciespolicies to tomake to make make China China China a aglobal aglobal global e-commerce e-commerce e-commerce consumerconsumerconsumer (C2C) (C2C) arenas.arenas. arenas. OfOf Of particular particular particular interest interestinterest leader,leader,leader, in inline in line linewith with with China’s China’s China’s transition transition transition from from from an an an areareare thethe the home-grown home-grown platformsplatforms platforms underpinning underpinning underpinning investment-heavyinvestment-heavyinvestment-heavy growth growth growth model, model, model, towards towards towards a a a thethethe riserise rise of of on-line on-line transactions,transactions, transactions, as as as well well well as asas the thethe moremoremore consumption-driven consumption-driven consumption-driven model. model. model. increasinglyincreasinglyincreasingly important important rolesroles roles of of of social social social media mediamedia andandand mobilemobile mobile devices. devices. These These These trends trends trends and and and others othersothers Nonetheless,Nonetheless,Nonetheless, the the thespeed speed speed at at which at which which the the the Chinese Chinese Chinese areareare fundamentallyfundamentally fundamentally re-shapingre-shaping re-shaping the the the ways ways ways Chinese ChineseChinese e-commercee-commercee-commerce industry industry industry has has has grown, grown, grown, and and and the the the way way way in in in consumersconsumersconsumers purchase purchase goodsgoods goods and and and services. services. services. whichwhichwhich it isit itaffectingis isaffecting affecting businesses businesses businesses and and and consumers consumers consumers hashas comehas come come as as a as surprisea asurprise surprise to to many: to many: many: by by theby the the end end end ThisThisThis articlearticle article also also highlightshighlights highlights the the the importance importance importance of ofof of 2013,ofof 2013, 2013, China China China will will willlead lead lead all all otherall other other countries countries countries in in in knowingknowingknowing exactly exactly whowho who youryour your consumers consumers consumers are, are,are, how howhow B2CB2C and and C2C C2C purchases. purchases.1 Jack1 Jack Ma, Ma, founder founder theythey make make their their purchases purchases online, online, and and highlights highlights B2C and C2C purchases.1 Jack Ma, founder they make their purchases online, and highlights ofof Alibaba, Alibaba, was was recently recently quoted quoted as as saying: saying: “in “in somesome foreign foreign and and domestic domestic success success stories stories in in of Alibaba, was recently quoted as saying: “in some foreign and domestic success stories in otherother countries, countries, e-commerce e-commerce is isa away way to to shop, shop, thethe market. market. other countries, e-commerce2 2 is a way to shop, the market. inin China China it itis isa alifestyle”. lifestyle”.2 No No matter matter how how you you slice slice in Chinathethe numbers, numbers,it is a lifestyle”. trends trends or Noor forecasts, forecasts, matter howit’s it’s clear youclear thatslice that 1. He1. Wei.He Wei. ‘China ‘China set toset overtake to overtake US inUS e-commerce’. in e-commerce’. China China Daily. Daily. August August 28, 201328, 2013 the numbers, trends or forecasts, it’s clear that 1. Hehttp://usa.chinadaily.com.cn/business/2013-08/28/content_16927926.htm Wei.http://usa.chinadaily.com.cn/business/2013-08/28/content_16927926.htm ‘China set to overtake US in e-commerce’. China Daily. August 28, 2013 e-commercee-commerce is isbooming booming in in China. China. 2. http://usa.chinadaily.com.cn/business/2013-08/28/content_16927926.htm‘E-commerce2. ‘E-commerce in China: in China: Gain Gain entrance entrance into intoa completely a completely different different world’. world’. Group Group of Companies, of Companies, June June 16, 201316, 2013 e-commerce is booming in China. 2. ‘E-commercehttp://www.ptl-group.com/blogs/e-commerce-in-china-gain-entrance-into-a-completely-different-worldhttp://www.ptl-group.com/blogs/e-commerce-in-china-gain-entrance-into-a-completely-different-world in China: Gain entrance into a completely different world’. Group of Companies, June 16, 2013 http://www.ptl-group.com/blogs/e-commerce-in-china-gain-entrance-into-a-completely-different-world

© 2014© 2014 KPMG KPMG International International Cooperative Cooperative (“KPMG (“KPMG International”), International”), a Swiss a Swiss entity. entity. Member Member firms firms of theof the KPMG KPMG network network of independentof independent firms firms are are affiliated affiliated with with KPMG KPMG International.International. KPMG KPMG International International provides provides no noclient client services. services. No No member member firm firm has has any any authority authority to obligateto obligate or bindor bind KPMG KPMG International International or anyor any other other member member firm firm vis-à- vis-à- © 2014visvis thirdKPMG third parties, Internationalparties, nor nor does does Cooperative KPMG KPMG International International (“KPMG have International”), have any any such such authority aauthority Swiss to entity. obligateto obligate Member or bindor bind firmsany any member of member the KPMGfirm. firm. All network Allrights rights reserved. of reserved. independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-1 1 vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 1 The e-commerce explosion in China The e-commerce explosion in China A little over a decade ago, China’s path to e-commerce 11/11 Aleadership little over woulda decade have ago, been China’s difficult path to to foresee, e-commerce even 11/11 leadership would have been difficult to foresee, even China’s ‘Singles Day’ as the tech boom in the US and other markets saw the China’s ‘Singles Day’ asdevelopment the tech boom of e-commerce in the US and as other an important markets B2Csaw theand C2C occurs on November 11 occurs on November 11 developmentchannel. of e-commerce as an important B2C and C2C each year. The month channel. each year.and Theday aremonth In 2000, China had yet to develop any2 e-commerce and day are 2 represented by ‘ones’ Inapplications, 2000, China and had had yet only to develop 2.1 million any total e-commerce internet users.3 represented by ‘ones’ applications, and had only 2.1 million total internet users.3 (11/11). Payment systems and physical delivery mechanisms to (11/11). Paymentfacilitate thesystems development and physical of e-commerce delivery mechanisms transactions to facilitatewere well-developed the development in other of e-commerce markets, but transactions were simply were well-developed in other markets, but were simply In 2013, ‘11/11’ online lacking in China. In 2013, ‘11/11’ online lacking in China. sales rose by 80 percent sales rose by 80 percent Fast forward to the end of 2013: with Chinese internet from the previous year, from the previous year, Fastusers forward quickly to approaching the end of 2013:600 million with Chinese4, and e-commerce internet to over USD5.7 billion users quickly approaching 600 million4, and e-commerce revenue growth (from 2009-2012) topping 70 percent to– over more USD5.7 than tripling billion the revenuecompounded growth annually (from 2009-2012)5, China is on topping pace to70 pass percent the US – more than tripling the compounded annually5, China is on pace to pass the US amount of ‘Cyber Monday’ and become the largest e-commerce market in the world. amount of ‘Cyber Monday’6 and become the largest e-commerce market in the world. revenues in the US. revenues in the US.6 Value of e-commerce transactions in Valuethe of USe-commerce and China, transactions 2009-2015 in the US and China, 2009-2015

600 Essentially, China’s large and growing middle-class have 600 Essentially,become accustomed China’s large to and making growing frequent middle-class e-commerce have 500 becomepurchases. accustomed Furthermore, to making as in manyfrequent longer-standing e-commerce 500 purchases.e-commerce Furthermore, markets, they as in are many also longer-standing developing brand 400 e-commerce markets, they are also developing brand 400 awareness, an increasing proclivity to purchase high awareness, an increasing proclivity to purchase high 300 quality and/or individually satisfying products, and showing

USD billion 300 qualitya commitment and/or individually to brand satisfyingloyalty and products, repeat business: and showing USD billion 200 a VANCL,commitment a Chinese to brand online loyalty clothing and repeatand apparel business: company, 200 VANCL,reported a Chinesethat 80 percentonline clothing of its consumers and apparel had company, made repeat 100 reported that 80 percent8 of its consumers had made repeat 100 Forecast purchases in 2012. purchases in 2012.8 0 Forecast 0 2009 2010 2011 2012 2013 2014 2015 The future development of China’s e-commerce channel 2009 2010 2011 2012 2013 2014 2015 The future development of China’s e-commerce channel China USA is closely linked to technology developments and also the China USA isbehaviors closely linked of Chinese to technology consumers, developments including andthe alsoway thethey behaviors of Chinese consumers, including the way they Sources: KPMG analysis of US and Chinese e-commerce data from Statista, research and order products online, and their preference for Sources: KPMGBain & analysis Company of US and Chinese e-commerce data from Statista, researchspeed and and convenience. order products online, and their preference for Bain & Company speed and convenience. By 2015, e-commerce transactions in China are projected According to Mary Chong, KPMG Partner and Head of Byto hit2015, USD e-commerce 540 billion, transactionsor approximately in China 10 percentare projected of total AccordingE-commerce to Mary and Chong,Payments KPMG for China, Partner there and Headare four of drivers toretail hit USDtransactions, 540 billion, and or by approximately 2020, China’s 10 e-commerce percent of total E-commerceof e-commerce and growthPayments in China:for China, e-commerce there are fourplatforms, drivers retailmarket transactions, is forecasted and to by be 2020, larger China’s than those e-commerce of the US, ofsocial e-commerce media platforms, growth in digitalChina: payments e-commerce platforms platforms, and marketBritain, isJapan, forecasted Germany, to be and larger France than combined.those of the7 US, socialmobile media devices. platforms, digital payments platforms and Britain, Japan, Germany, and France combined.7 mobile devices.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 2. Davidhttp://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T.http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 3. http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.htmlDavid Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7.http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch . March 13, 2013 3. Davidhttp://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda.http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 4. http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8.http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 4. ‘CNNIChttp://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang.http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 5. http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htmBain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5. Bainwww.bain.com/publications/articles/chinas-e-commerce-prize.aspx Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 www.bain.com/publications/articles/chinas-e-commerce-prize.aspx

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG ©International. 2014 KPMG KPMG International International Cooperative provides (“KPMG no client International”), services. No a memberSwiss entity. firm Memberhas any authority firms of theto obligate KPMG network or bind KPMGof independent International firms or are any affiliated other member with KPMG firm vis-à- International.vis third parties, KPMG nor Internationaldoes KPMG Internationalprovides no client have services.any such Noauthority member to obligatefirm has orany bind authority any member to obligate firm. or All bind rights KPMG reserved. International or any other member firm vis-à- vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 2 The e-commerce explosion in China Two purchase platforms dominate the Alibaba operates two distinct platforms: e-commerceA little over a decade landscape ago, China’s path to e-commerce 11/11 leadership would have been difficult to foresee, even • Alibaba’s Taobao (淘宝网) – Taobao is a C2C site as the tech boom in the US and other markets saw the analogousChina’s to Ebay, ‘Singles and was Day’ created by Alibaba in Similardevelopment to China’s of e-commerce specialized social as an media important platforms, B2C and China C2C 2003.occurs Sellers on are November able to post new11 and used goods haschannel. its share of home-grown e-commerce players. Some for saleeach or resale year. on The the month Taobao Marketplace, either of these competitors not only occupy a sizable share of the at a fixed price or by auction. Taobao claims over 500 and day are Chinese e-commerce market, but actually2 handle a greater million registered consumer accounts, 800 million In 2000, China had yet to develop any e-commerce represented by ‘ones’ numberapplications, of transactions and had only than 2.1 their million more total well-known internet users.global 3 product listings, and holds a staggering 80 percent (11/11). 11 competitors.Payment systems and physical delivery mechanisms to share of China’s C2C market. Like Ebay, Taobao’s facilitate the development of e-commerce transactions market is a place where many merchants sell their Alibabawere well-developed is one of those in home-grown other markets, companies. but were Perhaps simply products directly to customers; however Taobao In 2013, ‘11/11’ online notlacking yet asin China.well-known outside China as Ebay or Amazon, doesn’t charge any commission fees on transactions: Alibaba is China’s undisputed market share leader of B2C its main revenue streamsales is from rose advertising by 80 on percent the andFast C2C forward e-commerce. to the end Alibaba of 2013: recently with Chinese reported internet that the site. from the previous year, totalusers value quickly of merchandiseapproaching 600sold millionin 20124, wasand greatere-commerce than to over USD5.7 billion that of Ebay and Amazon combined.9 By 2016, Alibaba • Alibaba’s Tmall (天猫) – In 2008, Tmall was created as a revenue growth (from 2009-2012) topping 70 percent – more than tripling the expectscompounded to pass annually Wal-Mart5, China as the is numberon pace one to pass retail the network US B2C site (similar segment as Amazon), to compliment in the world.10 Taobao’s C2C marketplace.amount Tmall isof able ‘Cyber to provide Monday’ a and become the largest e-commerce market in the world. 6 unique ‘mall experience’ forrevenues brands to set in upthe their US. own mall website. Sellers pay a deposit to list on the site, Value of e-commerce transactions in and Tmall earns a commission on each transaction.12 the US and China, 2009-2015 Popular domestic and foreign brands occupy ‘mall space’. Each brand can have its own virtual store in the mall, and for foreign sellers, a Tmall store avoids 600 Essentially, China’s large and growing middle-class have becomethe requirement accustomed of toobtaining making anfrequent ICP license e-commerce needed 500 purchases.to sell on-line Furthermore, in China. as The in Tmall many model longer-standing has proven e-commercetremendously markets, successful: they are in 2012,also developing Tmall accounted brand for 400 awareness,around 51 an percent increasing of China’s proclivity B2C to online purchase sales, high up from 35 percent in 2010. Comparably, Amazon’s share of the 300 quality and/or individually satisfying products, and showing 13 USD billion a commitmentmarket in the to US brand is closer loyalty to and20 percent. repeat business: 200 VANCL, a Chinese online clothing and apparel company, Together,reported these that 80 two percent giants ofdominate its consumers China’s hadmarket, made selling repeat 100 everything from Lamborghinis8 to shoe laces. Forecast purchases in 2012. 0 2009 2010 2011 2012 2013 2014 2015 However,The future despite development Alibaba’s of market China’s position, e-commerce the channel e-commerce market in China is large enough for other China USA is closely linked to technology developments and also the competitorsbehaviors of and Chinese niche playersconsumers, to thrive, including including the someway they regionalresearch platforms, and order such products as Daminwang online, and (大闽网 their )preference in Fuzhou, for Sources: KPMG analysis of US and Chinese e-commerce data from Statista, 京东 Bain & Company andspeed Jingdong and convenience. ( ) 360buy.com. Jingdong holds roughly 15 percent of the B2C market.14 It is primarily focused on By 2015, e-commerce transactions in China are projected electronicAccording items, to Mary and Chong, is currently KPMG the Partner ‘3C’ e-commerce and Head of to hit USD 540 billion, or approximately 10 percent of total salesE-commerce leader in Chinaand Payments (computer, for communications, China, there are fourand drivers retail transactions, and by 2020, China’s e-commerce consumerof e-commerce electronics). growth in China: e-commerce platforms, market is forecasted to be larger than those of the US, social media platforms, digital payments platforms and Britain, Japan, Germany, and France combined.7 mobile devices.

