How China’s E-Commerce Revolution Changed Global Online Retail: Insights from ‘From Click to Boom

Why China Leads the World in E-Commerce: Lessons from Lizhi Liu’s Political Economy Analysis

Unlock the secrets behind China’s dominance in e-commerce with insights from Lizhi Liu’s “From Click to Boom.” Discover how state policy, innovative consumer protections, and unique market dynamics propelled China to the top of global online retail. Learn why Western models failed, how rural and urban divides persist, and what the future holds for Chinese e-commerce giants looking abroad. Read on for actionable strategies and expert analysis to stay ahead in the digital marketplace.

Ready to understand what truly drives the world’s largest online marketplace? Dive into our in-depth review of “From Click to Boom” and discover practical lessons and strategies you can apply to your own e-commerce journey. Keep reading to gain a competitive edge in the rapidly evolving global digital economy!

Recommendation

China has emerged as a global leader in e-commerce, and in this robust study, professor Lizhi Liu delves into the rise of the sector, particularly into the role of the Chinese state. Before 2020, Liu reports, Beijing mostly ignored the sector, leaving it to companies such as Alibaba to police themselves. China’s homegrown players responded by creating consumer protections that fostered the growth of online sales. Since 2020, however, China has cracked down on e-commerce platforms that overreach. Based on Liu’s own consumer research in China, this book offers new insights into a globally consequential corner of the economy.

Take-Aways

• China holds an outsized role in the e-commerce space.
• In some important ways, China remains mired in the category of developing nation.
• eBay’s failure in China illustrates the unique nature of Chinese e-commerce.
• E-commerce creates flexibility for Chinese merchants.
• E-commerce establishes a level playing field, at least in some ways.
• China is working to bring rural areas into the e-commerce economy.
• China’s big tech firms pushed their advantage too far, resulting in a Draconian crackdown by the state.
• As China’s economy slows, e-commerce entities are looking abroad.

Summary

China holds an outsized role in the e-commerce space.

China is the globe’s largest e-commerce market, accounting for nearly half of worldwide online retail sales. For perspective, China makes up just 13% of overall global consumption. The Chinese entrepreneur Jack Ma summed up the situation this way: “In the US, e-commerce is the dessert, but in China, it is the main course.” As Chinese consumers flock toward online sales, e-commerce’s effects have rippled throughout the economy, most tellingly in the disappearance of cash. Most Chinese consumers use digital payments, to the extent that Chinese panhandlers now use QR codes. When a group of out-of-town robbers descended on Hangzhou for a crime spree, their holdups at three convenience stores netted just $260. The criminals didn’t realize how little cash circulated in the city.

“China’s e-commerce market took off without strong formal institutions to support it.”

The rise of China’s successful online marketplace is unexpected in some respects. For instance, the conventional wisdom holds that a vibrant new industry can emerge only in political economies that provide the underpinnings of property rights, contract enforcement, and the rule of law. In online transactions, in particular, the rule of law seems a prerequisite — unregulated e-commerce creates a hotbed for fraud. In the United States, regulation and legal frameworks are seen as deterrents to online fraud. But China lacks those frameworks — and its e-commerce sector has thrived anyway. Another mystery in China’s e-commerce market is that buyers and sellers do business with anonymous strangers from far away, and yet there’s plenty of trust in this seemingly risky system.

In some important ways, China remains mired in the category of developing nation.

While China’s economy has exploded in recent decades, it’s stuck in many of the patterns associated with developing nations. One symptom is the lack of an advanced legal system: Western economists believe that the rule of law is a basic building block of a successful economy and that developing nations should adopt Western-style legal systems. China has steadfastly resisted such a transformation, opting instead for incremental changes. China’s gradualist approach focuses on implementing reforms for economic policy but avoiding any changes to its one-party system. For China’s rulers, legal restructuring presents a paradox: Creating an independent judiciary would risk opening challenges to the government. So while legal reforms would spur greater growth for financial markets, China’s leaders have opted to sacrifice economic growth for political control.

“Given the state’s especially strong presence in the Chinese economy — for example, a large sector of state-owned enterprises and the government’s frequent use of industrial policies and market interventions — commercial issues are often political as well.”

