China is the world's largest e-commerce market and accounts for $2 trillion in annual sales. In recent years, e-commerce has spread from China’s cities into its rural areas with its many low-income households. In fact, e-commerce is growing fastest in some of the country’s poorest provinces. This is creating economic opportunities for a wide range of entrepreneurs and small businesses.
Recently, CGAP went to China’s eastern coast to gain a better understanding of what is driving the success of e-commerce in rural areas and to extract lessons for countries where e-commerce is just taking off. In Shandong province, China’s largest agricultural exporter, we visited several villages and spoke with farmers and manufacturers. Here are a few insights from our visit.
1. Government has literally paved the way for e-commerce
E-commerce companies get a lot of attention, but they’re not the only ones responsible for China’s e-commerce boom. Over the past decade, a series of government policies, development programs and subsidies have played key roles in building the digital and physical infrastructure that make it possible for people to transact online and move goods at low cost.
Regarding digital infrastructure, electricity is widely available in rural areas of China, and 70 percent of the population owns a smartphone. With a 75 percent 4G network penetration, even advanced e-commerce services like livestreaming can reach phone owners in many remote areas. Beyond basic connectivity, most people have bank accounts (80 percent according to Findex, 90 percent according to the People’s Bank of China). Widespread bank account ownership has enabled the proliferation of digital payments by solving know-your-customer and cash-in/cash-out challenges.
The government also has played an important role in building the physical infrastructure needed to ship goods bought online. China’s 2.6 million miles of road reach into remote areas; over half of them have been built within the past 10 years. The postal service and private carriers in China’s mature logistics sector have played a key role in transporting goods to the last mile. The public postal service offers low, flat fees nationwide, which enables buyers and sellers even in rural areas to participate in e-commerce. For instance, shipping a 1 kg parcel from any municipal head to another municipal head costs less than 50 cents (USD). In other countries, governments can play an important role in paving the way for last-mile delivery until there is enough mail volume for private companies to achieve scale and offer affordable prices.
Another way government has spurred e-commerce is by stimulating productive industry in rural areas. Since the early 2000s, China has provided subsidies, grants and technical assistance to modernize rural livelihoods and promote rural hubs for specific agricultural or manufacturing products. In the process, it has created opportunities for farmers to engage in e-commerce. For example, peach farmers we visited in Feicheng had received financial support from the government to adopt greenhouse farming. Greenhouses enable them to produce larger, sweeter peaches.
As e-commerce has evolved, the government also has funded training programs for rural sellers. The programs cover basic business skills and e-commerce skills, such as photography, online marketing, branding and online store management.
In all the villages we visited, people had received extensive training and support free of charge and free access to facilities with computers and internet connectivity. However, even though they had received training, we found that farmers and manufacturers focused on production and relied on a family member to manage their online store for them. In other instances, sellers relied on e-commerce agents or intermediaries to manage online sales. These agents, often young people, seemed to play a crucial role in building the seller’s brand and establishing trust with customers.
We also observed farmers and manufacturers selling directly to customers via social media rather than e-commerce platforms. Doing so allowed them to sell goods that did not meet online brand specifications or to get higher margins. Although social networks typically reach a smaller market, payments are received instantly.
2. E-commerce is changing retail value chains, eliminating middlemen and creating new categories of products with higher margins
For sellers, one of the main benefits in switching to e-commerce is the ability to reach new markets, segment their products and charge higher prices. All the sellers we interviewed had been operating through traditional channels before going online. Since engaging in e-commerce, they have expanded into new markets such as urban centers. Because of their ability to reach new customer segments in these places, many merchants changed their product mix to focus on higher value items. The Feicheng peach farmers were selling their peaches online as specialized products, earning higher margins than they did from the local bulk sales they did before.
Although selling online has helped merchants increase their volumes and reach a bigger market, the biggest advantage seems to come from specialization — moving away from selling a basic product (essentially a commodity) to wholesalers, to selling higher quality products directly to customers or via an agent at a higher price. Direct marketing on e-commerce platforms using pictures, videos and livestreaming can increase prices by demonstrating the quality of goods. Sometimes the platforms themselves run marketing campaigns to drive sales, and merchants are encouraged to participate.
Overall, we observed e-commerce driving prices up because of better product selection and stronger branding and marketing, which often turn commodities into specialized products. At the same time, costs have been decreasing due to aggregation and compression of the supply chain. Platforms help sellers compile demand, connect to customers and ship orders more directly. The increased margin creates employment opportunities, such as jobs in product selection, preparation and packaging.
3. Access to credit has been most relevant for intermediaries
Most of the farmers and small business owners were already in business before e-commerce took off and financed their growth through their own savings, rural cooperative banks or e-commerce platforms. E-commerce platform financing seems more relevant for intermediaries than for producers or manufacturers. E-commerce agents, in particular, rely on working capital financing from e-commerce platforms, which has helped to bridge the period between when a purchase is made and when funds are released from escrow within the platforms. Agents also are more likely to be younger and newer in business, making it less likely that they have enough savings to support the operation.
China’s rural e-commerce system developed with strong government support on top of infrastructure and productive industry that were already in place. For other countries, an initial challenge will be to build the necessary infrastructure. While many urban areas have physical and digital connectivity, significant investments may be needed to reach more remote areas. Supportive government policies will be critical for areas that are difficult for the private sector to serve profitably, at least in the short term.
Farmers and businesses in smaller markets could see the biggest impact from e-commerce. As we saw in China, by opening newer and bigger markets, these groups could specialize in what they are best at producing and sell it at higher prices. As buyers, they could access a wider range of goods. For countries where offline industry and commerce is not as developed as it is in China, access to credit is likely to play a far more critical role as an enabler of business growth. Developing the right digital financial services to serve emerging e-commerce entrepreneurs could speed up inclusion and growth.