9. Kenneth Rapoza. ‘Alibaba Says Sales Better Than Amazon And eBay...Combined’. Forbes. September 9, 2012 11. Adam Jourdan. ‘Surviving Chairman Ma: Life in the shadow of China’s Alibaba’. Reuters. November 26, 2013 2. David http://www.forbes.com/sites/kenrapoza/2012/09/09/alibaba-exec-brags-sales-better-than-amazon-ebay-combined/ Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. http://www.reuters.com/article/2013/11/26/us-china-ecommerce-idUSBRE9AP17H20131126 J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html Juro Osawa. ‘Alibaba Isn’t the Amazon of China’. The Wall Street Journal. October 16, 2013 Willishttp://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ Wee. ‘With 1.4 Million Users, Taobao Launches Hong Kong Official Site’. TECHINASIA. May 10, 2013 3. David http://blogs.wsj.com/digits/2013/10/16/alibaba-isnt-the-amazon-of-china/ Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. http://www.techinasia.com/taobao-launches-hong-kong-official-site/ Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 10.http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html ‘E-commerce giant will not list on Hong Kong exchange’. South China Morning Post. October 11, 2013 12. Jurohttp://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ Osawa. ‘Alibaba Isn’t the Amazon of China’. The Wall Street Journal. October 16, 2013 4. ‘CNNIC http://www.scmp.com/business/china-business/article/1328993/e-commerce-giant-will-not-list-hong-kong-exchange released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. http://blogs.wsj.com/digits/2013/10/16/alibaba-isnt-the-amazon-of-china/ Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm 13. Adamhttp://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 Jourdan. ‘Surviving Chairman Ma: Life in the shadow of China’s Alibaba’. Reuters. November 26, 2013 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 http://www.reuters.com/article/2013/11/26/us-china-ecommerce-idUSBRE9AP17H20131126 www.bain.com/publications/articles/chinas-e-commerce-prize.aspx 14. Steven Millward. ‘A guide to China’s top 10 e-commerce sites’. CNET. www.asia.cnet.com/blogs/a-guide-to-chinas-top-10-e-commerce-sites-62215025.htm

300 quality19% and/or individually satisfying products, and showing

USD billion a commitment to brand loyaltyvs and repeat business: 200 VANCL, a Chinese online clothing and apparel company, reported that 80 percent of its consumers had made repeat 100 8 Forecast purchases in 2012. Mobile purchasing aligns with the Chinese consumer’s 0 2009 2010 2011 2012 2013 2014 2015 desireThe future for speed, development and the convenience of China’s e-commerce of ‘any time’ channel These social media platforms are stepping up their shopping. According to data presented by Taobao, the China USA is closely linked to technology developments and also the integration into the e-commerce chain. Retailers are busiestbehaviors time of of Chinese the day consumers,for mobile shopping including is the 10pm, way and they developing a more sophisticated social media presence, purchasesresearch andmade order by mobile products devices online, are and 67 theirseconds preference faster for Sources: KPMG analysis of US and Chinese e-commerce data from Statista, 22 and someBain &social Company media platforms – We Chat is a recent thanspeed purchases and convenience. made on personal computers. example – have added payment functionality, so users canBy 2015,make e-commercepurchases directly transactions from the in application.China are projected These TheAccording trend towards to Mary ‘smarter’ Chong, andKPMG more Partner functional and Head phones of trendsto hit USD are fostering 540 billion, an orenvironment approximately whereby 10 percent mobile of total andE-commerce tablets, coupled and Payments with the risingfor China, use ofthere social are media four drivers devicesretail transactions, are an increasingly and by 2020,crucial China’s element e-commerce in China’s platformsof e-commerce to inform growth and connect in China: consumers, e-commerce is likely platforms, e-commercemarket is forecasted arena. to be larger than those of the US, tosocial fuel the media continued platforms, rise digitalin the numberpayments and platforms proportion and Britain, Japan, Germany, and France combined.7 ofmobile so-called devices. ‘m-commerce’ transactions in the Chinese For more on social media in China, see Issue [8] of e-commerce market. China 360.17

15. Tracey Xiang. ‘WeChat Reportedly Surpassed 600 million Users’. TechNode. October 24, 2013 18. ‘China, South Korea Lead World in Mobile Commerce Adoption’. eMarketer. March 20, 2013 http://www.emarketer.com/Article/China-South-Korea-Lead-World-Mobile-Commerce-Adoption/1009742 2. David http://technode.com/2013/10/24/wechat-reportedly-surpassed-600-million-users/ Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 19. Steven Millward. ‘China’s M-Commerce Shopping Spree to Hit $27.1 Billion in 2014, Surpassing US 16. ‘E-commerce In China – Statistics and Trends’. GO Global.com. February 08, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html Mobilehttp://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ Shoppers’. TECHINASIA. March 18, 2013 3. David www.go-globe.com/blog/ecommerce-in-china/ Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. http://www.techinasia.com/china-mobile-shopping-hits-27-billion-dollars-in-2014/ Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 17. http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html KPMG. ‘Social media in China: Local innovation connecting the country’. April 1, 2013 20. Stevenhttp://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ Millward, ‘Mobile Commerce Worth $4.29 Billion in Q1 in China, But One Company Dominates’. 4. ‘CNNIC http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/China-360/Pages/ released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. TECHINASIA Chiang. ‘China. May Ecommerce 21, 2013 Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www.techinasia.com/china-q1-2013-mobile-commerce-worth-over-4-billion-dollars/ http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm China-360-Issue8-201304-Social-media-in-China.aspx http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 21. China, South Korea Lead World in Mobile Commerce Adoption’. eMarketer. March 20, 2013 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 http://www.emarketer.com/Article/China-South-Korea-Lead-World-Mobile-Commerce-Adoption/1009742 www.bain.com/publications/articles/chinas-e-commerce-prize.aspx 22. Vaughn Highfield, ‘Infographic: China’s M-Commerce Set to hit $27.1 Billion in 2014’. TotalPayments. March 18, 2013 http://blogs.terrapinn.com/total-payments/2013/03/18/infographic-chinas-commerce-set-hit-27-1-billion-2014/

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG ©International. 2014 KPMG KPMG International International Cooperative provides (“KPMG no client International”), services. No a memberSwiss entity. firm Memberhas any authority firms of theto obligate KPMG network or bind KPMGof independent International firms or are any affiliated other member with KPMG firm vis-à- International.vis third parties, KPMG nor Internationaldoes KPMG Internationalprovides no client have services.any such Noauthority member to obligatefirm has orany bind authority any member to obligate firm. or All bind rights KPMG reserved. International or any other member firm vis-à- vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 4 The e-commerce explosion in China Know your customer and market The road to e-commerce success A little over a decade ago, China’s path to e-commerce 11/11 Asleadership the e-commerce would have market been in difficult China matures, to foresee, businesses even Despite China’s e-commerce growth, success is certainly mustas the develop tech boom more in sophisticated the US and other strategies markets to influence saw the not a given;China’s businesses ‘Singles need toDay’ do their homework to anddevelopment reach target of e-commercecustomers: a as‘one-size-fits-all’ an important B2Ce-commerce and C2C understandoccurs the target on November market, and 11how best to influence strategychannel. is no longer sufficient. China’s on-line population is and directeach their on-lineyear. Thepurchases. month A common model is to not only incredibly large, it is also highly diverse, in terms sell through established e-commerce platforms. and day are of consumer behavior. Businesses should2 not assume that In 2000, China had yet to develop any e-commerce represented by ‘ones’ theapplications, China’s consumer and had onlymarket 2.1 is million homogeneous. total internet users.3 Uniqlo, a Japanese ‘brick and mortar’ retailer, chose to (11/11). Payment systems and physical delivery mechanisms to operate on Alibaba’s Tmall. Upon entry in 2009, Uniqlo set Exactlyfacilitate the the opposite development in fact: of sales e-commerce vary widely transactions by the up two sites: a company-specific site that shows detailed differentwere well-developed tiered cities China. in other In markets,tier-1 cities but such were as simply information about the company as well as brand clothing In 2013, ‘11/11’ online Shanghai,lacking in China.many consumers are e-purchasing vacations, offerings and price info, and another that is hosted on cars, or high-end personal care accessories, including Tmall. The two sites use the salessame layout, rose categories,by 80 percent cosmetics,Fast forward handbags, to the end and of high-end 2013: with fashion Chinese with internet greater assortment, and pricing schemes,from and the because previous Uniqlo’s year, transactionalusers quickly frequency approaching than 600 their million counterparts4, and e-commerce in tier-2, site executes purchases throughto Taobao,over USD5.7 both of Uniqlo’s billion tier-3, and tier-4 cities.23 sites centralize ordering and payment with Alibaba. revenue growth (from 2009-2012) topping 70 percent – more than tripling the compounded annually5, China is on pace to pass the US Brand loyalty is also materializing at a markedly higher rate There are many routes to successamount however, of ‘Cyber and many Monday’ and become the largest e-commerce market in the world. 6 in tier-1 cities than anywhere else in China. In contrast, companies have had success withoutrevenues listing inon the an US. in smaller markets such as Dalian, Xi’an, or Fuzhou, one established platform. may find greaterValue variabilityof e-commerce amongst transactions what products in and brands are favoredthe US– for and example China, ‘last 2009-2015 season’ items may Suning is one such example. Suning is a national ‘big box’ sell poorly in Shanghai, but still sell well in other markets. electronics retailer in China who entered the e-commerce Consumers from lower tier cities are still more focused arena relatively early, in 2009, and does not occupy space 600 Essentially, China’s large and growing middle-class have more on basic value propositions when making purchase onbecome Tmall. Their accustomed strategy tocalled making for the frequent development e-commerce of 24 decisions.500 a purchases.user-friendly Furthermore, website, heavy as inin manycontent longer-standing and products. Suninge-commerce also invested markets, in technology they are also to ensuredeveloping seamless brand 400 The methods of influence also differ between different cross-channelawareness, an fulfillment increasing between proclivity their to onlinepurchase store high and markets: tier-4 cities tend to rely more on ‘key opinion their physical store. During the last four years, it expanded 300 quality and/or individually satisfying products, and showing

leaders’USD billion and less on word-of-mouth, or user reviews and producta commitment categories to online,brand loyalty as well and as throughrepeat business: mobile blogs.200 Contrary to expectation, tier-4 city residents have applications,VANCL, a Chinese to integrate online its clothing digital channel and apparel with itscompany, brick relatively less discretionary income, yet they appear to be andreported mortar that stores. 80 percent From 2010-2012 of its consumers online sales had grew made by repeat a 100 28 spending similar amounts on-line as consumers from tier-3 compounded annual8 rate of 190 percent, and Suning is Forecast purchases in 2012. or even tier-2 cities.25 now rated amongst the top three B2C e-tailers in China, by 0 29 2009 2010 2011 2012 2013 2014 2015 marketThe future share. development of China’s e-commerce channel Overall, China’s e-commerce market does tend to be China USA is closely linked to technology developments and also the skewed heavily towards fashion and accessory purchases behaviors of Chinese consumers, including the way they such as handbags, shoes, and cosmetics. Roughly 40 Sources: KPMG analysis of US and Chinese e-commerce data from Statista, research and order products online, and their preference for percentBain of & all Company e-commerce transactions are fashion and speed and convenience. accessories, purchased by younger, white-collar, urban 27 femaleBy 2015, shoppers. e-commerce transactions in China are projected According to Mary Chong, KPMG Partner and Head of to hit USD 540 billion, or approximately 10 percent of total E-commerce and Payments for China, there are four drivers retail transactions, and by 2020, China’s e-commerce of e-commerce growth in China: e-commerce platforms, market is forecasted to be larger than those of the US, social media platforms, digital payments platforms and Britain, Japan, Germany, and France combined.7 mobile devices.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 23. Bain Brief. ‘China e-commerce: Heading toward RMB 1.5 trillion’. Bain & Company. February 27, 2012 27. ‘With E-Commerce Surging In China, Who Needs Brick-And-Mortar?‘. Jing Daily. June 13, 2012 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ http://www.bain.com/offices/china/en_us/publications/articles/china-ecommerce.aspx http://www.jingdaily.com/with-e-commerce-surging-in-china-who-needs-brick-and-mortar/18894/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 24. McKinsey & Company ‘2012 Annual Chinese Consumer Report. From Mass to Mainstream: 28. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ Keeping Pace with China’s Rapidly Changing Consumers’. September, 2012 www.bain.com/publications/articles/chinas-e-commerce-prize.aspx 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www.mckinseychina.com/wp-content/uploads/2012/09/McKinsey-2012-Annual-Chinese-Consumer-Report1.pdf 29. Steven Millward. ‘A guide to China’s top 10 e-commerce sites’. CNET. http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 25. KPMG. ’The rapidly Changing Face of D-commerce’.pdf. November, 2013 www.asia.cnet.com/blogs/a-guide-to-chinas-top-10-e-commerce-sites-62215025.htm 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 26. ‘Average value of U.S. online shopping orders in 2nd quarter 2013, by device (in U.S. dollars)’. Statista. September 2013 www.bain.com/publications/articles/chinas-e-commerce-prize.aspx http://www.statista.com/statistics/239247/us-online-shopping-order-values-by-device/; KPMG. ’The rapidly Changing Face of D-commerce’.pdf. November, 2013

600 MaryEssentially,Mary Chong Chong China’s large and growing middle-class have ReadRead on... on... Partner,becomePartner, KPMG accustomed KPMG China China to making frequent e-commerce 500 Email:purchases.Email: [email protected] [email protected] Furthermore, as in many longer-standing e-commerce markets, they are also developing brand 400 Tel.:Tel.: +86 +86 21 21 2212 2212 3280 3280 ForFor all all issues issues of of China China 360: 360: awareness, an increasing proclivity to purchase high 300 quality and/or individually satisfying products, and showing USD billion PrimaryaPrimary commitment contributors: contributors: to brand loyalty and repeat business: VisitVisit200 www.kpmg.com/cn/China-360 www.kpmg.com/cn/China-360 VANCL, a Chinese online clothing and apparel company, reported that 80 percent of its consumers had made repeat 100 ThomasThomas Stanley Stanley 8 oror scan scan the the following following QR QR code: code:Forecast purchases in 2012. 0 COO,COO, Global Global China China Practice Practice 2009 2010 2011 2012 2013 2014 2015 KPMGTheKPMG future China China development of China’s e-commerce channel China USA Email:isEmail: closely [email protected] [email protected] linked to technology developments and also the behaviors of Chinese consumers, including the way they Tel.:Tel.: +86 +86 21 21 2212 2212 3884 3884 Sources: KPMG analysis of US and Chinese e-commerce data from Statista, research and order products online, and their preference for Bain & Company speed and convenience. RobertRobert Ritacca Ritacca By 2015, e-commerce transactions in China are projected ResearchAccordingResearch Manager, to Manager, Mary Chong, Global Global KPMG China China Partner Practice Practice and Head of to hit USD 540 billion, or approximately 10 percent of total KPMGE-commerceKPMG China China and Payments for China, there are four drivers retail transactions, and by 2020, China’s e-commerce Email:ofEmail: e-commerce [email protected] [email protected] growth in China: e-commerce platforms, market is forecasted to be larger than those of the US, social media platforms, digital payments platforms and Tel.:Tel.: +86 +86 10 10 8508 8508 5109 5109 Britain, Japan, Germany, and France combined.7 mobile devices.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ kpmg.com/cnkpmg.com/cn4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 TheThe information information contained contained herein herein is ofis aof general a general nature nature and and is notis not intended intended to addressto address the the circumstances circumstances of anyof any particular particular individual individual or entity.or entity. Although Although we we endeavour endeavour www.bain.com/publications/articles/chinas-e-commerce-prize.aspx to provideto provide accurate accurate and and timely timely information, information, there there can can be beno noguarantee guarantee that that such such information information is accurateis accurate as asof theof the date date it is it receivedis received or thator that it will it will continue continue to beto be accurateaccurate in thein the future. future. No No one one should should act act upon upon such such information information without without appropriate appropriate professional professional advice advice after after a thorough a thorough examination examination of theof the particular particular situation. situation.

