Red Envelopes: Create a Culture of Private Giving

The infamous ‘红包 hong bao’

red envelopes hong bao

Handing out red envelopes (“红包” or pronounced “hong bao” ) is a custom that dates back hundreds, if not thousands of years. Before and during Spring Festival, companies, families, and friends dish out large amounts of cash all tucked into a red envelopes.

Red envelope giving is a society wide method of appreciation for family, friends, and employees. This act is shrouded in privacy and laced with tons of incentives which used properly can be an incredibly powerful tool. Private giving is infinitely better than public giving and drives why red envelopes are so effective. 

Below I’ll explain why private giving is so important, what red envelopes are, the ideas driving incentives, how our company handled it this year, and I added a bonus section on WeChat.

  • Private giving leads to private contribution
  • What is a red envelope?
  • Ideas driving incentives behind red envelopes
  • How we personally distributed them and why
  • BONUS – fun game of WeChat + red envelopes

My hope is this serves as a thought guide for you and your company around Spring Festival or if you have Chinese friends. It’s a huge advantage if done correctly.

Private giving leads to private contribution

We’re taught from a young age true giving should happen silently and privately. Those who publicly announce their giving, the reward ends at the announcement. When you give in private, will be rewarded in more ways than you know, especially in the context of an employer-employee relationship.

Think about it this way. If everything you do to acknowledge employees is public (which should happen from time to time), they will want all of their good deeds/accomplishments public as well. Creating a perverse internal political culture that leads to brown nosing rather than driving value to the bottom line.

On the other hand, a private reward system encourages employees to privately add value to your company without needing to be publicly acknowledged for it.  If you reward in private, the rewards (or value) they offer back to the company will also be private.  Without you having know about it, the employee will drive value in the dark which is where real value is created.

Red envelopes are a method of private giving and I highly encourage you to take advantage of this opportunity to build private giving into your culture. Here’s how.

What the heck is a ‘red envelope’?

Red envelopes are just what they sound like, red envelopes. In Mandarin we call them “hong bao” which translates into “red bag”. In Chinese culture there are two major times when red envelopes are handed out: Spring Festival and weddings. In this post I focus on the Spring Festival, mostly because I’m not married (yet).

At the end of the year, companies pull out a lot of cash – which happens to be red too, stuffs them into red envelopes, and hands them out as a form of bonus for a job well done and/or appreciation for all their hard work for the year.

Traditionally, the rule of thumb is the ’13th month rule’. Which translates to each employee receiving an extra months wage at Spring Festival. This works from a budgeting/planning perspective, but doesn’t leverage the entire effectiveness / meaning of the red envelope.

Chinese companies on the other hand, view red envelopes a lot differently. It’s not only a way to pay less income tax but also lift up the spirit of the entire company. Throughout the year, it’s anticipation of the unknown that drives employees to work harder and longer for a big hong bao  (大红包).

Historically red envelopes are filled with cash, but in tight times like this year, companies get creative in their giving. One of my favorites were condoms and tree seedlings.

Ideas driving incentives behind red envelopes

Red envelopes offer employers the opportunity to appreciate their employees for a year well done. You can pull your relationship (关系) closer and make them more committed to you and the vision.

As an employer, it’s not our responsibility to make employees happy. Ultimately it’s up to each person to make that happen for him/herself. We do however, play a significant role in whether or not our employees feel appreciated. This is a critical distinction in the importance of hong baos.

Think about it, how often do we genuinely thank our employees for all the hard work they do on our behalf? People bleed to be acknowledged and appreciated and red envelopes are an incredible opportunity to do just that. Even if your company is not profitable or having an off year, it’s the thought that counts. Big or small the red envelope is painting a picture for a better future and one that makes them happy.

You might be thinking: physical gifts can accomplish the same thing. On the surface they absolutely can. Gifts allow employees to feel appreciated, but runs counter to the idea that private giving is better than public giving. Red envelopes (other than the thickness of course) don’t allow anybody else to know how much money is inside. They are hidden from view and can be put in employees, friends, or family members’ pockets. Much easier than carrying a ribbon wrapped red box out the front door of the office.