Another quirk of China’s economy is its system of “competitive federalism.” While leaders in Beijing call the shots, state-level leaders have wide leeway in terms of setting economic policy and competing with other states. Local leaders respond with subsidies, tax incentives, and even trade barriers designed to give their regions an edge over neighboring areas. This format sets the stage for cutthroat competition. Local leaders remain employees of the national government, and their prospects for career advancement are very much determined by the economic performance of their regions. Competitive federalism encourages state leaders to prioritize their own growth over that of the broader nation, and it also creates fertile ground for corruption and cronyism.

eBay’s failure in China illustrates the unique nature of Chinese e-commerce.

In 2003, eBay was flying high when it decided to push into China. eBay’s leaders viewed success in China as an important path to its global expansion. The American company built partnerships, squeezed potential rivals, and publicly proclaimed a desire to be the No. 1 e-commerce company in China. But an unlikely rival thwarted eBay. Alibaba was founded in 1999 by Jack Ma, a former English teacher who seemed overmatched by the Silicon Valley sharks. But Alibaba adapted quickly. In one move, it rolled out Taobao.com, an eBay-like site that mimicked eBay’s consumer-to-consumer auction model. When eBay arrived in 2003, it quickly grabbed a 72% market share; Alibaba had just 7% of the market. But in only four years, that market share had flipped, and eBay had to leave China in defeat.

“By withholding payment until both parties are satisfied, the escrow system ensures both sides fulfill their contractual obligations.”

Ma used some folksy wisdom to describe his strategy: “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose — but if we fight in the river, we win.” In contrast to eBay’s preferred ecosystem of regulation and legal protections, Alibaba was swimming in murkier waters, where protections against counterfeiting and fraud were nonexistent. eBay didn’t grasp this reality and tried to simply transplant its US model to China. Alibaba responded to the reality of the market by establishing its own consumer protections. In another innovation, Alibaba created Alipay, a system for building trust. In contrast to PayPal or credit cards, by which payment is instant, Alipay created an escrow service that released funds only when the buyer was satisfied with the product. In the event of a dispute, Alipay could stop payment until the disagreement was resolved. In this way, China’s private sector stepped up when the government wouldn’t.

E-commerce creates flexibility for Chinese merchants.

In China’s tightly controlled economy, it’s difficult for small merchants to reach a national market. E-commerce shifts that dynamic. For example, China allows no private ownership of land, so businesses must secure both government permission to use land and ownership of buildings on the land. Online sellers don’t need physical locations and can operate their businesses from their homes. A 2019 law codified that practice and allowed individual merchants to register businesses at virtual addresses. In another way of cutting overheads, many online merchants rely on drop shipping, which lets them fill orders without storing inventory in expensive warehouses.

“It is no longer necessary to establish a brick-and-mortar store or secure an expensive location to attract customers.”

Because so many e-commerce merchants operate with so few costs, the growth of China’s sector has taken unexpected turns. For instance, one northern city set up an e-commerce incubator designed to appeal to online merchants and spur business activity. But the expensive facility remained mostly vacant: China’s new merchant class had figured out how to operate with little need for offices or distribution space, so an incubator providing physical space proved unnecessary. On Taobao.com, merchants pay nothing to establish and operate online stores. While merchants spend money on advertising and on processing returns, overhead is minimal. What’s more, prepaid orders are common in China, so merchants have little need for working capital. For those that do need cash, Alibaba and JD extend loans to entrepreneurs who might not qualify for bank financing.

E-commerce establishes a level playing field, at least in some ways.

Globally, women own about one-third of businesses. In China, that gender gap doesn’t exist — women own more than half of the stores on e-commerce platforms. For instance, Alibaba’s official data showed women owned 50.1% of stores as of 2015, but that number could have been higher, given that some women registered businesses in their husbands’ names. Among the many reasons for the gender equity, e-commerce happens without the heavy drinking required for face-to-face business in China. What’s more, women often sell products to other women, and the flexible hours of e-commerce can work well with child care responsibilities.

“Despite the potential of e-commerce to grant rural regions equal national market access, there remains a persistent urban-rural disparity in online entrepreneurship.”

While e-commerce seemingly has closed the gender gap, the same isn’t true for the geography gap. China’s online merchants overwhelmingly live in urban areas, with just 13% residing in rural regions. Online merchants might launch their businesses from remote villages, but they often move to a city at the first opportunity. This migration is motivated in large part by better schools in urban areas. In other words, while technology might best physical space in some important cases, it has yet to bridge the city-country divide in China. Urban areas remain hubs of opportunity.