E-commerceTheTheThe emergence emergence emergence in China:of of of Chinese Chinese Chinese Drivingmultinationalmultinationalmultinational a new corporations corporations corporations consumer(MNCs):(MNCs):(MNCs): Local Local Localculture and and and global global global implicationsimplicationsimplications January 2014

(This (This (This article article article is isbased isbased based on on KPMG on KPMG KPMG commentary commentary commentary In China’s e-commerce 12th Five-Year Plan This month’sDancingDancingDancing withChina with with the the360 theDragon: Dragon: breaksDragon: The The down Theemergence emergence emergence China’s of of of (2011-2015), the Chinese government’s Ministry explosiveChineseChineseChinese e-commerce multinational multinational multinational growth corporations corporations corporations within and andthe andwhat what what of Industry and Information Technology unveiled business-to-consumerthisthis thismeans means means for for thefor the therest rest (B2C) rest of of the of the and theglobe globe consumer-to-globe).*).*).* policies to make China a global e-commerce consumerAsAs China’sAs China’s China’s (C2C) national national national arenas. economy economy economy Of particular continues continues continues tointerest to to leader, in line with China’s transition from an areglobalize, theglobalize,globalize, home-grown it isit isitimportant isimportant important platforms to to see to see seehow howunderpinning how this this thisis isplaying isplaying playing investment-heavy growth model, towards a theoutout rise outat atthe atofthe thecorporateon-line corporate corporate transactions, level. level. level. A Anumber Anumber number as of well of Chinese of Chinese asChinese the more consumption-driven model. increasinglycompanies,companies,companies, both importantboth both State-owned State-owned State-owned roles and of and andsocialprivate, private, private, media are are are andsuccessfullysuccessfullysuccessfully mobile internationalizingdevices. internationalizing internationalizing These operations,trends operations, operations, and in othersinmany inmany many Nonetheless, the speed at which the Chinese casesarecasescases fundamentally in ina inmattera mattera matter of of a of fewre-shapinga fewa fewyears. years. years. the ways Chinese e-commerce industry has grown, and the way in SomeSomeconsumersSome firms firms firms have havepurchase have pursued pursued pursued goodsoverseas overseas overseas and listings, listings, services. listings, some some some have have have which it is affecting businesses and consumers enteredenteredentered into into intojoint joint joint ventures ventures ventures or or cooperation or cooperation cooperation agreements agreements agreements has come as a surprise to many: by the end withwithThiswith foreign foreign foreignarticle companies, companies, companies,also highlights and and andothers others others the have haveimportance have expanded expanded expanded of of 2013, China will lead all other countries in overseasoverseasoverseasknowing through through through exactly M&A, M&A, M&A, whoGreenfield Greenfield Greenfield your consumers investment, investment, investment, are,or or other or otherhow other 1 B2C and C2C purchases. Jack Ma, founder formsformsformsthey of of outbound of outboundmake outbound their direct direct direct purchases investment investment investment online, (ODI). (ODI). (ODI). As and As aAs result, ahighlights result,a result, of Alibaba, was recently quoted as saying: “in thethe theglobal globalsome global business business foreign business community communityand community domestic is isnow isnow now successseeing seeing seeing a newastories newa new in other countries, e-commerce is a way to shop, phenomenon:phenomenon:phenomenon:the market. the the theChinese Chinese Chinese MNC. MNC. MNC. in China it is a lifestyle”.2 No matter how you slice * http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublicati* http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublicati* http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublicati1. He Wei. ‘China set to overtake US in e-commerce’. Chinaons/Pages/Dancin ons/Pages/DancinDaily.ons/Pages/Dancin August 28,g-with-the-dragon-O-201309.aspx 2013g-with-the-dragon-O-201309.aspxg-with-the-dragon-O-201309.aspx the numbers, trends or forecasts, it’s clear that http://usa.chinadaily.com.cn/business/2013-08/28/content_16927926.htm e-commerce is booming in China. 2. ‘E-commerce in China: Gain entrance into a completely different world’. Group of Companies, June 16, 2013 http://www.ptl-group.com/blogs/e-commerce-in-china-gain-entrance-into-a-completely-different-world

© 2013© 2013© KPMG2013 KPMG KPMG International International International Cooperative Cooperative Cooperative (“KPMG (“KPMG (“KPMG International”), International”), International”), a Swiss a Swiss a Swiss entity. entity. entity. Member Member Member firms firms firmsof theof theof KPMG the KPMG KPMG network network network of independentof independentof independent firms firms firmsare are affiliated are affiliated affiliated with with KPMGwith KPMG KPMG International.International.International. KPMG KPMG KPMG International International International provides provides provides no noclient noclient clientservices. services. services. No No member No member member firm firm has firm has any has any authority any authority authority to obligateto obligateto obligate or bindor bindor KPMGbind KPMG KPMG International International International or anyor anyor other any other othermember member member firm firm vis-à- firm vis-à- vis-à- ©vis 2014vis thirdvis thirdKPMG parties,third parties, Internationalparties, nor nor does nor does doesKPMG Cooperative KPMG KPMG International International International (“KPMG have have International”), anyhave any such any such authoritysuch authority aauthority Swiss to obligateto entity. obligateto obligate orMember bindor bindor anybind firmsany member any member of member the firm. KPMGfirm. Allfirm. Allrights network Allrights rights reserved. reserved. of reserved. independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-1 1 1 vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 1 The e-commerce explosion in China The rise of Chinese multinational Chinese MNCs take advantage of companiesA little over a decade ago, China’s path to e-commerce market11/11 dynamics leadership would have been difficult to foresee, even China’s ‘Singles Day’ Overas the the tech last boom 30 years, in the as US China and has other pursued markets policies saw the of China has long benefited from the flow of foreign direct occurs on November 11 economicdevelopment reform of e-commerce and re-balancing, as an China’s important corporations B2C and C2C investment (FDI) demand into the country. In recent years, havechannel. evolved as well. Large private enterprises have however, iteach has beenyear. China’s The month outbound direct investment hurtled into being, and even the largest State-owned that has garneredand attention: day are ODI represents the willingness 2 enterprisesIn 2000, China (SOEs) had haveyet to undergone develop any massive e-commerce change. Many and abilityrepresented of Chinese companies by ‘ones’ to invest directly in equity applications, and had only 2.1 million total internet users.3 of China’s large companies, however, have developed and/or assets of foreign(11/11). companies located outside of inPayment an environment systems characterizedand physical deliveryby strong mechanisms domestic to China. China, long known as a top investment destination demand,facilitate thecomparatively development low of labor e-commerce and variable transactions costs, and for MNCs, has recently grown its ODI to almost equal the were well-developed in other markets, but were simply the ability to set market prices due to limited or restricted amount it receives in FDI. In 2013, ‘11/11’ online competition.lacking in China. This trend started to gain momentumsales rose as the by global 80 percent crisis TheseFast forward domestic to themarket end conditions,of 2013: with and Chinese the scale internet of the took shape in 2007 and 2008. Itfrom was duringthe previous the global year, Chineseusers quickly market approaching itself, have 600 helped million to propel4, and e-commercecorporate financial crisis, as well as the subsequentto over USD5.7 European billion debt growthrevenue for growth Chinese (from companies, 2009-2012) with topping the result 70 percent that some crisis, that market prices (both– equity more and than real triplingassets) were the Chinesecompounded companies annually have5, China quickly is risenon pace up theto pass global the league US pushed downward. Inside China, to mitigate the global tables, to rank among the largest and most successful financial crisis’ impact on China’samount economy, of ‘Cyber the government Monday’ and become the largest e-commerce market in the world. 6 corporate players in the world. helped lift domestic demand throughrevenues a variety in ofthe stimulus US. packages, while adjusting policy measures and structural As can be seen from the chart below, in the past three Value of e-commerce transactions in reforms. This helped enable Chinese companies to make years alone, the number of Chinese companies in the the US and China, 2009-2015 purchases at suppressed market prices. ‘Global Fortune 500’ has more than doubled to 85 companies in 2013, versus 42 in 2010. By this measure, At the same time, the Chinese government has been China600 recently overtook Japan, which has 62 companies on allowingEssentially, China’s China’s currency, large theand Renminbi growing middle-class(RMB), to have the Fortune list, and trails only the US, which still holds the marginallybecome accustomedappreciate. Although to making a strongerfrequent RMBe-commerce has had 500 top spot with132 companies. a purchases.clear impact Furthermore, on China’s exporters as in many and longer-standing therefore its e-commerce markets, they are also developing brand 400 net export trade balance, it has also benefited Chinese companiesawareness, looking an increasing to invest proclivity outward, to by purchase enhancing high their Chinese Global Fortune 500 Companies, 300 purchasingquality and/or power individually versus other satisfying local currency. products, and showing

USD billion 1996-2013 85 a commitment to brand loyalty and repeat business: 200 OverVANCL, the pasta Chinese five years, online a combinationclothing and of apparel factors company, has 69 providedreported a thattailwind 80 percent to Chinese of its companies consumers looking had made to repeat 100 invest outside of China:8 they have not only been making Forecast57 purchases in 2012. investment decisions to buy foreign assets at a time of 0 2009 2010 2011 2012 2013 422014 2015 lowerThe futureglobal developmentmarket prices, of but China’s have beene-commerce doing so channel with a marginally stronger local currency. China USA 34 is closely linked to technology developments and also the 25 Thebehaviors proof is of in Chinesethe numbers, consumers, and the including numbers the show way a theyclear 19 22 Sources: KPMG analysis of US and Chinese14 e-commerce15 data from Statista, andresearch sustained and trend.order productsChina’s ODI online, in the and late their 1970s preference was for 9 11 11 11 Bain &6 Company nextspeed to nothing,and convenience. and as recently as 2002, China’s ODI was 2 3 3 only USD2.7 billion.1 In just a decade, this figure had grown By 2015, e-commerce transactions in China are projected byAccording leaps and to bounds Mary Chong,to hit a recordKPMG USD87.8Partner and billion Head in 2012, of 2 to1996 hit 1997 USD1998 5401999 2000 billion,2001 2002 or 2003 approximately2004 2005 2006 2007 102008 percent2009 2010 2011 of total2012 2013 whichE-commerce represents and an Payments 18 percent for year-on-year China, there increase. are four drivers retail transactions, and by 2020, China’s e-commerce of e-commerce growth in China: e-commerce platforms, Source: Fortune China. http://www.fortunechina.com/fortune500/c/2013-07/08/2013G500.htm For the first time since its reform, China has become a market is forecasted to be larger than those of the US, social media platforms, digital payments platforms and top 3 outbound investor in global markets.3 Thus, it is Britain, Japan, Germany, and France combined.7 mobile devices. not a matter of ‘if’ China’s ODI will exceed the FDI figure (USD111.7 billion in 20124), but ‘when’.

1 Perkowski, Jack. ‘Get ready for more China overseas investment’. Forbes, March 10, 2012.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 http://www.forbes.com/sites/jackperkowski/2012/10/03/get-ready-for-more-china-overseas-investment/6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html 2 ‘Chinahttp://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 2012 ODI hits record high’. Xinhuanet, September 9, 2013. 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 http://news.xinhuanet.com/english/china/2013-09/09/c_132704494.htm7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 3 Wang, Yanlin. ‘China among top-3 global investors’. ShanghaiDaily, September 10, 2013. 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.shanghaidaily.com/Business/finance/China-among-top3-global-investors/http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 4 ‘FDI inflow to China dropped by 3.7% in 2012 to USD111.7 billion, first time since 2009’. www.bain.com/publications/articles/chinas-e-commerce-prize.aspx Current Affairs Business News, January 17, 2013. http://currentaffairs-businessnews.com/2013/01/17/ fdi-inflow-to-china-dropped-by-3-7-in-2012-to-usd-111-7-billion-first-time-since-2009/