Lastly, since the entire country goes home for Spring Festival, handing out red envelopes right before puts a great taste in their mouths to talk with their family about. It builds positive word-of-mouth for the company amongst family members, which is critical to their support system and leads to a lower turnover rate in the long-term.

How our company distributed them and why.

Distribution, both the actual delivery and total amount of red envelopes is crucial to maximizing effectiveness. You have to think through each individual person, their job responsibilities, key metrics that define their role, and how they will feel compared to others. It’s important to spend time and get it all right. Employees sure pay attention.

Obviously it would destroy the point of my whole theory of ‘giving in privacy’ if I published what we gave on my blog. That being said we handed out nothing substantial except to a few key employees and used it was more a token of appreciation for the people that have committed their lives to our cause.

Red envelopes were broken down into two handouts: company and manager.

Company

Goal

The company (or General Manager) portion of the annual red envelope was meant to be appreciation on behalf of the company. We moved at a break neck pace this year and wanted to acknowledge that.  This is not to be confused with something we should or have to hand out, it’s purely out of thanks for the employee.

In our case,  this portion was significantly larger than the managers (see below).

Distribution

I invited each employee into my office one-on-one to give them a personalized thank you on behalf of the company. This isn’t a time for a full on performance review, but to acknowledge what they had done throughout the year, ram home our company vision for a better future, and encourage them to truly enjoy the time with their families.

At the end, I’d open a drawer of my desk, pull out the red envelope, hand it over, and wish them a happy Spring Festival. Jaws dropped and some even teared up. It was completely unexpected (good job team!) and they had no idea it was coming. Mission accomplished.

Manager(s)

Goal

We had three new managers this year and the goal was to improve their relationships with all the people under them, build loyalty, and respect for the upcoming year. Ideally employees felt these were handed on independent of the company and was the managers giving out of their own kindness of their heart.

Since it was meant to be felt as an in-kind give, the total amount were proportionally smaller than the company’s.

Distribution

We had them write down a unique message for each person and hand them out on their own time. Made it more personal that way. I had teams at each location on the last Friday before Spring Festival have a meal together and assume they handed them out at this time. Didn’t get into the weeds of their distribution but know they handled it well.

Results

Nobody in the company knew red envelopes were coming until the last three days before Spring festival. Everyone thought, “oh well, foreign invested companies don’t get it”. They were wrong.

The entire staff went into the Spring Festival ecstatic and ready to talk about the meaningful work they are doing at HONT. We accomplished our goal but on a completely different level, it felt amazing from an employers perspective to acknowledge all the hard work they put in for us all year.

We all know size (of red envelope) matters on some level, but it’s not the most important thing. The most important aspect of giving, is the act of doing it. We could have publicly announced red envelopes at our company retreat and made a big brouhaha about it but the fact we did it in private goes a long way.

BONUS: WeChat + red envelopes

To keep the buzz going into the Spring Festival while they are home with their families, we used WeChat to pull the team together once again. You hop over to my in-depth introduction of WeChat to learn more about the app itself.

Spring Festival eve, I decided to make giving a game and refocus everybody back on HONT on the most important night of the year.

How it worked, is you set a total amount you want to give, say 100 RMB, and then people click to open and see how much they win. See below for step-by-step instructions.

 

red envelope hong bao

Choose total people and total amount you want to send.

red envelope hong bao

Sends ‘envelope’ into group channel

red envelope hong bao

As people click, app populates who received how much.

It’s a way for people to get excited about the New Year and to play along – generating buzz around the culture of giving. Our WeChat channels were all dead until I opened up the firehose of red envelopes and everybody started to get involved. People were giving, playing, and having a blast. This runs counter to the idea of private giving but serves more as a function of creating a giving culture, and for 热闹 or activity as they say in Chinese.

What you should do about it.

Red envelope giving is a practice deeply embedded in Chinese culture. My hope is this can serve as a guide for you and your company when you’re considering handing them out, it’s a huge opportunity to leave a lasting impact on the people that work for you.  And more importantly, to build in the culture of giving.

