• Over the past decade, e-commerce platforms in China have sharpened their technology, operations, and business strategies as online shopping boomed.
•  Now they are taking this business model beyond China, with Temu and fast fashion-focused Shein making a strong start. But regulatory risks and fierce competition are on the horizon.
• Understanding the potential and the challenges of Chinese e-commerce overseas will be increasingly important to investors trying to gauge their fair valuations in the stock market.

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Domestic success

It’s easy to forget that the success of Chinese e-commerce was once an uncertainty. User experience was nowhere near as smooth as it is today, authenticity of products was a real problem, and the ambitions of Chinese platforms were confined to the Chinese market. The switch from computer to mobile as the primary platform for transactions - something we now take for granted - only took place a decade ago, as did the pivot from focusing on businesses to serving consumers.

But Hyomi Jie, a Singapore-based portfolio manager who started analysing Chinese e-commerce companies over a decade ago and has had a front-row seat to their evolution thanks to Fidelity’s investment in Alibaba ahead of its 2014 IPO, remembers the early days vividly: “It was very different. The usual big-cap names that we know very well today - none of them were listed,” she says.

Change has only accelerated since those early days. More operators have come onto the scene, with better infrastructure and creative ways to engage with consumers, such as livestreaming. Aggressive pricing is another hallmark of the market, which can be seen beyond China as these platforms expand across the world.

International potential

Leaping over domestic boundaries is nothing new for Chinese e-commerce. Chinese platforms have been trying to tap overseas demand for years, and the likes of eBay and Amazon have well-established links with Chinese merchants. But business was plagued by unreliable quality and the poor customer experience that followed.

What changed the game was the pandemic, according to Sherry Qin, a Hong Kong-based analyst focused on the Chinese internet sector. As shoppers around the world could only buy online, Chinese platforms cut through with strong infrastructure, based on mature payments and logistics systems. Temu, owned by value-for-money Chinese platform PDD, has gained 300 million users in less than two years. Shein, the fast-fashion platform (which doesn’t sell within China) doubled its gross merchandise value in 2020.

Equally important to this story is the macro environment that followed after the pandemic, with high inflation eating into household budgets in many developed markets. “Naturally they want to find a cheaper alternative, and the Chinese players come up with [prices] half that of Amazon - or even cheaper,” says Qin.

The flipside is that Chinese e-commerce platforms are making much less money compared to international competitors with a similar number of customers. With around 80 per cent of Amazon’s user base, Temu is only fetching 2.5 per cent of Amazon’s total transaction volume. “How quickly these platforms can increase their revenue, profit, and cash flow is something we, as investors, must monitor,” says Jie.

Risk and reward

Competition won’t get any easier for Chinese companies in Southeast Asia, a popular destination for Chinese companies going global. It’s a fragmented market with a spectrum of regulation, customs, and languages - an impediment that doesn’t exist in mainland China. And that’s before you’ve taken account of the strong position of local operators, such as Shopee, which has enjoyed success in part by replicating the Chinese model. “E-commerce innovations get ported over to Southeast Asia very shortly after they come out in China,” says Elroy Ng, a Singapore-based analyst covering e-commerce names in the region.

Shareholders also need to watch for risks outside of the industry, such as regulation. A high-profile example is Indonesia’s banning of TikTok Shop in the name of protecting local merchants. US tariffs on low-value goods would hurt Chinese companies more than most. “Investors are concerned about China's macroeconomic backdrop and potential geopolitical risks,” says Qin.

E-commerce shares were struggling at depressed levels before Chinese policymakers announced stimulus measures in September, which is not a surprise given the bulk of their business remains in the domestic market. But traders may be overly pessimistic with a negative price tag on Chinese e-commerce overseas operations. While lossmaking, their growth momentum has been evident. To Jie, this mismatch could present another long-term opportunity - not unlike the one she took a decade ago.

“I think the market's expectation is still very subdued because of geopolitical concerns and also because the [overseas] business itself is at a very early stage,” she says. “The way things are reflected in the share price is not really black and white. There are so many shades of grey in between.”