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG ©International. 2013 KPMG KPMG International International Cooperative provides (“KPMG no client International”), services. No a memberSwiss entity. firm Memberhas any authority firms of theto obligate KPMG network or bind KPMGof independent International firms or are any affiliated other member with KPMG firm vis-à- International.vis third parties, KPMG nor Internationaldoes KPMG Internationalprovides no client have services.any such Noauthority member to obligatefirm has orany bind authority any member to obligate firm. or All bind rights KPMG reserved. International or any other member firm vis-à- vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 2 The e-commerce explosion in China China’s Outbound Investment, Issues and responses for Chinese A little over a decade ago,2005-2012 China’s path to e-commerce multinationals11/11 leadership would have been difficult to foresee, even China’s ‘Singles Day’ as the tech boom in the US and other markets saw the Despite international success stories, some Chinese MNCs occurs on November 11 development of e-commerce as an important B2C and C2C have run into international resistance during their M&A channel. transactions.each Some year. of Thethese month setbacks can be attributable to local market politicaland day resistance, are due to lack of 2 In 2000, China had yet to develop any e-commerce corporaterepresented transparency. In by China’s ‘ones’ domestic market, these applications, and had only 2.1 million total internet users.3 companies may enjoy(11/11). competitive advantages in terms of Payment systems and physical delivery mechanisms to access to capital, scale, and de facto monopoly position facilitate the development of e-commerce transactions in certain industries. However, when the focus turns to were well-developed in other markets, but were simply outbound investment, the ballgameIn 2013, shifts ‘11/11’ to the firm online they lacking in China. are acquiring and the country’ssales rules, rose restrictions, by 80 andpercent Sources: 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment. China Statistics Press; 2012 data from the China Ministry of Commerce (2012 Statistical Bulletin of China’s Outward Foreign Direct transparency arrangements they must abide by. InvestmentFast forward remains unreleased to the at the end time ofof publication) 2013: with Chinese internet from the previous year, users quickly approaching 600 million4, and e-commerce In addition to the different managementto over USD5.7style and control billion MNCsrevenue growth with (from Chinese 2009-2012) characteristics topping 70 percent characteristics of multinational– SOEs, more there than are tripling some other the compounded annually5, China is on pace to pass the US factors that may hinder the progress of these companies. For example, despite the stellaramount growth of of ‘Cyber China’s megaMonday’ Likeand becomeearlier waves the largest of fast-growing e-commerce Asian market MNCs in from the world.Japan, 6 South Korea and Taiwan, and their contemporaries from companies inside China, they arerevenues rarely seen in as the influential US. India, Brazil and Russia, Chinese MNCs are bound to create or having strong brands in their respective industries. an impact onValue the ofcompetitive e-commerce landscape transactions of the global in According to Interbrand’s ‘Top 100 Brands’ list, a Chinese business world.the Competition US and China, for talent, 2009-2015 capital, resources, brand has yet to make the list. In contrast, many companies consumers, and innovation will become more intense. from smaller or emerging economies made the list in 2012, 6 suchEssentially, as Spain’s China’s Santander large Bank,and growing and Mexico’s middle-class Corona. have When600 looking at the implication for the rest of the globe, become accustomed to making frequent e-commerce from the ongoing emergence of Chinese MNCs, it is 500 purchases. Furthermore, as in many longer-standing important to remember that most Chinese MNCs have e-commerce markets, they are also developing brand travelled400 on a different path to get to where they are today. awareness, an increasing proclivity to purchase high By and large, the top companies in China have had the quality and/or individually satisfying products, and showing backing300 of the State, which means abundant resources, USD billion a commitment to brand loyalty and repeat business: controlled competition, and low variable costs. The same 200 VANCL, a Chinese online clothing and apparel company, companies that no one outside of China had heard of two reported that 80 percent of its consumers had made repeat years100 ago, are now making daily headlines on international purchases in 2012.8 newswires and even becoming market leaders in Forecasttheir respective0 fields. 2009 2010 2011 2012 2013 2014 2015 The future development of China’s e-commerce channel

Chinese companies are alsoChina choosing diverseUSA industries is closely linked to technology developments and also the and sectors to outwardly invest. In the recent past, Chinese behaviors of Chinese consumers, including the way they companies were known for investing in narrow industries Sources: KPMG analysis of US and Chinese e-commerce data from Statista, research and order products online, and their preference for overseasBain such& Company as engineering and contract projects, energy speed and convenience. and power, metals and mining, automotive, and financial services.By 2015, However,e-commerce recently transactions Chinese in MNCs China have are projectedbeen According to Mary Chong, KPMG Partner and Head of Not only have Chinese companies failed to produce any diversifyingto hit USD 540their billion, reach. or Substantial approximately outbound 10 percent deals have of total E-commerce and Payments for China, there are four drivers global leading brands, but Chinese companies were also beenretail madetransactions, in progressive and by industries2020, China’s such e-commerce as: consumer of e-commerce growth in China: e-commerce platforms, perceived to lack innovation and creativity. In Forbes ‘The goodsmarket and is forecasted services, real to beestate, larger or than agribusiness those of theindustries. US, social media platforms, digital payments platforms and World’s Most Innovative Companies’ list, the magazine ForBritain, example, Japan, Chinese Germany, privately-owned and France combined. enterprise7 Dalian mobile devices. included only four Chinese companies out of 100 (namely Wanda Group recently acquired AMC entertainment Tencent, China Oilfield Services, Sany, and Zoomlion).7 In company in a deal worth around USD2.6 billion, creating addition, of the 50 companies ranked by Fortune as the largest theater chain in the world.5 ‘The World’s Most Admired Companies 2013’, none were 2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html fromhttp://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ China. 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5 Voigt, Kevin. ‘China firm buys AMC to form world’s largest cinema chain’. CNN, May 21, 2012. http://edition.cnn.com/2012/05/21/business/china-amc-wanda-theater/ 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 6 ‘Bestwww.bain.com/publications/articles/chinas-e-commerce-prize.aspx Global Brands 2012’. Interbrand. http://www.interbrand.com/en/best-global-brands/2012/Best-Global-Brands-2012.aspx 7 ‘The World’s Most Innovative Companies’. Forbes. http://www.forbes.com/innovative-companies/list/

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG ©International. 2013 KPMG KPMG International International Cooperative provides (“KPMG no client International”), services. No a memberSwiss entity. firm Memberhas any authority firms of theto obligate KPMG network or bind KPMGof independent International firms or are any affiliated other member with KPMG firm vis-à- International.vis third parties, KPMG nor Internationaldoes KPMG Internationalprovides no client have services.any such Noauthority member to obligatefirm has orany bind authority any member to obligate firm. or All bind rights KPMG reserved. International or any other member firm vis-à- vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 3 The e-commerce explosion in China Although the world has yet to see a truly global The future of POEs and SOEs on the ‘brand name’ from China, Chinese companies are A little over a decade ago, China’s path to e-commerce global 11/11stage making progress: Gree Electric Appliances is selling leadership would have been difficult to foresee, even its air conditioning products in over 70 countries, as the tech boom in the US and other markets saw the China’s ‘Singles Day’ while automaker Chery is exporting automobiles to Within the next 10 years, the outflow of Chinese development of e-commerce as an important B2C and C2C occurs on November 11 over 50 countries. It is only a matter of time before overseas investment will touch a wide range of channel. each year. The month the world starts recognizing innovative products companies, industries, and geographies. Investors 8 will comprise: andprivately-owned day are enterprises (POEs) from China. 2 In 2000, China had yet to develop any e-commerce and SOEs.represented Although SOEs by ‘ones’ have been behind many applications, and had only 2.1 million total internet users.3 Chinese MNCs also lack experience managing a of the past ‘headline-making’(11/11). overseas investments, globalPayment business. systems Althoughand physical Chinese delivery companies mechanisms may to POEs will certainly play a more active role going befacilitate quite theeffective development at managing of e-commerce their sizable transactions domestic forward. Compared to SOE companies, POEs are were well-developed in other markets, but were simply operations, the challenge of running a multinational or more market driven, flexible,In efficient 2013, ‘11/11’ and nimble online globallacking operationin China. requires a different managerial skill in decision making, and havesales clear rose ownership by 80 percentand set. Some companies simply are not yet ‘mentally’ incentive structures. readyFast forward to be globalto the endplayers; of 2013: they with tend Chinese to operate internet from the previous year, theirusers global quickly business approaching in the 600 same million way4, and they e-commerce manage Deal industries will also becometo over more USD5.7 diversified. billion theirrevenue domestic growth business.(from 2009-2012) Managing topping daily 70 operations percent Despite the continuing wave– moreof large than ODI tripling deals the 5 in natural resources – oil & gas, coal, iron ore and overseas,compounded including annually issues, China such is on as pace working to pass with the USlabor amount of ‘Cyber Monday’ and become the largest e-commerce market in the world. minerals – future Chinese MNCs are not likely to be unions in other countries, has proven challenging revenues in the US.6 to Chinese management in the past. In addition, from these industries alone. Companies in the energy Chinese MNCs have had difficulty bridging gaps in and resources fields are mainly State-owned, enjoy culture, deailingValue of with e-commerce unfamiliar transactions legal environments, in a monopolistic position in the domestic market, and the US and China, 2009-2015 and different compliance landscapes from that of are tasked with implementing the national strategy China. of securing resources. By comparison, companies inEssentially, manufacturing, China’s technology, large and growing and services middle-class have have It is600 likely that Chinese MNCs will make internal operatedbecome accustomedin a competitive to making environment frequent e-commercein the adjustments to their operating model, and also 500 domesticpurchases. market, Furthermore, and maintain as in many fewer longer-standing government explore external-facing strategies, in order to be more tiese-commerce or obligations. markets, They they have are alsoalso developeddeveloping brand effective400 in running a multinational business. Internal coreawareness, capabilities an increasing in operations, proclivity and to accumulated purchase high adjustments could include policies to hire or retain knowledgequality and/or of individuallythe global satisfyingmarket by products, associating and withshowing local300 talent to deal with local issues, training that is USD billion overseasa commitment business to brand partners. loyalty and repeat business: specific to local country processes, implementing 200 VANCL, a Chinese online clothing and apparel company, an international rotation program, or setting up reported that 80 percent of its consumers had made repeat an internal100 government or community relations purchases in 2012.8 capability. External-facing strategies may includeForecast 0 Xing Yujing, Secretary-General of a systematic process to learn and manage local 2009 2010 2011 2012 2013 2014 2015 The future development of China’s e-commerce channel government expectations of compliance, teaming up China’s Central Bank’s monetary China USA is closely linked to technology developments and also the with local organizations, such as non-governmental behaviorspolicy of Chinese committee consumers, includingnotes that the way they organizations or local community agencies, and research“the and orderCentral products Bank online, supports and their preferencethe for bridgingSources: KPMG culture analysis of gaps US and orChinese mitigating e-commerce other data from operating Statista, Bain & Company speedever-stronger and convenience. RMB to purchase assets challenges in the local context. or equity in cross-border transactions”, By 2015, e-commerce transactions in China are projected According to Mary Chong, KPMG Partner and Head of to hit USD 540 billion, or approximately 10 percent of total E-commerceas the andcurrency Payments will for China,offer there SOEs are andfour drivers retail transactions, and by 2020, China’s e-commerce of e-commercePOEs greater growth globalin China: opportunity.e-commerce platforms, In market is forecasted to be larger than those of the US, socialaddition, media platforms, Li Jinzao, digital payments Vice-Minister platforms ofand Britain, Japan, Germany, and France combined.7 mobileCommerce, devices. predicted “outbound investment from China will reach USD500 billion in five years”9

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 8 Flannery, Russell. ‘China Mobile tops best Chinese brands list’. Forbes, July 6, 2010. http://www.forbes.com/2010/07/06/china-top-brands-markets-emerging-markets-omnicom-group.html# 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 9 ‘Economy,www.bain.com/publications/articles/chinas-e-commerce-prize.aspx ODI and currency bring opportunities’. Xinhuanet , September 26, 2013. http://news.xinhuanet.com/english/china/2013-09/26/c_132751252.htm

Value of e-commerce transactions in the US and China, 2009-2015

600 Essentially, China’s large and growing middle-class have Contact us becomeRead accustomed on... to making frequent e-commerce 500 purchases. Furthermore, as in many longer-standing e-commerce markets, they are also developing brand 400 For more information, contact: Forawareness, all issues an increasing of China proclivity 360: to purchase high 300 quality and/or individually satisfying products, and showing ThomasUSD billion Stanley a commitment to brand loyalty and repeat business: 200 VisitVANCL, www.kpmg.com/cn/China-360 a Chinese online clothing and apparel company, COO, Global China Practice reported that 80 percent of its consumers had made repeat 100 KPMG China or scan the following8 QR code: Forecast purchases in 2012. Email:0 [email protected] Tel.: +862009 21 22122010 38842011 2012 2013 2014 2015 The future development of China’s e-commerce channel China USA is closely linked to technology developments and also the Robert Ritacca behaviors of Chinese consumers, including the way they research and order products online, and their preference for Sources:Research KPMG analysisManager, of US and Global Chinese e-commerceChina Practice data from Statista, Bain & Company speed and convenience. KPMG China ByEmail: 2015, [email protected] e-commerce transactions in China are projected According to Mary Chong, KPMG Partner and Head of toTel.: hit USD+86 10540 8508 billion, 5109 or approximately 10 percent of total E-commerce and Payments for China, there are four drivers retail transactions, and by 2020, China’s e-commerce of e-commerce growth in China: e-commerce platforms, market is forecasted to be larger than those of the US, social media platforms, digital payments platforms and Britain, Japan, Germany, and France combined.7 mobile devices.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ kpmg.com/cn4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour www.bain.com/publications/articles/chinas-e-commerce-prize.aspx to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

E-commerceThe rise of the in China:urban Driving‘post-90s’ a new generation in China consumer culture

September 2013 January 2014

In China’sIn 2012, e-commerce a new generation 12th ofFive-Year young people Plan began ThisThe month’s allocation China of 360 resources breaks down in aChina’s post- (2011-2015),to enter China’sthe Chinese workforce. government’s This generation Ministry explosive1990s China e-commerce growth within the of Industryhas been and dubbed Information ‘the post-90s’ Technology generation unveiled in business-to-consumer (B2C) and consumer-to- policiesChina to (90 make 后), andChina the a traits global and e-commerce characteristics consumerGrowing up (C2C)in the 1990sarenas. and Of 2000s, particular the post interest leader,of thisin line group with has China’s been extensively transition analyzed from an in are90s thegeneration home-grown have enjoyed platforms the fruits underpinning of China’s investment-heavyChinese society, growth just as the model, ‘Gen X’towards and ‘Gen a Y’ theeconomic rise of rise: on-line an economy transactions, growing as at wella double- as the morephenomena consumption-driven were in the West. model. increasinglydigit pace, less important government roles control of social over daily media life, anda proliferation mobile devices. of communication These trends and information and others In China, the ‘post-90s’ generation is Nonetheless, the speed at which the Chinese aretechnology, fundamentally greater access re-shaping to local the and ways foreign Chinese goods e-commerceapproximately industry 135 million has grown,1 strong. and They the are waya in consumers purchase goods and services. and services, and remarkable increases in family whichproduct it is affecting of China’s businesses economic reform and consumerspolicies, and discretionary income. has comeover the as next a surprise 10 years, to will many: have anby increasingthe end This article also highlights the importance of of 2013,impact China on China’s will lead economy all other and countriessociety. It in knowingThe post-90s exactly generation who yourhas also consumers been raised are, in how B2C wouldand C2C therefore purchases. be relevant1 Jack to Ma,understand founder their theya stronger make and their more purchases global China, online, with andmilestone highlights of Alibaba,expectations was recentlyand motivations, quoted what as saying: distinguishes “in someevents foreignsuch as andthe 2008 domestic Olympics, success the 2010 stories in otherthem countries, from their e-commerce parents’ generation, is a way and to how shop, theShanghai market. Expo, the successful Chinese space 2 in Chinathey itplan is ato lifestyle”. add value toNo an matter economy how that you seeks slice program and China’s emergence as the second 1. He Wei. ‘China set to overtake US in e-commerce’. China Daily. August 28, 2013 the numbers,to further develop trends its or future forecasts, GDP growth it’s clear around that largesthttp://usa.chinadaily.com.cn/business/2013-08/28/content_16927926.htm economy all looming large for this generation. e-commerce is booming in China. 2. ‘E-commerce in China: Gain entrance into a completely different world’. Group of Companies, June 16, 2013 consumer spending. http://www.ptl-group.com/blogs/e-commerce-in-china-gain-entrance-into-a-completely-different-world

For this issue of China 360, four KPMG post 90s professionals were interviewed, to capture views and opinions representative of urban post-90’s, about topics ranging from the economy and technology to consumer habits. What may come as a surprise is the stark differences in outlook, expectations, and consumer behavior between this group and their parents’ generation – the last generation of parents from China’s pre-one-child policy era.