Shoot, who says this should wait until the end of the year. Think of somebody you want to appreciate and go do it now.

 

I’d love to know about your own experiences handing out red envelopes.

Pay Your Bills Before Chinese New Year

 

Wheeless Car for Chinese New Year

Source: http://inews.ifeng.com/47287141/news.shtml?from=singlemessage&isappinstalled=0

Personal Story on Workers Collecting Before Chinese New Year

Chinese New Year is right around the corner and what most people don’t understand, is the scramble for money that comes along with it. Just last week I was rushed out of our nursery when two, large Chinese men came to collect money (that we don’t owe btw).

At year end, companies are expected throw annual parties, hand out red envelopes to employees, and  most stressful of all, close out any payables accumulated throughout the year. It’s a domino effect of companies pushing out payments as long as possible, up until the last minute, which is the last day just before Chinese New Year starts. This puts an unbelievable amount of strain on the financial system and companies operating in it.

As a result, workers often times go on strike for owed wages and in serious cases, threaten companies with their own life to move the needle. In our case, farmers are hanging out in our office and barricading the doors. No fun.

The goal of this post is for you to better understand stresses that plague Chinese business owners at years end through our own story.

Chinese New Year

Chinese New Year (“CNY”) falls between February 7th – 13th in 2016. It represents the end of the Lunar calendar and most important holiday in Chinese culture. Everything, from factories to restaurants close their doors to bring in the New Year with their families.  Chinese companies hold annual company parties, hand out red envelopes (another form of bonus), and gifts to employees for a job well done (China Highlights wrote a nice summary here). However, Chinese New Year isn’t all celebration, largely due to payments.

Payment terms in China

Payment terms in China, as a relation based society, can vary from full payment pre-shipment (new relationships) to multiple years (good relationships). Savii businesses delay payment(s) for as long as possible with one hard deadline: the day before Chinese New Year. It’s acceptable to push off payments until then, but bills need to be cleared at the end of the year.

Government contracts are also structured this way – payments are closed out before Chinese New Year. Chinese managers at years end run all over the country, giving gifts, and trying to collect all of their receivables. Since most of the money in the country waterfalls down from the government, it sure is a busy time of year and a stressful one at that.

Payment hiccup at higher levels trickle down from upper management to the people actually doing the work: farmers/laborers and where it gets not-so-interesting.

Personal story

Recently (January 28th, 2016), I showed up to our Shandong office in the afternoon around 3:00pm to meet with our production manager and supervisor. After 30 minutes with the supervisor, our Production Manager and I decided to walk to the nursery to put my eyes on the trees.

Everything proceeded as normal until 4:00pm, when our driver whipped into the nursery and said “we need to go”. Apparently between the time I showed up to the office at 3:00pm and 4:00pm, two large Chinese guys showed up to push us for money. Our driver was sitting in his car at the entrance to our office and overheard them say “the American should be in the office”. News traveled fast.

My first reaction was to go sit down with them face to face – hear them out, explain the situation, and handle it like adults. You can solve almost any problem by listening. However at the advice of all our employees, particularly ones that have been through this before, they encouraged me to head back to the hotel for the night and not get caught up in the mess.

Background on why workers showed up

For context, I’ll explain why these guys showed up in the first place (for the record, we don’t owe ANY money).

Our partner, let’s call them Party A, is contractually obligated to install/invest in our nursery infrastructure in full, and we will repay them in 5 years either through sales or a lump sum. Party B is the contractor they used to install the infrastructure and finished construction June 2016.

Payment terms were set up as such that Party A will pay Party B 50% at the end of the year (February 2016) and the remaining 50% at the end of the second year (February 2017). All is good, until February 2016 and Party A has not paid Party B, which lead to workers showing up at our doorstep. Why us you might ask?

You’d think Party B would go directly to Party A to collect, but it’s more complicated than that. Party A and Party B have a long working relationship and Party B doesn’t want to hurt their ‘connection’ (we call this 关系 in Mandarin).

