E-commerce: Changing dynamics of SME growth and profitability in Asia

Event report

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This session, organised by World Trade Centre Mumbai – AIAI, aimed at examining the key factors influencing the growth of e-commerce in Asia, with special relevance to China and India. A key point was the discussion on how e-commerce is shaping the growth and profitability of technology-enabled firms in the small and medium sized enterprises (SMEs) sector, thereby contributing to economic development and job creation.

 John Danilovich, Secretary General at the International Chamber of Commerce (ICC), provided an overview of the discussions at the World Trade Organization (WTO) Business focus Group 1 – Micro, Small and Medium Enterprises (MSMEs) and E-commerce, which recently published a report containing recommendations to the WTO. He assessed that existing rules are not adequate to support SMEs, and that a comprehensive WTO package of 21^st century trade rules is required. It would include, among other things:

• Measures to enhance connectivity and capacity for e-commerce. In Danilovich’s view, the WTO did a good work on the rules for the liberalisation of the telecommunications sector. They should be revisited, considering what should be improved.
• Scaling up capacity building programmes for SMEs, especially using online education tools. The WTO should be a hub for trade-related capacity building.
• A trade facilitation 2.0 agenda: build on the WTO Trade Facilitation agreement to expedite tax, and facilitate the delivery of products to the consumer, among others.
• Re-thinking de minimis thresholds, so government agencies will no longer spend resources to assess the low value parcels, and create provisions to encourage the electronic payment of duties.
• A package of digital rules to enhance trust, such as consumer protection.

Andrew Crosby, Managing Director of the International Centre for Trade and Sustainable Development (ICTSD), presented trends in digital commerce, particularly in Asia. According to Crosby, one of the aspects that need to be looked into is the sectors in which jobs growth and job losses will happen. The digital economy creates jobs, but the adequate skills and regulatory frameworks need to be in place for countries to seize the opportunities. Data collected by McKinsey from 2005 to 2014 show that data communication flows have grown significantly. Nevertheless, the global map shows ‘weak links’, less connected to the chain. They should be the main target of the policy development process. Some Asian countries present better indicators, and it is important to map where the enabling environments are present and how this was achieved. Crosby remarked that, in e-commerce discussions, countries with different types of national environments will have different negotiating interests. For example, free data flow is important for developed countries, but it may not be a priority for a country that does not have good telecommunication infrastuctures or financial systems.

Aileen Kwa, Coordinator of the Trade and Development Programme at the South Centre, emphasised the staggering disparity between the developing and developed worlds. Some of the less developed countries have fixed broadband penetration of less than 1% ,and less than 7% of households have Internet connectivity, for example. She mentioned that, according to the African Development Bank, Africa still has serious problems of access to electricity. Without solving such basic problems, the Internet will not be able to be a determinant factor to boost the economy. Kwa opined that it is not possible to enjoy the benefits of the digital economy when severe health and hunger problems are still present. WTO rules on agriculture and trade could not solve the problems of food security and access to medicines, and tackling these problems should be priority. Developed countries still apply tariffs and subsidies in agriculture that are higher than those in developing countries. More time is needed to understand the consequences of the rising digital economy, of ‘uberisation’, of big data, and of tailored advertising, before decisions are made on e-commerce.

The themes related to e-commerce which are currently monitored by the United Nations Conference on Trade and Development (UNCTAD) were presented by Torbjorn Fredriksson, Officer-in-Charge of the Science, Technology and ICT Branch of UNCTAD. The organisation noticed, for example, that the use of social media is much higher than online purchases. This shows that, in many areas, there is a problem of lack of trust, not connectivity. Regulatory frameworks are not in place in China, which lacks data protection norms, or India, which lacks consumer protection regulation. There needs to be targeted efforts to help SMSEs, micro companies and women to understand the opportunities presented by e-commerce. It could be particularly beneficial for women, who feel special constrains, such as limited mobility and dual responsibilities. Fredriksson also mentioned the initiative eTrade for All as a good example at international level. He recognised that e-commerce has transformative effects, which will not always be positive for developing countries. However e-commerce will not disappear, so developing countries need to be assisted to seize the opportunities and address the challenges.

Quan Zhao, Trade Policy Advisor in the Office of the Chief Economist at the International Trade Centre (ITC), presented the experience of China. E-commerce in China is significant. The business-to-consumer market is twice the size of the one in the US, and could grow 4 times by 2019. E-commerce is part of the life of ordinary people in China. As an example, in a survey in which individuals were asked what they would miss the most if they left China, online shopping came in second place, after food. He assessed that market size is the predominant reason for the success of e-commerce, coupled with a rising middle class. The availability of online payment is also important. Regulators have not introduced barriers that hampered e-payment and e-banking, they have instead tried to alleviate the negative impacts with regulations covering areas such as consumer protection.

Zhao explained how SMEs in China have adapted to the new reality. In his view, ‘Internet thinking’ is a key approach in China. Generating traffic to websites, amassing followers, being given ‘thumbs-up’ is what leads to sales and profit. The strategy is based on what he called ‘blockbusters, honey pots and meat balls’. It is important to have ‘blockbusters’ for sale in e-commerce platforms. This means offering the products that are sold the most, and not necessarily the most profitable ones, in order to attract traffic to a particular online shop. Traffic helps to push the shop up on the list of online search results. The ‘honey pots’ are products over which a huge discount is offered in order to attract consumers to the website. ‘Meat-balls’ are not as attractive as the previous ones, but they represent the products that bring profit to the companies. Platforms that are adapted to the special characteristics of the local markets provide successful case studies, such as Taobao, Mercado Livre, Netshoes, and Flipkart.

Maurits Bruggink, Secretary General of the European eCommerce & Omni-Channel Trade Association, announced that the Association is signing a Memorandum of Understanding with the Chinese Trade Association. He predicts that the purchase made by Europeans from Chinese e-commerce websites – which is already significant – will dramatically increase. According to Bruggink, building trust is key to the development of e-commerce, especially in three areas: trust in delivery, in payment, and in legal frameworks. In many regions transactions depend on incumbent postal delivery services, because private ones are too expensive. However, different postal operators do not have a good reputation in working well together. Consumers are afraid to buy cross-border even inside the European Union. Moreover, because of an agreement concluded within the framework of the Universal Postal Union (UPU), developed countries need to give developing countries a preferential rate when delivering packages coming from developing regions. In Bruggink’s view, this needs to change, because large e-commerce companies like Alibaba do not need preferential treatment.

by Marília Maciel