1 ‘Population of China: Statistics, trends, patterns and consequences’. Jeffrey Hays, http://factsanddetails.com/china.php?itemid=129

© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à © 2014vis thirdKPMG parties, International nor does Cooperative KPMG International (“KPMG have International”), any such authority a Swiss to entity. obligate Member or bind firmsany member of the KPMGfirm. All network rights reserved. of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-1 vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 1 The e-commerce explosion in China In contrast, the parents of the post-90s generation Generation driven by higher wereA little raised over a indecade an entirely ago, China’s different path China, to e-commerce which has expectations,11/11 more alternatives potentiallyleadership would increased have beenpressure difficult and to expectations foresee, even ofas the techpost-90s boom to in takethe US advantage and other of markets the new saw the China’s growthChina’s and ‘Singles prosperity Day’ over the past few opportunitiesdevelopment of available e-commerce to them. as an important B2C and C2C decadesoccurs has provided on November the post-90s 11 with tangible channel. economiceach benefits, year. but The has month also clearly bolstered the Some examples of China’s 30 years of economic confidence andand the day expectation are of future success progress that have contributed to the2 post-90s’ In 2000, China had yet to develop any e-commerce for this generation.represented More by than‘ones’ ever before, this improvedapplications, living and standardshad only 2.1 are million listed total below: internet users.3 generation is open to choosing jobs that will satisfy (11/11). Payment systems and physical delivery mechanisms to their personal passion, rather than focus only on a • facilitateIn 2012, the developmentChina’s per capitaof e-commerce GDP was transactions traditional ‘successful career path’ as defined by their wereapproximately well-developed RMB38,000 in other markets, – versus but were RMB527 simply parents. 2 In 2013, ‘11/11’ online lackingin 1982.in China. As this cohort enters the workforcesales rose in byrecord 80 percent numbers, however, China’s economy is shifting • Fast Inforward 2012, tothere the endwere of nearly2013: with7 million Chinese university internet from the previous year, 3 toward a new stage of development – marked by graduates in China – versus 450,0004 in 1982. users quickly approaching 600 million , and e-commerce substantially slower economicto overgrowth USD5.7 rates. The billion revenue growth (from 2009-2012) topping 70 percent double digit growth rates of– the more 1990s than and tripling 2000s theare • In 2012, there were5 nearly 340,000 Chinese compounded annually , China is on pace to pass the US likely to continue to moderateamount between of ‘Cyber 6 and Monday’ and studentsbecome the studying largest e-commerceabroad – versus market approximately in the world. 10,000 from 1980-1985.4 8 percent, with implications forrevenues the career in theprospects US.6 for the post-90s. Value of e-commerce transactions in the US and China, 2009-2015 College graduates in China “It is important for our 8

600parents to provide for us, because Essentially,7 China’s large and growing middle-class have our parents do not want us to struggle become6 accustomed to making frequent e-commerce 500 like they had to. At times, purchases.5 Furthermore, as in many longer-standing they were unsure if they had enough e-commerce4 markets, they are also developing brand 400 food or water to share with awareness,3 an increasing proclivity to purchase high

Millions of graduates 2 300 rest of the family.” quality and/or individually satisfying products, and showing 1 USD billion a commitment to brand loyalty and repeat business: 200 0 – Rani Guo, Transactions & Restructuring, VANCL, a Chinese online clothing and apparel company,

reported2000 that2001 802002 percent2003 2004 of2005 its2006 consumers2007 2008 2009 had2010 2011 made2012 repeat 2013 100 KPMG China. Birth year: 1990 8 Forecast purchases in 2012. 0 2009 2010 2011 2012 2013 2014 2015 InThe 2000, future there development were just of over China’s 1 million e-commerce new college channel China USA graduatesis closely linkedin China. to technology As of 2013, developments this number and has also the skyrocketedbehaviors of toChinese nearly consumers, 7 million.5 Inincluding the current the way they

Sources: KPMG analysis of US and Chinese e-commerce data from Statista, economicresearch and cycle order in China,products a considerableonline, and their number preference for Bain & Company ofspeed new andpost-90s convenience. graduates have been unable to secure a specific job or position they desire, and By 2015, e-commerce transactions in China are projected manyAccording are electing to Mary toChong, delay KPMG the start Partner of their and Headcareer. of to hit USD 540 billion, or approximately 10 percent of total NewlyE-commerce minted and graduates Payments are for opting China, tothere pursue are four higher drivers retail transactions, and by 2020, China’s e-commerce educationof e-commerce options, growth at home in China: or overseas: e-commerce recent platforms, market is forecasted to be larger than those of the US, reportssocial media suggest platforms, that nearly digital 20 payments percent platformsof graduates and 6 Britain, Japan, Germany, and France combined.7 frommobile Beijing devices. universities prefer to further their education with post-graduate degrees.

2 National Bureau of Statistics of China, http://www.stats.gov.cn/tjgb/ndtjgb/qgndtjgb/t20130221_402874525.htm; 2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 ‘Nationalhttp://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html data’. National Bureau of Statistics of China, http://data.stats.gov.cn/search/keywordlist2?keyword=GDP%201982 http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3 3. Liu,David Qiang. Wei. ‘E-commerce ‘6.99 mln gradsbigger hitin China market’. than UnitedChina.org.cn States’. ,CNN May. September 20, 2013. 19, http://www.china.org.cn/china/2013-05/20/content_28875009.htm 2013 7. Amanda. ‘China E-Commerce Market to Reach; 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 Nationalhttp://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html Bureau of Statistics of China, http://www.stats.gov.cn/tjgb/ndtjgb/qgndtjgb/t20020331_15376.htmhttp://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 4 China Market Report Center, http://www.chinairn.com/news/20120918/639306.html; http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5.China Bain Brief. Inspection ‘China’s e-commerceand Quarantine prize’. Times Bain &, Company. http://cngm.cqn.com.cn/cngm201002/html/2009-09/09/content_38334.htm August 28, 2013 5 Liu,www.bain.com/publications/articles/chinas-e-commerce-prize.aspx Qiang. ‘6.99 mln grads hit market’. China.org.cn, May 20, 2013. http://www.china.org.cn/china/2013-05/20/content_28875009.htm 6 Liu, Qiang. ‘6.99 mln grads hit market’. China.org.cn, May 20, 2013. http://www.china.org.cn/china/2013-05/20/content_28875009.htm

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG ©International. 2013 KPMG KPMG International International Cooperative provides (“KPMG no client International”), services. No a memberSwiss entity. firm Memberhas any authority firms of theto obligate KPMG network or bind KPMGof independent International firms or are any affiliated other member with KPMG firm vis-à- International.vis third parties, KPMG nor Internationaldoes KPMG Internationalprovides no client have services.any such Noauthority member to obligatefirm has orany bind authority any member to obligate firm. or All bind rights KPMG reserved. International or any other member firm vis-à vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 2 The e-commerce explosion in China “Our parents’ generations were A little over a decade ago, China’s path to e-commerce 11/11 leadershipprogrammed would have tobeen focus difficult on to foresee,their initial even as thejob.They tech boom did in the not US haveand other many markets choices saw the China’s ‘Singles Day’ developmentlike we of e-commerce have. If they as an wereimportant textile B2C and C2C occurs on November 11 channel.producers in the 1970s or 1980s, their each year. The month primary career goal would be to focus and day are 2 In 2000,on Chinaknowing had yet everything to develop any about e-commerce how represented by ‘ones’ applications, and had only 2.1 million total internet users.3 to manufacture textiles and become (11/11). Paymentexperts systems in and that physical area, delivery irrespective mechanisms of to facilitate theliking development or disliking of e-commerce the job.” transactions were well-developed in other markets, but were simply In 2013, ‘11/11’ online lacking in China. – Emily Qu, Transactions & Restructuring intern, sales rose by 80 percent KPMG China. Birth year: 1990 Fast forward to the end of 2013: with Chinese internet from the previous year, users quickly approaching 600 million4, and e-commerce to over USD5.7 billion Consumerrevenue growth awareness(from 2009-2012) topping 70 percent – more than tripling the 5 compounded annually , China is on pace to pass the US amount of ‘Cyber Monday’ Theand becomeconsumer the behavior largest e-commerce and awareness market of in the the post world. revenues in the US.6 90s is markedly different from previous generations. Although they are the youngest and newest The technological savviness of the post-90s generationValue of independent of e-commerce consumers transactions and mayin still the US and China, 2009-2015 generation makes them de facto ‘experts’ in the eyes have relatively limited consumer purchasing power, of elder generations, and this means that they wield the post-90s generation is both more willing and influence (and even decision-making power) beyond able600 to access more specific product information and theirEssentially, own personal China’s largespending and growing capacity, middle-class by impacting have feedback than past generations. thebecome purchase accustomed decisions to makingof their frequent family or e-commerce elder 500 purchases. Furthermore, as7 in many longer-standing They are able to effectively take advantage of the acquaintances. One study suggests that urban youth e-commerce markets, they are also developing brand information400 explosion represented by social media consume, or directly influence, 50 percent or more of awareness, an increasing proclivity to purchase high sites, micro-blog feedback services, direct product their family’s expenditures. Nearly one-third said they quality and/or individually satisfying products, and showing websites,300 and peer-to-peer instantaneous feedback made decisions about major purchases, including USD billion a commitment to brand loyalty and repeat business: via China’s now-ubiquitous messaging platforms. houses and cars, and over 60 percent of urban post 200 VANCL, a Chinese online clothing and apparel company, This heightens their ability to make informed and 90s youngsters have their own credit card. In terms reported that 80 percent of its consumers had made repeat researched100 decisions about products and services, of corporate advertising and marketing, the post-90s purchases in 2012.8 creating both opportunities (to build a loyal customerForecast are an important target for companies to build up base)0 and risks for companies (those unable to their brand equity. 2009 2010 2011 2012 2013 2014 2015 The future development of China’s e-commerce channel respond nimbly to issues, trends, and consumer China USA is closely linked to technology developments and also the demands). behaviors of Chinese consumers, including the way they research and order products online, and their preference for Sources: KPMG analysis of US and Chinese e-commerce data from Statista, “People look to us for information, we Bain & Company speedhave and the convenience. greatest ability to seek out By 2015, e-commerce transactions in China are projected Accordingand obtain to Mary information Chong, KPMG aboutPartner andproducts’ Head of to hit USD 540 billion, or approximately 10 percent of total E-commercefunctions and and Payments uses.Thus, for China, thereour areelders four drivers retail transactions, and by 2020, China’s e-commerce of(especially e-commerce growth our familyin China: members)e-commerce platforms, trust market is forecasted to be larger than those of the US, socialus mediato know platforms, what digital products payments areplatforms most and Britain, Japan, Germany, and France combined.7 mobilereliable, devices. have the widest uses, or are worth the steep price tag.”

– Marc Zhao, Transactions & Restructuring, 2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/KPMG China. Birth year: 1990 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 7 Kisselmann,http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm Olga. ‘China’s post-90 generation is making its mark’. Digital Development Debates, http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5. http://www.digital Bain Brief. ‘China’s e-commerce-development prize’.-debates.org/issues/11 Bain & Company. August-youth/lifestyle/chinas 28, 2013 -post-90-generation-is-making-its-mark/ www.bain.com/publications/articles/chinas-e-commerce-prize.aspx

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG ©International. 2013 KPMG KPMG International International Cooperative provides (“KPMG no client International”), services. No a memberSwiss entity. firm Memberhas any authority firms of theto obligate KPMG network or bind KPMGof independent International firms or are any affiliated other member with KPMG firm vis-à- International.vis third parties, KPMG nor Internationaldoes KPMG Internationalprovides no client have services.any such Noauthority member to obligatefirm has orany bind authority any member to obligate firm. or All bind rights KPMG reserved. International or any other member firm vis-à vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 3 The e-commerce explosion in China The target market Chinese consumer electronics manufacturer Xiaomi, on the other hand, is a local company that is having A little over a decade ago, China’s path to e-commerce 11/11 tremendous recent success with young Chinese Companiesleadership would that have beenstarted difficult aggressively to foresee, marketing even consumers. The company has not only developed a toas post-90sthe tech boom are finding in the USthat and they other are markets a challenging saw the China’s ‘Singles Day’ reputation for quality products at an affordable price groupdevelopment to target. of e-commerce This demographic as an important often chooses B2C and to C2C occurs on November 11 point, but also allows users an open-ended platform foregochannel. brand name purchases, in favor of choosing each year. The month a product that retains the greatest long-term value. to contribute feedback, allows other users to view the feedback, and evenday areencourages them to make InIn 2000,a recent China survey, had yet only to develop13.3 percent any2 e-commerce of responders suggestionsrepresented for forthcoming by ‘ones’ software releases.10 reportedapplications, that and a brand had only was 2.1 the million first totalfactor internet they users.3 This embrace of (11/11).consumer engagement taps into the consideredPayment systems when and shopping, physical whiledelivery 65.2 mechanisms percent took to very fabric that motivates the post-1990s generation bothfacilitate brand the and development practicality of e-commerceinto account transactions when making to make purchases and stay loyal to a brand. awere purchase. well-developed Before makingin other amarkets, purchase but decision, were simply 70 In 2013, ‘11/11’ online percentlacking in said China. they considered both quality and price It is also important to remember that the post-90s, in shopping decisions, while 47.3 percent viewed the growing up entirely in the salesinternet rose age, by are 80 avid percent product’sFast forward style to theand end design of 2013: as ‘importantwith Chinese decision- internet users of e-commerce channelsfrom to the purchase previous products. year, makingusers quickly factors’. approaching8 600 million4, and e-commerce China’s 2012 e-commerce purchasesto over USD5.7 amounted billion to revenue growth (from 2009-2012) topping 70 percent USD212 billion versus USD228– more billion than in the tripling US, the Leading consumer product5 companies, such as China-basedcompounded annuallysporting, goodsChina is and on apparelpace to passgiant the LiNing US representing average 71 percentamount average of ‘Cyber year-on-year Monday’ and become the largest e-commerce market in the world. Corporation, are finding it difficult to connect with this growth of China e-commerce since 2009, versus 6 11 revenues in the US. young group. According to LiNing, “this generation 13 percent from the US. Forecasts have China is not lured by the star power as past generations outpacing the US to become the largest e-commerce Value of e-commerce transactions in market in the world by the end of this year.12 This were. They arethe young US and and China, hard to2009-2015 interpret, but will become the pillar of China in the next 10 to 15 years. extraordinary growth is driven in large part by the They are better educated than consumers from past technologically savvy consumers of the post-1990s generations.”600 9 generation.Essentially, China’s large and growing middle-class have become accustomed to making frequent e-commerce 500 purchases. Furthermore, as in many longer-standing e-commerce markets, they are also developing brand 400“Everyone knows staple products such as Apple, everyone trusts these awareness, an increasing proclivity to purchase high products.300 But for foreign or domestic quality and/or individually satisfying products, and showing USD billion products that are lesser known, more a commitment to brand loyalty and repeat business: 200 VANCL, a Chinese online clothing and apparel company, diligent research is necessary for me reported that 80 percent of its consumers had made repeat 100 to make a purchase.” 8 Forecast purchases in 2012. 0 – Li Nan,2009 Global2010 China2011 Practice2012 2013intern, 2014KPMG.2015 The future development of China’s e-commerce channel