Instead, they decide to disrupt our operations (office environment, blog roads in/out of our nursery etc) and force us to do one of two things:

  1. Go back to our partner, Party A, and push them to make payment. Under this scenario, Party B doesn’t look bad and upholds their relationship.
  2. Since our operations are disrupted, we bite the bullet and pay back Party B the 50% far ahead of schedule, outside of contract.

We could always take the legal route but as you know, that’s a long and ardous process that won’t solve our problem in the short-term. While we’re working through the options above, workers will continue loitering at our office and possibly take action against our assets (no bueno).

I need to rely on some relational judo to work through this and will update the post as soon as we bring it to resolution.

What happens if they caught up with me in the nursery?

Don’t worry, they weren’t going to beat me up. People who have experienced this before told me they would have cornered me, held my legs, not let me get in the car, lay down in front/behind the car — basically done anything and everything to bother me enough to pay bills.

If I retaliate and get physical, they will submit a claim and I would be forced to dish money out for injury. Apparently even if I decided to walk back to my hotel, they would follow me or prevent me from doing so. Honestly I don’t understand their tactic – our assets are in the field and strapping me down doesn’t free me up to actually solve their problem.

To avoid this, our employees encouraged me to go back to the hotel immediately and focus on the problem at large. I couldn’t tell if they were joking or not, but they encouraged me to:

  • Check-in to hotel under a pseudo name
  • Change my cell phone number
  • Take the first train back to Hangzhou

Obviously I did none of the above but sheds light on how they address / think about the problem.  Deflect as much as possible and work through it relationally with our partner. We’re actively working through solutions now and I’m happy I got out untouched this time around. Not going back to the nursery anytime soon, however.

How often does this happen?

Talking with our employees, this is very common at the end of the year, especially in Northern China. China gets incredibly cold from November – March and there is not a lot of work for farmers. With a lot of time on their hands, they can afford to loiter / beg for payments.

Below are just some examples given to me by our employees and a link to a few images ( ‘swipe’ pictures left-right).

  1. Workers standing on roofs/equipment, threatening to jump if they aren’t paid.
  2. Locking managers inside of offices until they do something about it (or parking cars in front of an elevator)
  3. Breaking windows of cars and factories in rebellion
  4. Disrupting operations and refusing to work after Chinese New Year

When people are backed up against a wall, they resort to desperate measures. I couldn’t imagine being a laborer and not being paid for 3-6 months. Without any other means, I might do the same thing. I’ll make sure to fill in any other stories as I hear about them throughout the Chinese New Year.

Our company only has experienced the tip of the iceberg and can only hope nothing serious happens. Perhaps this is a growing pain or a deeper, systemize wide problem that the government is going to need to address.

Moral of the story: pay your bills before Chinese New Year.


 

If you want to join the conversation and build a bridge understanding between the two power houses of our time, sign up for my newsletter (upper right) and reach out at anytime.

 

Manage Multi Location Company(s) Through Culture

Screen Shot 2016-01-20 at 6.27.31 PM
If you want one year of prosperity, grow grain. If you want ten years of prosperity, grow trees. If you want one hundred years of prosperity, grow people.”

If you manage or have managed a foreign-invested company in China like I do, you know how challenging it is to maintain the quality and integrity of the organization across multiple locations, from management to the people actually doing the work.

This is not uniquely a Chinese problem, it exists everywhere including the United States. It is however, exaggerated by trying to impose your business culture on another.

Living and breathing this reality over the past two years has lead me to the conclusion that culture is the key to maintain quality and integrity of your organization across multiple locations. 

Managing multiple locations in any organization is difficult. Spread out operations can bring geographic advantages, while at the same time sacrifice the quality of the organization, particularly in China, which hurts your brand. I have learned this the hard way.

HONT (“Haining Oregon Nursery Technologies”) grew fast, both in terms physical locations and people.
  • 2014
    • 50 acre nursery from scratch in Haining, China
    • ~15 admin + managers + supervisors, 40-150 workers
  • 2015
    • 50 acre nursery in Jinan, China (800 miles away)
    • A corporate headquarters in Hangzhou
    • 30 admin + managers + supervisors, 80 – 250 workers
  • 2016
    • 170 acre nursery in Shuyang, China (in process)
    • Build out of nurseries for customers (in process)
This presented a problem for a our growing company: how do we maintain quality and integrity of the original team while we spread out geographically? 