China is working to bring rural areas into the e-commerce economy.

It’s not just that rural entrepreneurs aren’t participating in China’s e-commerce boom; consumers from the countryside aren’t participating either. The Chinese government has been working to improve roads and otherwise make rural areas viable for e-commerce. However, these efforts have been hampered in part by limited logistics networks. For years, village households could not directly receive packages, just notifications to pick up their packages from nearby drop-off points. Another challenge is that rural consumers often don’t know how to use technology to order and pay for goods, or they don’t trust a new way of shopping.

“Scaling up rural e-commerce was a widespread challenge across China.”

In the mid-2010s, China began to expand rural e-commerce, working with Alibaba to launch an initiative known as Rural Taobao. The program aimed to provide country residents with the ability to both buy and sell online. China invested $1.6 billion over three to five years to extend e-commerce services to 100,000 administrative villages. The program included a subsidy to cover the unprofitability of delivering packages to sparsely populated areas. Such efforts indeed connected rural buyers to e-commerce sellers. The author surveyed rural households and found a 9% increase in e-commerce use as a result of the initiative. However, the rural e-commerce push had no effect on incomes or on the prices of consumer goods. The findings illustrate the ongoing divide between younger, wealthier consumers who embrace e-commerce, and the older, poorer Chinese citizens who don’t use it.

China’s big tech firms pushed their advantage too far, resulting in a Draconian crackdown by the state.

China’s largest e-commerce firms have played hardball around collecting consumers’ private information. Compared to consumers in the United States and Europe, Chinese citizens had been willing to make this trade-off. But the Chinese sites pushed too hard, with such features as capturing every activity on a device while the e-commerce app was open. An inquiry by the Shanghai Consumer Rights Protection Commission concluded that more than half of popular apps grabbed sensitive information from consumers’ phones, including personal contacts and audio recordings, along with messages, even though the apps lack the corresponding functions to justify the use of such data. In some cases, the information is abused: A 2018 law enforcement investigation led to the arrests of people who were selling 468 million pieces of personal information captured from users of e-commerce apps.

“China’s turbulent regulatory shifts toward platforms post-2020 can be succinctly described as follows: the platforms overstep, and the state overreacts.”

Driven in part by unsavory practices, China’s e-commerce companies were flying high in late 2020. Then came the Chinese government’s crackdown. In one example of how quickly the Chinese state can act, a government inquiry into Alibaba was completed in just four months; Western antitrust cases take an average of 16 months to reach resolution. And Alibaba suffered a significant fine of $2.8 billion. In a similar case in 2021, the Chinese government took just five months to impose a $527 million fine on Meituan, a large e-commerce platform. By contrast, the Microsoft antitrust case in the United States dragged on for more than a decade, and while a district court ordered a breakup of Microsoft, the company survived.

As China’s economy slows, e-commerce entities are looking abroad.

For China’s homegrown e-commerce companies, growth has been tepid since 2020, the year that COVID-19 lockdowns began. But China’s e-commerce companies have quickly evolved, and now they’re doing business outside China. Hampered by a slowdown at home, Chinese vendors are looking to the United States. They’re now common on Amazon, and Chinese platforms such as Shein and Temu quickly established beachheads in the US market. Still, since 2022, Chinese consumers have slowed their spending, a harsh reality for the nation’s e-commerce platforms.

“An excessively strong government can hinder market growth by instilling fear of property and rights seizures, thereby discouraging investment and innovation among firms and individuals.”

China’s slowing economy has presented one threat to the Chinese e-commerce sector. The iron-fisted government poses another. In the best-case scenario for economic growth, the public sector is robust enough to uphold contracts and property rights, but not so powerful that it can rule a marketplace. While Beijing took a hands-off approach to its burgeoning e-commerce industry before 2020, its more controlling approach since then is likely to slow the sector’s growth. In some ways, China’s firm hand has created ripe conditions for growth. For instance, China’s strict censorship kept US companies out of the market in the 2000s and 2010s, giving homegrown firms time to build market share.

About the Author

Lizhi Liu is an assistant professor in the McDonough School of Business at Georgetown University. She holds degrees in political science, statistics, and international policy studies from Stanford University and in international relations from Renmin University of China.