BirthChina year: 1991 USA is closely linked to technology developments and also the behaviors“Technology of Chinese consumers, has taken including over the our way they research and order products online, and their preference for Sources: KPMG analysis of US and Chinese e-commerce data from Statista, lives. I don’t think I could ever live Bain & Company speedwithout and convenience. it. I don’t remember a time By 2015, e-commerce transactions in China are projected Accordingwhere to Mary I haven’t Chong, KPMG been Partner using and it, Head or of to hit USD 540 billion, or approximately 10 percent of total E-commerce and adjustingPayments for toChina, it.” there are four drivers retail transactions, and by 2020, China’s e-commerce of e-commerce growth in China: e-commerce platforms, market is forecasted to be larger than those of the US, social– Marcmedia Zhao,platforms, Transactions digital payments & Restructuring, platforms and Britain, Japan, Germany, and France combined.7 mobile devices.KPMG China. Birth year: 1990

8 Kisselmann, Olga. ‘China’s post-90 generation is making its mark’. Digital Development Debates, http://www.digital-development-debates.org/issues/11-youth/lifestyle/chinas-post-90-generation-is-making-its-mark/ 9 ‘Brands struggle to connect with China’s “Post-90s” generation’. Jing Daily, http://www.jingdaily.com/brands-struggle-to-connect-with-chinas-post-90s-generation/19296/ 2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 10 Perez,http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html Bien. ‘Xiaomi eyes global expansion as it hires Google’s Hugo Barra’. South China Morning Posthttp://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/, August 30, 2013. 3. http://www.scmp.com/business/china-business/article/1300477/xiaomi-eyes-global-expansion-new-hire-google; David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 Hong,http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html Kaylene. ‘Here’s why you should care about rising Chinese smartphone firm Xiaomi’. The Nexthttp://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ Web, September 6, 2013. 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://thenextweb.com/asia/2013/09/06/heres-why-you-should-care-about-rising-chinese-smartphone-firm-xiaomi/ http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 11 5. Carsten,Bain Brief. Paul. ‘China’s ‘Chinese e-commerce shoppers prize’. Bainset to& Company.become Augustworld 28,leaders 2013 online’. Reuters, August 28, 2013. http://www.reuters.com/article/2013/08/28/net-us-china-ecommerce-idUSBRE97R0GT20130828www.bain.com/publications/articles/chinas-e-commerce-prize.aspx 12 Ding, Yining. ‘China’s online sales may overtake US’. Shanghai Daily, August 29, 2013. http://www.shanghaidaily.com/Business/consumer/Chinas-online-sales-may-overtake-US-/shdaily.shtml

Value of e-commerce transactions in the US and China, 2009-2015

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ kpmg.com/cn4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour www.bain.com/publications/articles/chinas-e-commerce-prize.aspx to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

E-commerceInnovated in in China: China: DrivingNew frontier a new for global R&D consumer culture

August 2013 January 2014

For much of the past 30 years, manufacturing The China R&D attraction In China’sinvestment e-commerce has been the 12 drivingth Five-Year force behind Plan the This month’s China 360 breaks down China’s (2011-2015),foreign direct the investment Chinese government’s(FDI) landscape inMinistry China, explosiveChina is quickly e-commerce rising up the growth global withinranks in the a of Industryand China andhas developedInformation a global Technology reputation unveiled as business-to-consumernumber of intellectual property-heavy (B2C) and consumer-to-sectors, from policiesthe factory to make of the China world. a Duringglobal this e-commerce time, Chinese consumerhealthcare and(C2C) biotech, arenas. to high-tech Of particular manufacturing, interest leader,companies in line were with typically China’s not transition viewed as from true an areinformation the home-grown technology, platformsand alternative underpinning energy. In the investment-heavyinnovators; foreign growth companies, model, for the towards most part, a thelast riseten years, of on-line R&D investmenttransactions, in these as well sectors as the has morekept consumption-driven their advanced designs model. and products off-shore. increasinglybeen significant, important and the numberroles of of social MNCs media setting up andR&D mobile centers devices. in China continues These trends to rise. and Since others 2000, Nonetheless,However, the the focus speed of China’s at which government, the Chinese domestic arethe fundamentallynumber of foreign-invested re-shaping R&D the centers ways Chinesehas e-commercecompanies, andindustry global has corporations grown, andalike, the is now way in consumersincreased from purchase under 200 goods to over and 1,300. services.1 whichclearly it isshifting affecting toward businesses research and and development consumers R&D spending in China is rising as a result. In 2011, has(R&D) come – especiallyas a surprise R&D toin China,many: for by China, the end and This article also highlights the importance of for the rest of the world. With strong support China passed Japan to place second in the world for of 2013, China will lead all other countries in knowing exactly who2 your consumers are, how B2Cfrom and the C2C 12th purchases.Five-Year Plan,1 Jack and Ma,underpinned founder by theytotal R&Dmake spending, their purchases and in 2013, online, China and is expected highlights of Alibaba,corporations’ was need recently to innovate quoted their as way saying: to success “in someto spend foreign approximately and domestic USD220 success billion. While stories this in otherin a countries,competitive e-commerce market, R&D activities is a way in to China shop, are thestill market.places China a distant second behind the US (the in Chinaentering it ais new a lifestyle”. era. 2 No matter how you slice 2013 forecast is USD424 billion), based on current 1.R&DHe Wei. growth‘China set to overtake trends, US in e-commerce’.China is China on Daily. track August to28, 2013overtake the the numbers, trends or forecasts, it’s clear that http://usa.chinadaily.com.cn/business/2013-08/28/content_16927926.htm Multinational companies (MNCs) and foreign-invested 3 e-commerce is booming in China. 2.US ‘E-commerce in about in China: 10 Gain years; entrance into according a completely different to world’. a United Group of Companies, Nations June 16, 2013 enterprises (FIEs) are increasingly locating key R&D report,http://www.ptl-group.com/blogs/e-commerce-in-china-gain-entrance-into-a-completely-different-world China had already surpassed the US to activities in China, not only because of tangible become the world’s ‘most attractive’ destination for business advantages (and incentives), but also to be R&D investment.4 closer to the ever-expanding Chinese market. While it is commonly known that China has surpassed the US to become the world’s largest manufacturing nation, it will come as a surprise to many that China may soon become the world’s global R&D investment 1 ‘World to gain from an innovative China’. The Business Times, July 11, 2011. leader as well. http://www.businesschina.org.sg/en.php/resources/news/317/1 2 This month’s China 360 examines the new R&D Naik, Gautam. ‘China surpasses Japan in R&D as powers shift’. The Wall Street Journal, December 13, 2010. landscape in China, including some emerging R&D http://online.wsj.com/article/SB10001424052748703734204576019713917682354.html hot spots and available incentives. The article will 3 Thibodeau, Patrick. ‘China set to surpass U.S. in R&D spending in 10 years’ also explain some of the advantages and challenges Computerworld, December 24, 2012. http://www.computerworld.com/s/ article/9234976/China_set_to_surpass_U.S._in_R_D_spending_in_10_years_ of setting up R&D centers in China, as well as the 4 ‘Building successful research and development centers in China’. Russell Reynolds current and historical trends that support growth of Associates http://www.russellreynolds.com/zh-hans/content/building-successful- China-based R&D activities. research-and-development-centers-china

billion) In 2013, ‘11/11’ online lacking in 400China. spending sales rose by 80 percent 300 (USD

FastR&D forward to the end of 2013: with Chinese internet from the previous year, 200 users quickly approaching 600 million4, and e-commerce to over USD5.7 billion revenue growth100 (from 2009-2012) topping 70 percent – more than tripling the 5 compounded0 annually , China is on pace to pass the US amount of ‘Cyber Monday’ and become the largest e-commerce market in the world. 2011 2012 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022erevenues 2023e in 2024e the US. 6 US China Source: Batelle; ValueR&D Magazine of e-commerce; KPMG analysis transactions in the US and China, 2009-2015 Ongoing policy reform favors R&D in China

Around600 10 years ago, China began to reform its legal PoliciesEssentially, and China’sguidance large to andsupport growing intellectual middle-class property have environment and offer attractive benefits for R&D rightsbecome (IPR) accustomed have also tobeen making significantly frequent e-commerceupgraded 500 investments. In 2006, China’s government released inpurchases. the last decade. Furthermore, Since as the in implementationmany longer-standing of e-commerce markets, they are also developing brand the400 ‘National Medium- and Long-term Program for a national IPR strategy in 2008, China’s leading Science and Technology Development’ (2006-2020). companiesawareness, have an increasing focused proclivityon strengthening to purchase their high Some300 of the goals of this Program were to: capabilitiesquality and/or in IPRindividually creation, satisfying utilization, products, protection, and showing USD billion anda commitment management. to brand In addition, loyalty and the repeat implementation business: 200 ofVANCL, national a Chineseplans to online protect clothing IPR, suchand apparel as the company,12th • increase R&D expenditure as a percentage of reported that 80 percent of its consumers had made repeat 100 Five-Year Plan on National Intellectual Property GDP to 2.5 percent by 2020 purchases in 2012.8 Forecast Development (2011-2015) and the 12th Five-Year Plan 0 for Patent Examination (2011-2015), have increased • derive2009 more2010 than 602011 percent2012 of 2013China’s2014 economic2015 The future development of China’s e-commerce channel growth from technical progress by 2020 the confidence of foreign-invested enterprises China USA conductingis closely linked R&D to in technology China.7 developments and also the behaviors of Chinese consumers, including the way they • position China as fifth in the world for patents Moreresearch favorable and order policies products and online,IP protection and their measures preference for Sources: KPMG analysis of US and Chinese e-commerce data from Statista,5 andBain citations & Company of publications worldwide. havespeed contributed and convenience. to an increase in the number of applications for patents and inventions in China. Subsequently, in the last decade employment in the By 2015, e-commerce transactions in China are projected InAccording 2011, China to Mary reported Chong, 525,000 KPMG Partnerpatent andfilings, Head of R&D sector in China increased from about one million to hit USD 540 billion, or approximately 10 percent of total comparedE-commerce to justand Paymentsover 500,000 for China, for the there US. are Only four a drivers to 2.8 million, while R&D as a share of GDP doubled, retail transactions, and by 2020, China’s e-commerce yearof e-commerce earlier, China growth ranked in China: a distant e-commerce second to platforms, the from 0.8 percent to 1.75 percent.5 This compares market is forecasted to be larger than those of the US, US,social with media approximately platforms, digital 400,000 payments patent platforms applications and favorably to many other developing nations, such as 8 Britain, Japan, Germany, and France combined.7 versusmobile 490,000 devices. in the US. While some have Brazil, Russia, and India, whose R&D contribution as challenged the numbers as potentially reflecting a percentage of GDP were 1.2 percent, 1.2 percent, quantity rather than quality of innovation, the trend 6 and 0.8 percent respectively. shown in the graph below is clear.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 5 3. Fabre,David Wei. Guilhem ‘E-commerce and Stéphane bigger in ChinaGrumbach. than United ‘The States’. world CNN upside. September down, China’s19, 2013 R&D and innovation strategy’.7. Amanda. Fondation ‘China E-Commerce Maison des Market sciences to Reach de 30 l’homme,Trillion Yuan inApril 2020’. 7, China2012. Internet Watch. March 13, 2013 http://hal.inria.fr/docs/00/68/63/89/PDF/FMSH-WP-2012-07_Fabre-Grumbach.pdfhttp://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 64. Garcia‘CNNIC Herrero,released the Alicia, 32nd and Statistical Fielding Report Chen. on Internet‘Innovation: Development’. Where doesCNNIC China. July 22, stand?’ 2013 Economic Watch, 8.June Chiang. 8, 2012.‘China BBVAEcommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 http://www.bbvaresearch.com/KETD/fbin/mult/120608_ChinaWatch_Innovation_EN_tcm346-332809.pdf?ts=2082013 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 7 Bin,www.bain.com/publications/articles/chinas-e-commerce-prize.aspx Yang. ‘It pays to know where you stand on R&D’. China Daily, November 23, 2012. http://usa.chinadaily.com.cn/weekly/2012-11/23/content_15952428.htm 8 Garcia Herrero, Alicia, and Fielding Chen. ‘Innovation: Where does China stand?’ Economic Watch, June 8, 2012. BBVA http://www.bbvaresearch.com/KETD/fbin/mult/120608_ChinaWatch_Innovation_EN_tcm346-332809.pdf?ts=2082013

were well-developedPatent applications (thousand) 0 in other markets, but were simply In 2013, ‘11/11’ online lacking in China.1991 1996 2001 2006 2011 sales rose by 80 percent Fast forward to the end of 2013: with Chinese internetChina US from the previous year, users quickly approaching 600 million4, and e-commerce to over USD5.7 billion Source: Garcia Herrero, Alicia, and Fielding Chen. ‘Innovation: Where does China stand?’ Economic Watch, June 8, 2012. BBVA revenue http://www.bbvaresearch.com/KETD/fbin/mult/120608_ChinaWatch_Innovation_EN_tcm346-332809.pdf?ts=2082013; growth (from 2009-2012) topping 70 percent KPMG analysis – more than tripling the 5 compounded annually , China is on pace to pass the US amount of ‘Cyber Monday’ Incentivizingand become the largest foreign-invested e-commerce market inentities the world. revenues in the US.6