Issues growing geographically

I failed in the beginning. I expected to be able to hand a manager a piece of paper with well-written job descriptions (mission, deliverables, and key attributes), a hand book on on how to execute, well-defined budgets, and then they would flourish and I could go home! Boy was I wrong.

Issues didn’t surface right away but crept up on us over time. To name a few:
  • Kill the messenger syndrome. Nobody likes to be the bearer of bad news, which makes identifying deeper problems harder.
  • Quality of the product went down.  Quality products start with quality people.
  • Employee morale & drive fell. People (especially new hires) didn’t feel the sense of working for foreign-invested company.
  • Labor efficiency tanked. Follows point above, managers didn’t drive things and waterfalled down to laborers.
  • Slow decision making. Classic ‘let the boss make the decision’ slows operations down and costs money in the long-term.

None of these jump out at you right away but showed up over time. It’s easy to think managing another location will be easy, but it’s not. And for a little while, we paid the consequences.

There are many reasons why these issues came up, but in HONT’s case, our saving grace was refocusing everybody on our culture.

Define your culture

I remember like it was yesterday: our core team sat in the HONT Museum (a showroom for trees) and white boarded out the lifeblood of who we are, why we do it, and the attitude we expect for everyone who shows up for work. Our culture was no so much born, but defined.

Immediately, all employees were presented with our culture deck and new hires to this day are indoctrinated into it and walk out a different person. The results have been nothing short of spectacular.

Fuel to the fire

We then implemented a few habits below (in no particular order) that have worked magic at turning the mentality / spirt of the organization around.
  • Weekly team meetings across departments and locations.
  • Weekly memo to entire staff identifying small wins
  • Professionalism work shops
  • Identify managers who ‘get it’, aka breathe your company culture
  • Never stop being a conduit for the culture, 24 hours a day.
Within three months, HONT was different company and we had returned to the feeling of a founding few at each location and I’m looking forward to continuing to do so into the future.

Your turn.

Building cultural discipline across multiple locations takes a lot of effort, care, and attention. It’s not easy to do and requires 100% buy-in on behalf of the people executing it.

I encourage you to try this in your own companies, in China or not, and see what happens. Your life will be a lot easier and your company will thrive.


Leave comments below about your experiences managing multiple locations and good/bad solutions you’ve tried!

WeChat (微信) for Beginners: Introduction

WeChat-logo

WeChat is the window into China everything. It’s a way for you to connect with friends, do business, and reach millions and millions of people. In a few short years, WeChat has grown from nothing into a messaging and marketing giant. Mobile China = WeChat.

WeChat is owned by Tencent (founders of QQ, another popular messaging app) and by the numbers, is one of the largest social networking apps in the world. As of August 12, 2015 WeChat has 600 million monthly active users (MAUs). Twice the population of the United States.

WeChat is a messaging service with an explosion of features on it’s mobile-only platform. Connie Chan from Andreessen Horowitz wrote an amazing deep dive summary into WeChat’s history and future. Highly suggested for an in-depth review of WeChat’s business fundamentals.

I want to introduce WeChat basics so marketers and normal people like you and I can better operate in China. I’ll cover:

  • Why WeChat is important
  • How to set up the English version
  • Find and add friends
  • Feature introduction

In the meantime, I encourage everybody to download the app and I can be your first friend (id: bampbell).

WeChat can be downloaded from the app store either in English or Chinese depending on your phones default language. It’s best if you use a Chinese cell phone number to register, it will open up a lot of features but a US number works as well.

Why it’s important you start using WeChat

China is a massive market everybody is trying to figure out and get a piece of (myself included). WeChat is a perfect gateway drug to getting your feet wet with a built-in translate feature for non-mandarin speakers so you can begin to build a network.

WeChat serves a lot of different purposes for different people. Personally I have two accounts: one for business and one for pleasure. Here is some areas of your life it will improve.

Social Life

You’re entire social life will be run through WeChat. Guaranteed. People prefer to use WeChat over phone calls…yikes.

