How to Sell Online in China

As more Chinese embrace e-commerce, multinational companies need to understand what makes China's online population unique

By David Michael and Yvonne Zhou

To many multinationals, digital China is the mother of all untapped markets. At 384 million as of 2009, China already has twice as many Internet users as the U.S. and Japan combined. Just as important is the intensity with which Chinese are connected—an average of 2.7 hours online each day. That translates to Chinese eyeballs glued to e-commerce sites, blogs, mobile applications, and games for 1 billion hours each day, twice as many as in the U.S.

So far, many Western companies have been caught flat-footed. Savvy Chinese Internet companies like Tencent (700:HK), Alibaba.com (1688:HK), and Sohu (SOHU) are running circles around Western Internet giants, utterly dominating a fast-growing, $37 billion consumer e-commerce industry. Many foreign consumer-product and services companies are missing out, too. At a time when tens of millions of Chinese each year are newly embracing online shopping, it is essential to move beyond traditional television and outdoor advertising.

The good news for foreign companies is that the game is still early. China's online population is projected to reach 650 million in five years as the Web penetrates deep into the interior. The percentage shopping online is expected to surge from 9 percent in 2009 to 19 percent in 2012. And digital activities still nascent in China such as social networking, mobile broadband services, and online advertising are poised for explosive growth.

To succeed, multinationals must shed assumptions that have worked well in the West. Instead, they must carefully study the idiosyncrasies of Internet use in China and the online impulses of its digital consumers.

Enormous Potential

Mind you, China isn't a snap for anybody. The government can change the rules swiftly. On June 22, for instance, the Culture Ministry announced regulations for online gaming that sent shares of Tencent tumbling. Big urban markets like Beijing and Shanghai are also getting saturated from some online services.

Still, no other market matches China's enormous potential. To understand this market in all its diversity, BCG undertook an extensive study that included interviews with 1,700 Chinese, ages 14 to 55, in 12 cities and rural areas in 11 of the nation's 22 provinces. We broke this population into six distinct segments—teenagers, university students, young professionals, young gamers, active middle-agers, and passive middle-agers. We also divided these interviews among cities of different sizes, from mega-metropolises like Beijing and Chengdu to smaller, less affluent cities such as Yibin in Sichuan province.

The picture that emerges is of an online population that is destined to become the world's most strategic e-commerce market in the years ahead. For example, our research found that a stunning 99 percent of university students and professionals ages 22 to 35—the key consumers of the future—are online an average of four hours a day. And they are already comfortable buying goods and services online.

But this digital population must be approached quite differently than in the West and even other big emerging markets, such as Brazil, India, Russia, and Indonesia. China's leading Internet companies know their habits well, which helps explain why Tencent has attained a market capitalization of $36 billion, Baidu (BIDU) of $28 billion, and Alibaba.com of $10 billion.

Crucial Differences

One crucial difference is that consumers in the U.S., Japan, and most other nations primarily use the Internet for e-mail and searching for information. In China, by contrast, 87 percent communicate online via instant messaging.

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