GovernmentsValue from of e-commerce different countries transactions can choose in There may also be additional local or municipal among variousthe tools US toand attract China, and 2009-2015 expand R&D subsidies available when investing in specific cities in business activities. They can offer direct support via China. The following are two examples: government grants and procurement, or they can use 600 Essentially, China’s large and growing middle-class have a more indirect approach by offering fiscal incentives, • In 2009, Shanghai’s municipal government such as tax holidays and credits. China is pursuing become accustomed to making frequent e-commerce 500 introduced subsidies for corporations engaged a multi-pronged approach that includes government purchases. Furthermore, as in many longer-standing e-commercein pharmaceutical markets, theyresearch are also and developing development. brand policy400 measures to support R&D efforts, as well as a awareness,Shanghai an approved increasing a proclivity10 percent to purchase government high number of attractive tax measures to incentivize R&D subsidy for additional investment in biomedical investment.300 quality and/or individually satisfying products, and showing USD billion a commitmentor biopharmaceutical to brand loyalty research, and repeat development, business: and 9 These200 incentives may include: VANCL,production. a Chinese The online subsidy clothing can andbe increased apparel company, to 30 reportedpercent that of 80 an percent investment of its consumersin new technologies had made repeat 100 • reduced corporate income tax rates (15 percent purchasesthat represent in 2012.8 a major breakthrough, or in the versus 25 percent) for ‘high and new technologyForecast construction of a public research platform.10 0 enterprises’2009 2010 2011 2012 2013 2014 2015 The future development of China’s e-commerce channel • In Chongqing, as well as other western areas China USA is closely linked to technology developments and also the • a super deduction of eligible R&D expenditures behaviorsof China, of Chineselocal and consumers, municipal including subsidies the may way be they (expense deduction of 150 percent versus 100 granted to companies supporting government- Sources: KPMG analysis of US and Chinese e-commerce data from Statista, research and order products online, and their preference for percent)Bain & Company speedbacked and convenience.industries. For example, a 15 percent income tax rate is available for enterprises • By 2015,tax concessions e-commerce fortransactions advanced in technology China are projected service Accordingestablished to Mary in theChong, western KPMG regions Partner ofand China Head of to hitenterprises USD 540 billion, or approximately 10 percent of total E-commerceengaged inand industries Payments supported for China, thereby national are four drivers retail transactions, and by 2020, China’s e-commerce of e-commercepolicy, which growth includes in China: research e-commerce and development. platforms, • marketcustoms is forecasted duty and to be value-added larger than thosetax exemption/ of the US, socialIn addition,media platforms, Chongqing’s digital localpayments government platforms may and Britain,refund Japan, for Germany, purchases and of France R&D equipment,combined.7 and mobilegrant devices. financial subsidies for ‘new products’ developed in Chongqing.11 • concessions for technology transfers.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 9 ‘Securinghttp://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm R&D tax incentives in China’. KPMG, October 2012. http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5. Bain http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Pages/Securing-Research-Development-Tax-Incentives-in-China-201210.aspx Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 10 www.bain.com/publications/articles/chinas-e-commerce-prize.aspx‘Development of Shanghai’s pharmaceutical industry’. Information Office of Shanghai Municipality, May 28, 2013. http://en.shio.gov.cn/presscon/2013/05/28/1152304.html 11 ‘Chongqing new northern zone: China’s inland open economy demonstration zone’. Chongqing Municipal Government, December 29, 2010. http://en.cq.gov.cn/Investors/PriorityDevelopmentRegion/2983.htm

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG ©International. 2013 KPMG KPMG International International Cooperative provides (“KPMG no client International”), services. No a memberSwiss entity. firm Memberhas any authority firms of theto obligate KPMG network or bind KPMGof independent International firms or are any affiliated other member with KPMG firm vis-à- International.vis third parties, KPMG nor Internationaldoes KPMG Internationalprovides no client have services.any such Noauthority member to obligatefirm has orany bind authority any member to obligate firm. or All bind rights KPMG reserved. International or any other member firm vis-à vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 3 The e-commerce explosion in China TheThe rise rise of of R&D R&D localization localization A little over a decade ago, China’s path to e-commerce 11/11 Currently,Currently,leadership there wouldthere are arehave over over been 1,600 1,600 difficult R&D R&D to centers foresee,centers in even in China.China. For For decades, decades, the the sheer sheer size size of of China’s China’s market market China’s ‘Singles Day’ China,China,as the12 12withtech with boomat atleast least in the1,300 1,300 US belongingand belonging other markets to to multinational multinational saw the temptedtempted many many of of the the world’s world’s largest largest companies, companies, corporationscorporationsdevelopment – ofup– upe-commerce from from just just 120 as120 inan in theimportant the year year 2000. B2C 2000. and13 13 C2C whichwhich previously previouslyoccurs servedon served November China China with with11 products products ThisThischannel. number number continues continues to to rise rise rapidly rapidly thanks thanks to to the the createdcreated elsewhere elsewhereeach year. and and The adapted adapted month them them for for mainland mainland ongoingongoing investment investment interest interest by by MNCs: MNCs: of of all all major major sale.sale. Today, Today, multinationals multinationalsand day are have have been been moving moving R&D R&D 2 multinationalmultinationalIn 2000, China companies companies had yet to investing develop investing any in inR&D, e-commerce R&D, 61 61 percent percent closercloser to to theirrepresented their target target market, market, by ‘ones’ not not only only to to get get closer closer applications, and had only 2.1 million total internet users.3 nownow have have at atleast least one one research research and and development development toto customers, customers, but but to(11/11). to better better enhance enhance their their products products centercenterPayment already already systems set set upand up in physical inChina. China. 14delivery 14 mechanisms to towardtoward local local market market preferences. preferences. facilitate the development of e-commerce transactions A Awerekey key reason well-developed reason behind behind this in this other explosive explosive markets, growth growth but were is isthe simplythe SomeSome recent recent examples examples are are listed listed below: below: In 2013, ‘11/11’ online ongoingongoinglacking desirein desireChina. for for MNCs MNCs to to localize localize products products in in sales rose by 80 percent Fast forward to the end of 2013: with Chinese internet from the previous year, Inusers In2012, 2012, quickly PepsiCo PepsiCo approaching (owner (owner 600of of Frito-Lay millionFrito-Lay4, and and e-commerceQuaker Quaker BASFBASF is isa leadinga leading chemical chemical company companyto over servicing USD5.7servicing billion Brands)revenueBrands) openedgrowth opened (fromits its largest largest2009-2012) R&D R&D toppingcenter center outside70 outside percent of of severalseveral diversified diversified industries. industries. In– In moreearly early 2004, than 2004, BASFtripling BASF the 5 establishedestablished the the BASF BASF Asia Asia Technical Technical Center Center in in thecompoundedthe US, US, in inShanghai. Shanghai. annually Their, TheirChina new newis on USD45 USD45pace tomillion passmillion thefacility facility US amount of ‘Cyber Monday’ and become the largest e-commerce market in the world. Shanghai;Shanghai; nine nine years years later, later, they they have have a totala total of of 10 10 includesincludes kitchens kitchens where where PepsiCo PepsiCo chefs chefs develop develop revenues in the US.6 newnew flavors flavors suitable suitable for for the the Chinese Chinese marketplace; marketplace; R&DR&D centers centers in inShanghai, Shanghai, and and recently recently opened opened a a laboratorieslaboratories where where they they taste-test taste-test the the product product with with USD75USD75 million million innovation innovation center, center, also also in inShanghai, Shanghai, Value of e-commerce transactions in whichwhich is istheir their greater greater China China headquarters. headquarters. According According consumers;consumers; and theand plants US plants and where whereChina, test test2009-2015 batches batches are are produced.Theproduced.The resulting resulting products products can can hit hit China’s China’s toto the the Vice-Chairman Vice-Chairman of of the the BASF BASF Board Board of of Directors, Directors, shelvesshelves in inas as little little as as two two weeks weeks – and– and cater cater to to “BASF“BASF continues continues to to increase increase investment investment in inChina China becausebecause the the BASF BASF product product lines lines need need to to be be adjusted adjusted ChineseChinese600 customer customer tastes: tastes: purple purple sweet sweet potato potato Essentially, China’s large and growing middle-class have oatmealoatmeal and and hot hot and and sour sour fish fish soup-flavored soup-flavored potato potato toto Chinabecome China requirements requirements accustomed and to and making tastes, tastes, frequent and and their their e-commerce proximity proximity 50015 15 needsneedspurchases. a morea more Furthermore,efficient efficient location location as in tomany to better better longer-standing service service chips.chips. 15 15 customercustomere-commerce requests.” requests.” markets, they are also developing brand 400 awareness, an increasing proclivity to purchase high

300 quality and/or individually satisfying products, and showing

USD billion a commitment to brand loyalty and repeat business: 200 VANCL, a Chinese online clothing and apparel company, reported that 80 percent of its consumers had made repeat 100 8 Forecast purchases in 2012. 0 2009 2010 2011 2012 2013 2014 2015 The future development of China’s e-commerce channel

China USA is closely linked to technology developments and also the behaviors of Chinese consumers, including the way they

Sources: KPMG analysis of US and Chinese e-commerce data from Statista, research and order products online, and their preference for Bain & Company speed and convenience.

By 2015, e-commerce transactions in China are projected According to Mary Chong, KPMG Partner and Head of to hit USD 540 billion, or approximately 10 percent of total E-commerce and Payments for China, there are four drivers retail transactions, and by 2020, China’s e-commerce of e-commerce growth in China: e-commerce platforms, market is forecasted to be larger than those of the US, social media platforms, digital payments platforms and Britain, Japan, Germany, and France combined.7 mobile devices.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013

12 12 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ Waldmier,Waldmier, Patti. Patti. ‘China ‘China offers offers a taste a taste of R&Dof R&D to come’.to come’. FT, FTNovember, November 13, 13,2012. 2012. http://www.ft.com/cms/s/0/b568f34a-2d83-11e2-9988-00144feabdc0.html#axzz2dFSqgS11 http://www.ft.com/cms/s/0/b568f34a-2d83-11e2-9988-00144feabdc0.html#axzz2dFSqgS11 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 13 von13 von Zedtwitz, Zedtwitz, Maximilian. Maximilian. ‘Managing ‘Managing foreign foreign R&D R&D laboratories laboratories in China’. in China’. International International Institute Institute for forManagement Management Development Development (IMD). (IMD). http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.195.3244&rep=rep1&type=pdf 5. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.195.3244&rep=rep1&type=pdf Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 14 ‘Building14 ‘Buildingwww.bain.com/publications/articles/chinas-e-commerce-prize.aspx successful successful research research and and development development centers centers in China’. in China’. Russell Russell Reynolds Reynolds Associates Associates http://www.russellreynolds.com/zh-hans/content/building-successful-research-and-development-centers-china http://www.russellreynolds.com/zh-hans/content/building-successful-research-and-development-centers-china 15 Waldmier,15 Waldmier, Patti. Patti. ‘China ‘China offers offers a taste a taste of R&Dof R&D to come’.to come’. FT, FTNovember, November 13, 13,2012. 2012. http://www.ft.com/cms/s/0/b568f34a-2d83-11e2-9988-00144feabdc0.html#axzz2dFSqgS11 http://www.ft.com/cms/s/0/b568f34a-2d83-11e2-9988-00144feabdc0.html#axzz2dFSqgS11

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG © 2013©International. 2013 KPMG KPMG International KPMG International International Cooperative Cooperative provides (“KPMG (“KPMG no International”),client International”), services. aNo Swiss a memberSwiss entity. entity. firm Member Memberhas any firms authority firms of theof theto KPMG obligate KPMG network network or bind of KPMGindependentof independent International firms firms are or are affiliatedany affiliated other with member with KPMG KPMG firm vis-à- International.International.vis third parties, KPMG KPMG nor International Internationaldoes KPMG provides Internationalprovides no noclient client have services. services.any such No No authoritymember member tofirm obligatefirm has has any orany authority bind authority any to member obligateto obligate firm. or bindor All bind rightsKPMG KPMG reserved. International International or anyor any other other member member firm firm vis-à vis-à visvis third third parties, parties, nor nor does does KPMG KPMG International International have have any any such such authority authority to obligateto obligate or bindor bind any any member member firm. firm. All Allrights rights reserved. reserved. 2 4 4 The e-commerce explosion in China Top spots for R&D A little over a decade ago, China’s path to e-commerce 11/11 Shanghaileadership andwould Beijing have beenare undeniably difficult to foresee,the leading even cities Although Beijing and Shanghai remain the two China’s ‘Singles Day’ foras theR&D tech activity boom byin theMNCs US andin China. other marketsBeijing hassaw overthe largest cities for research and development, local 550development such R&D of centers,e-commerce16 while as an Shanghai important has B2C over and C2C governmentsoccurs from on Novembertier-two and 11tier-three cities 350.channel.17 One location in Beijing – the Zhongguancun are activelyeach offering year. incentivesThe month to locate new or Science Park – is the largest science and technology transferred R&Dand operations day are to their cities. Xi’an, 2 parkIn 2000, in China. China hadIt houses yet to developnearly half any of e-commerce all R&D centers Chengdu,represented and Chongqing, by ‘ones’all in the interior of China, applications, and had only 2.1 million total internet users.3 in Beijing, and is often referred to as ‘China’s Silicon are attracting greater(11/11). foreign R&D interest and Valley’.Payment18 systemsTop MNCs and include: physical Hewlett-Packard,delivery mechanisms to investment. Recent moves by MNCs toward these Samsung,facilitate the IBM, development Motorola, of Sony,e-commerce Microsoft transactions and Sun tier-two cities can be seen below: were well-developed in other markets, but were simply Microsystems. In 2013, ‘11/11’ online lacking in China. sales rose by 80 percent IBM – In 2010, IBM announced the opening of their rational software analyzer lab andfrom regional the previous software year, Fastgrowth forward center to the endin Xi’an. of 2013: It opened with Chinese with 200internet employees but plans to continue its expansion for the next 10 4 usersyears. quickly Currently approaching IBM 600 operates million seven, and e-commerce regional software growth centers in China, comprising:to over USD5.7 Xi’an, Nanjing, billion revenue growth (from 2009-2012) topping 70 percent Jinan, Wuhan, Hangzhou, Shijiazhuang and Shenyang.19 – more than tripling the 5 compounded annually , China is on pace to pass the US amount of ‘Cyber Monday’ and become the largest e-commerce market in the world. Applied Materials – In 2009, Applied Materials opened a 400,000 square foot solar revenuestechnology in center the US. 6 in Xi’an. Applied Materials is the world’s largest supplier of equipment to the photovoltaic industry, and believesValue that of this e-commerce facility will transactions help improve in industrialization of its solar modules and scale production to lower cost.the US and China, 2009-2015

600EMC – In 2011, EMC announced that it had established itsEssentially, third R&D China’s center large in China,and growing located middle-class within the have country’s largest professional software park in Chengdu.become The new accustomed facility aims to tomaking better frequent service e-commerce Southwest 500and Northwest China, promote business development inpurchases. the region, Furthermore, and attract asinternational in many longer-standing talent due to its highly livable environment. According to EMC management,e-commerce the local markets, talent they pool are from also developinguniversities brand and 400 research institutions was “better than corporate expectations”,awareness,20 and an they increasing expect proclivity to benefit to purchasefrom local high talent

300– which is often cheaper than talent in Beijing or Shanghai.quality and/or individually satisfying products, and showing

USD billion a commitment to brand loyalty and repeat business: 200 R&D in China – Challenges and upsides VANCL, a Chinese online clothing and apparel company, reported that 80 percent of its consumers had made repeat 100 purchases in 2012.8 In the past, due to a lack of qualified technicalForecast still quite low in China, particularly away from the 0 personnel,2009 MNCs2010 might2011 have2012 had doubts2013 about2014 2015 coastalThe future regions, development salary costs of China’s for skilled e-commerce R&D staff channel setting up R&D centers in China. This situation has may not be as minimal as some may expect. While China USA is closely linked to technology developments and also the drastically changed, as China is the biggest ‘producer’ juniorbehaviors staff of may Chinese be 25 consumers, to 30 percent including cheaper the waythan they in of science graduates in the world. Currently, there are theresearch US or andEurope, order costsproducts for online,middle and managers their preference may for moreSources: thanKPMG analysisseven of USmillion and Chinese21 new e-commerce university data from graduatesStatista, be comparable, while packages for senior managers Bain & Company speed and convenience. per year (and rising) in China. Approximately 900,000 may actually be 20 to 25 percent higher.23 This is ofBy these2015, aree-commerce engineering transactions majors, incompared China are toprojected only dueAccording to a short to Mary supply Chong, of senior KPMG R&D Partner managers and Head in of 22 80,000to hit USD in the540 US.billion, or approximately 10 percent of total China,E-commerce as well and as Paymentsrelatively strongfor China, demand there are from four drivers both local and MNC rivals, who will bid up potential However,retail transactions, expectations and by that 2020, a ChineseChina’s e-commerce R&D facility of e-commerce growth in China: e-commerce platforms, employee salaries to land highly skilled senior R&D willmarket come is forecasted with a small to be price larger tag than may those be a of bit the dated. US, social media platforms, digital payments platforms and 7 management in their facility. AlthoughBritain, Japan, construction, Germany, andplant, France and propertycombined. costs are mobile devices.