Business

Business executives, managers, employees, and businesses themselves all have WeChat accounts and use them daily. China never caught the email bug and have always preferred instant messaging. We now are seeing a transition from QQ (basically IM) to mobile messaging aka WeChat.

WeChat makes it easy to set up call times in different timezones and stay in touch with what’s happening in your business on the ground through images/videos. It has been the silver bullet on our nursery business.

Marketing

WeChat uses the ‘app within an app’ model and already hosts millions of mini apps on its platform (See Connie Chan’s article above). Marketers can target ming boggling numbers of active Chinese users through ‘official accounts’. This is important because Chinese consumers are notoriously difficult to reach and WeChat is a perfect platform to reach your target.

How to find/invite friends

There are a lot of different ways to add people on WeChat. Below are the most common. WeChat follows the Facebook model of adding/accepting friends rather than an open platform like Twitter.

User ID (usually their Chinese cell) — most common unless you’re standing next to them

wechat-add-friends-id

QR code — fastest and most used method of adding people on WeChat, especially face to face

wechat-qr

-wechat-qr-code

wechat-scan-qr

 

 

Other — there are other ways like shake or recommended friends but these are the ones you’ll use most

Accepting friend requests — Once somebody has added you, it will pop up under recommended friends

wechat-add-friends

Features

WeChat is loaded with features and continues to expand their offerings focused on utility rather than fluff. I still remember when it was an ugly black/white screen you could send messages over wifi.

Messaging

Messaging is the core of WeChat and it’s main interface. You can send text, images, videos, files of all formats (.pdf, word, excel), voice recordings, stickers, and short 5 second videos.

wechat-messaging

You communicate directly with friends, not with strangers. It’s similar to Facebook but focused on the messaging rather than the ‘wall post’ model.  Facebook went from wall -> messages, WeChat has grew from messenger -> wall (aka moments). Far more utilitarian.

Voice messages

Users are able to walkie talkie into WeChat and leave a voice message (max 60 seconds). What’s culturally interesting about voice recordings are they avoid one of the most anoyying parts of Mandarin Chinese: typing characters. Unbelievably more efficient.

wechat-voice recordings

Autotranslate (yay!)

WeChat translates messages directly in app by pressing and holding messages. If your default language is English, it will automatically translate into Chinese and vice versa for Chinese <> English. Amazing feature for people living in China that don’t speak Mandarin.

wechat-translate

Send images/video

WeChat automatically compresses images/videos and you can send up to 9 images at a time – either by taking them new or selecting them from an album.

1445518306_thumb.png

Sights

Record and send 6 second clips either directly to other users via messenger or in the moments feature. Think Vine but built in.

wechat-sight

Voice/video calls

Voice and video calls are embedded into the messaging feature. Voice/video calls are made natively through WeChat and can only be made through the platform (for now) and seems to be faster than Skype.

wechat-voice-video

Group messaging

Pretty self explanatory. You can create a group and take advantage of all messaging features.

wechat-groups

wechat-group-image.png

 

Group messaging alone is a gigantic time saver. One message can prevent an entire 30 minute meeting with our staff.

Moments:

Moments deserves it’s own post. Imagine Facebook as a mobile only version of News Feed. You post articles, pictures, sights, or just their thoughts.

wechat-moments

For each post you can either ‘like’ it or ‘leave a comment’. If I comment on a post, if we’re not mutual friends, the third party won’t see my post. This is another level of privacy for users posting personal content to their WeChat.

Another useful feature is you can highly target your readers by selecting who to send content to. This is awesome for marketers who want to send more directed adds at their audiences.

Can’t tell you how many people use this. Everywhere you look, they are spending the majority of their time on moments. I’ll be experimenting with ways to better target readers.

Payments

One of the strongest features of WeChat is it’s payment system. It allows payments to be paid directly through the platform itself and businesses can accept payment instantaneously. Through the payments platform you can: book a hotel, taxi, doctors appointment etc.

Payments bring the most important factors to business natively inside of the app: money. Through official accounts, businesses can reach users directly and in a more intimate way.