16 Beijing Evening News, July 16, 2013. http://bjwb.bjd.com.cn/html/2013-07/16/content_90345.htm 17 Xinmin Evening News, July 26, 2013. http://xmwb.xinmin.cn/xmwb/html/2013-07/26/content_2_3.htm 182. XinhuanetDavid Wei. ‘E-commerce, September bigger 12, 2012. in China http://www.bj.xinhuanet.com/zt/2012-09/12/c_113057327.htm than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 19 ‘IBM launches R&D center in Xi’an’. Global Times, March 23, 2010. http://www.globaltimes.cn/business/industries/2010-03/515313.html 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 20 ‘EMChttp://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html opens R&D center in Chengdu Tianfu Software Park’. Tianfu Software Park http://www.tfsp.cn/en/news/reports/2544-emc-opens-rad-center-in-chengdu-tianfu-software-park-.htmlhttp://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 214. ‘7‘CNNIC million released China the colleage 32nd Statistical graduates Report are on working Internet hardDevelopment’. to find job’. CNNIC China. July Navis, 22, 2013 May 16, 2013. 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www.chinanavis.com/7-million-china-college-graduates-are-working-hard-to-find-job-153608http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 22 ‘Number of students in regular HEIs by field of study’. Ministry of Education of the People’s Republic of China. www.bain.com/publications/articles/chinas-e-commerce-prize.aspx http://www.moe.edu.cn/publicfiles/business/htmlfiles/moe/s7382/201305/152543.html 23 Waldmier, Patti. ‘China offers a taste of R&D to come’. FT, November 13, 2012. http://www.ft.com/cms/s/0/b568f34a-2d83-11e2-9988-00144feabdc0.html#axzz2dFSqgS11

A little over a decade ago, China’s path to e-commerce 11/11 leadership7 million would have been difficult to foresee, even as the tech boom in the US and other markets saw the 900,000China’s ‘Singles Day’ developmentThe number of e-commerce of new college as an important B2C and C2C occurs on November 11 channel.graduates in China in 2013. The number of newlyeach graduating year. The engineering month students in In comparison, there were and day are 2 China each year – versus 80,000 in the US. In 2000,only China 1 million had yet in to2000. develop24,25 any e-commerce represented by ‘ones’ applications, and had only 2.1 million total internet users.3 (11/11). Payment systems and physical delivery mechanisms to facilitate400+ the development of e-commerce transactions 43% were well-developed in other markets, but were simply PercentageIn 2013, of estimated ‘11/11’ online lacking in China. Number of the Fortune 500 new globalsales R&D rose spending by 80 percent companies that have set up 26 Fast forward to the end of 2013: with Chinese internet accountedfrom for theby China. previous year, R&D centers in China.27 users quickly approaching 600 million4, and e-commerce to over USD5.7 billion revenue growth (from 2009-2012) topping 70 percent – more than tripling the 5 compounded annually , China is on pace to pass the US amount of ‘Cyber Monday’ and become the largest e-commerce market in the world. 2,800,000 revenues in the US.6

Value of e-commerce transactions in Number of personnel the US and China, 2009-2015 working in China’s R&D sector.

600 Essentially, China’s large and growing middle-class have become accustomed to making frequent e-commerce 500 24 Garcia Herrero, Alicia, and Fielding Chen. ‘Innovation: Where does China stand?’ Economic Watch, purchases.June 8, 2012. BBVA Furthermore, as in many longer-standing http://www.bbvaresearch.com/KETD/fbin/mult/120608_ChinaWatch_Innovation_EN_tcm346-332809.pdf?ts=2082013e-commerce markets, they are also developing brand 400 25 ‘7 million China colleage graduates are working hard to find job’. China Navis, May 16, 2013 awareness, an increasing proclivity to purchase high http://www.chinanavis.com/7-million-china-college-graduates-are-working-hard-to-find-job-153608 300 quality and/or individually satisfying products, and showing 26 ‘Battelle-R&D Magazine release newest global research funding forecast’. Battelle, December 18, 2012 USD billion a commitment to brand loyalty and repeat business: http://battelle.org/media/press-releases/battelle-r-d-magazine-release-newest-global-research-funding-forecast 200 27 Tiak. ‘Outsouring becoming a necessity rather than a need’. Speech at the Global Services Forum, VANCL,CIFTIS, May a28, Chinese 2013. online clothing and apparel company, http://unctad.org/meetings/en/Presentation/gsf2013_S3PanelA_Loh_en.pdf reported that 80 percent of its consumers had made repeat 100 8 Forecast purchases in 2012. China0 R&D outlook 2009 2010 2011 2012 2013 2014 2015 The future development of China’s e-commerce channel

China USA is closely linked to technology developments and also the Foreign direct investment into China continues to It is expected that the R&D investment boom in behaviors of Chinese consumers, including the way they outpace the global economy, and R&D investment China still has many years of growth ahead. Given the research and order products online, and their preference for intoSources: China KPMG analysisis playing of US and an Chinese increasingly e-commerce datasignificant from Statista, role. 28 diversity of sectors undertaking R&D, the continuous Bain & Company speed and convenience. In 2012, while many countries experienced significant growth of R&D centers in China, and MNC expansion FDI declines, China’s FDI decreased only marginally, to second- and third-tier locations, it would seem that By 2015, e-commerce transactions in China are projected According to Mary Chong, KPMG Partner and Head of due in part to R&D investment into China. In 2013, R&D as a percentage of total FDI will also continue to to hit USD 540 billion, or approximately 10 percent of total E-commerce and Payments for China, there are four drivers global R&D spending is forecast to grow by USD53.7 climb. Additionally, not only is the government (both retail transactions, and by 2020, China’s e-commerce of e-commerce growth in China: e-commerce platforms, billion, to USD1.5 trillion: China is expected to nationally, and at the local levels) actively encouraging market is forecasted to be larger than those of the US, social media platforms, digital payments platforms and account for USD23 billion (or over 40 percent) of this this form of clean, high-value added, knowledge- Britain, Japan, Germany, and France combined.7 mobile devices. projected growth.29 based investment, corporations are also finding that basing R&D activities in China provides a strong competitive boost to their ability to service a large

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 and6. J.T. Quigley.growing ‘Singles Daymarket. in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 28 Ross,http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html John. ‘Why FDI into China outperformed the world’. China.org.cn, December 24, 2012. http://www.china.org.cn/opinion/2012-12/24/content_27500147.htmhttp://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 294. ‘Battelle-R&D‘CNNIC released Magazine the 32nd Statistical release Reportnewest on globalInternet research Development’. funding CNNIC forecast’.. July 22, Battelle, 2013 December 18, 2012.8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 http://battelle.org/media/press-releases/battelle-r-d-magazine-release-newest-global-research-funding-forecast 5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 www.bain.com/publications/articles/chinas-e-commerce-prize.aspx

A little over a decade ago, China’s path to e-commerce 11/11 leadershipContactContact would have been difficult us us to foresee, even as the tech boom in the US and other markets saw the China’s ‘Singles Day’ development of e-commerce as an important B2C and C2C occurs on November 11 ForForchannel. more more information, information, contact: contact: each year. The month and day are 2 In 2000, China had yet to develop any e-commerce represented by ‘ones’ ThomasThomasapplications, Stanley Stanley and had only 2.1 million total internet users.3 (11/11). COO,COO,Payment Global Global systems China China andPractice Practice physical delivery mechanisms to KPMGKPMGfacilitate China China the development of e-commerce transactions ReadRead on... on... were well-developed in other markets, but were simply Email:Email: [email protected] [email protected] In 2013, ‘11/11’ online lacking in China. ForFor all all issues issues of of China China 360 360 Tel.:Tel.: +86 +86 21 21 2212 2212 3884 3884 sales rose by 80 percent Fast forward to the end of 2013: with Chinese internet from the previous year, BinBinusers Yang Yang quickly approaching 600 million4, and e-commerce to over USD5.7 billion Director,Director,revenue Tax growth Tax (from 2009-2012) topping 70 percent – more than tripling the 5 KPMGKPMGcompounded China China annually , China is on pace to pass the US amount of ‘Cyber Monday’ and become the largest e-commerce market in the world. 6 Email:Email: [email protected] [email protected] revenues in the US. Tel.:Tel.: +86 +86 20 20 3813 3813 8605 8605 Value of e-commerce transactions in the US and China, 2009-2015 RobertRobert Ritacca Ritacca ResearchResearch Manager, Manager, Global Global China China Practice Practice 600 Essentially, China’s large and growing middle-class have KPMGKPMG China China become accustomed to making frequent e-commerce Email:Email:500 [email protected] [email protected] purchases. Furthermore, as in many longer-standing e-commerce markets, they are also developing brand Tel.:Tel.: +86400 +86 10 10 8508 8508 5109 5109 awareness, an increasing proclivity to purchase high

300 quality and/or individually satisfying products, and showing

China USA is closely linked to technology developments and also the behaviors of Chinese consumers, including the way they

Sources: KPMG analysis of US and Chinese e-commerce data from Statista, research and order products online, and their preference for Bain & Company speed and convenience.

2. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 6. J.T. Quigley. ‘Singles Day in China Decimates Online Shopping Records’. The Diplomat. November 12, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://thediplomat.com/2013/11/singles-day-in-china-decimates-online-shopping-records/ 3. David Wei. ‘E-commerce bigger in China than United States’. CNN. September 19, 2013 7. Amanda. ‘China E-Commerce Market to Reach 30 Trillion Yuan in 2020’. China Internet Watch. March 13, 2013 http://edition.cnn.com/2013/09/19/business/on-china-alibaba-e-commerce/index.html http://www.chinainternetwatch.com/2007/china-e-commerce-market-2020/ 4. ‘CNNIC released the 32nd Statistical Report on Internet Development’. CNNIC. July 22, 2013 8. Chiang. ‘China Ecommerce Roundup: IPOs, Downsizing, and Gaopeng’. Business Insider. February, 2012 http://www1.cnnic.cn/AU/MediaC/rdxw/hotnews/201307/t20130722_40723.htm http://www.businessinsider.com/china-ecommerce-roundup-ipos-downsizing-and-gaopeng-2012-2 kpmg.com/cnkpmg.com/cn5. Bain Brief. ‘China’s e-commerce prize’. Bain & Company. August 28, 2013 www.bain.com/publications/articles/chinas-e-commerce-prize.aspx TheThe information information contained contained herein herein is of is aof general a general nature nature and and is not is not intended intended to addressto address the the circumstances circumstances of anyof any particular particular individual individual or entity.or entity. Although Although we we endeavour endeavour to to provideprovide accurate accurate and and timely timely information, information, there there can can be beno noguarantee guarantee that that such such information information is accurate is accurate as ofas theof the date date it is it received is received or thator that it will it will continue continue to beto beaccurate accurate in in thethe future. future. No Noone one should should act act upon upon such such information information without without appropriate appropriate professional professional advice advice after after a thorough a thorough examination examination of theof the particular particular situation. situation.

TheThe© KPMG 2014 KPMG KPMGname, name, Internationallogo logo and and “cutting “cutting Cooperative through through (“KPMGcomplexity” complexity” International”), are are registered registered a Swiss trademarks trademarks entity. or Member trademarksor trademarks firms of of KPMGof the KPMG KPMG International International network Cooperative of Cooperative independent (“KPMG (“KPMG firms International”). are International”). affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à- © 2013©vis 2013 third KPMG KPMG parties, International International nor does Cooperative KPMG Cooperative International (“KPMG (“KPMG International”),have International”), any such authoritya Swiss a Swiss entity. to entity. obligate Member Member or bind firms firms any of membertheof the KPMG KPMG firm. network networkAll rights of independentof reserved. independent firms firms are are affiliated affiliated with with KPMG KPMG International.International. KPMG KPMG International International provides provides no noclient client services. services. No Nomember member firm firm has has any any authority authority to obligateto obligate or bindor bind KPMG KPMG International International or anyor any other other member member firm firm 2 vis-à-visvis-à-vis third third parties, parties, nor nor does does KPMG KPMG International International have have any any such such authority authority to obligateto obligate or bindor bind any any member member firm. firm. All Allrights rights reserved. reserved. 7 7 Contact

KPMG AG Wirtschaftsprüfungsgesellschaft

Andreas Feege Partner Audit, Munich Head of China Practice in Germany T +49 89 9282-1152 [email protected]

Wei Wang Director Business Development, China Practice in Germany T +49 211 475-6527 [email protected] www.kpmg.de/china

Die enthaltenen Informationen sind allgemeiner Natur und nicht auf die spezielle Situation einer Einzelperson oder einer juristischen Person ausgerichtet. Obwohl wir uns bemühen, zuverlässige und aktuelle Informationen zu liefern, können wir nicht garantieren, dass diese Informationen so zutreffend sind wie zum Zeitpunkt ihres Eingangs oder dass sie auch in Zukunft so zutreffend sein werden. Niemand sollte aufgrund dieser Informationen handeln ohne geeigneten fachlichen Rat und ohne gründliche Analyse der betreffenden Situation. © 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, ein Mitglied des KPMG-Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative („KPMG International“), einer juristischen Person schweizerischen Rechts, angeschlossen sind. Alle Rechte vorbehalten. Printed in Germany. Der Name KPMG, das Logo und „cutting through complexity“ sind eingetragene Markenzeichen von KPMG International.