Note: this requires that you have Chinese cell phone number to sign up. I’ll think of a workaround method to hacking this so people can gain access to this feature.

I owe my social life and business to WeChat while living in China. It has served as an invaluable tool and I’m sure will continue to only get better. Moving forward, I can’t wait to see just how deep it can infiltrate everybodys lives.

How have you used WeChat? Leave any comments of your own experiences with WeChat!

China’s Ecommerce Model (e-tail) Explained

China Ecommerce

**Published August 14th, 2013**

Read time: 5 min

Unlike the United States where retail was built upon a strong foundation of national chains, China’s retail model is going to jump or skip the physical store stage, also known as the leapfrog effect .

A new model of retail is emerging. Not one built upon the infrastructure of physical stores, but one built on top of ecommerce that paves the way towards higher levels of retail efficiency.

China ecommerce at a glance

Hard Facts:

• World’s largest online population, with 130 million residential broadband accounts
• Ecommerce produced more than $190 billion in 2012 sales
• China’s commerce industry has posted 120% compound annual growth since 2003
• More than 6 million e-merchants list products on Taobao

Growth potential:

• China’s broadband penetration is only 30% (population 1.3 billion)
• Online sales could reach $650 billion by 2020
• By 2020, commerce could potentially lift China’s private consumption by additional 4-7%
• In Tier 4 cities (small, rural cities), the average online shopper spends 27% of disposable income through ecommerce
• Ecommerce could boost labor productivity in China’s retail sector by 14%

**SOURCE: McKinsey Global Institute analysis**

Compare and contrast these with the United States.

Source: http://www.mckinsey.com/insights/asia-pacific/china_e-tailing

Source: http://www.mckinsey.com/insights/asia-pacific/china_e-tailing

Focus on Where do sales happen? Interesting huh?

Most of us don’t differentiate between different types of ecommerce. We all think ecommerce is ecommerce, but clearly this doesn’t tell the whole story. As seen above, marketplaces share of China’s total e-tailing activity stands at a staggering 90% compared to only 23% in the United States. Clearly there is something going on here.

Why the difference? Retail in the United States originated from physical stores and large players grew into national chains. National chains then laid the foundation for ecommerce to be built upon, explaining why 76% of ecommerce activity in the United States is done through individual sites or storefronts. Surprisingly Amazon and Ebay combined only account for 12.5% of the market share.

Evidence of the leapfrog effect is already taking place in China.

Retail in China traditionally has been hyper-local and lower tiered cities didn’t have access to products. With the explosion of ecommerce, businesses can now reach consumers in Tier 2, 3 and 4 cities.  People living in tier 4 cities (Beijing/Shanghai are Tier 1 for reference) already spend 27% of their disposable income through ecommerce.

Shipping has also reaped the benefits. True story: I bought t-shirt in the morning, it shipped same day, and was at my doorstep by dinner. Had to be expensive right? Nope, cost me nothing. Can you imagine free same day shipping through Amazon? No one would ever leave their house ever again.

Potential outcomes of an explosion in retail efficiency

  • Cities not centered around shopping malls or shopping centers, saving space for an urbanizing population
  • Entrepreneurs and existing retail stores host their products only on the marketplace giant – Taobao.com – rather than start their own ecommerce sites (cutting costs)
  • Online sales drive offline sales to spur domestic demand
  • Less expensive, high-end retail
  • An entire retail ecosystem built around efficiency

Growth will be fueled by value-add services

Value chain activities need to be improved, such as marketing/online systems, payment, warehousing, delivery, and IT (ERP or CRM). As of now the majority of  value-add activities are  done through the major marketplaces themselves, such as Taobao or Paipai.

(To all you entrepreneurs, there is a ton of opportunity for startups in this space. Some of us call it the Wild Wild East.)

Ultimately, China is poised to develop a retail model centered around efficiency, side-stepping or leap frogging the importance of physical stores. Who knows, maybe their unique e-tail system will provide the rest of the developing world with another model to replicate.

I would love to hear any comments, responses, or ideas on the impact of the leapfrog effect and what it means for the world economy.

**For more detailed analysis, see China’s e-tail revolution**