China’s meteoric rise in e-commerce has been nothing short of stunning. In 2005, China accounted for less than 1% of the world’s e-commerce transaction value. In 2016, China’s global market share was a whopping 42.4%. Today, China is the world’s largest e-commerce market, and its e-commerce revenue is expected to reach USD 1.26 trillion in 2021.
From group buying to live streaming, the Chinese e-commerce industry is constantly innovating and seeking new growth drivers. One of the latest fads in the industry is something called C2M. The three e-commerce giants, namely Alibaba, JD.com, and Pinduoduo, have recently set foot in C2M.
In this two-part series, I will attempt to explain the rise of C2M in China and share some key takeaways from my research. Part 1 will focus on the state of play of C2M in China today, including the driving forces, key players, and benefits of C2M. Part 2 will examine the challenges and future of C2M in China.
C2M stands for consumer-to-manufacturer. We are familiar with B2B and B2C terms that describe transaction models of companies selling to other businesses (the former) or consumers (the latter). In C2M, the consumer is not selling an actual product or service to the manufacturer. Instead, the idea is that consumers can offer something valuable to the manufacturers — that is, data on our tastes and preferences.
In C2M, the consumers connect directly to manufacturers to purchase a product. The process skips the intermediaries in the traditional retail value chain, such as wholesalers, distributors, or retailers (Figure 1). The consumer can tell the manufacturer what product to make, how to package the product, how many to make, and even how much to sell.
Therefore, C2M is about conveying consumers’ preferences to manufacturers to enable customization of products. In traditional retail or e-commerce, manufacturing is an R&D and marketing-driven process where production drives consumption. C2M flips the relationship and prioritizes understanding of consumers’ needs. In C2M, manufacturing becomes a consumer-driven process.
Of course, the capturing and synthesis of data to generate consumer insights is performed through the help of an e-commerce platform. There are generally three ways in which e-commerce platforms can work with manufacturers for C2M, as illustrated in Figure 2 below.
The e-commerce platform connects the consumers directly to the manufacturers in each model, removing the intermediaries and the possible price increases. The e-commerce platform also leverages valuable consumer data to inform manufacturing. The differences between the three models lie in the ownership of the brand and the timing of production.
Who is dabbling in C2M?
Biyao, founded in 2014, is widely regarded as the first Chinese C2M company. It onboards ODMs as independent brands and allows consumers to place orders directly with manufacturers, often at a much lower price than the retail price. I went to Biyao’s website and saw lip balms from the same factory producing for Dior selling at RMB 89 (approx. USD 14), 60% lower than the lip balm (USD 35) on Dior’s website (Figures 3,4).
Besides Biyao, the e-commerce giants like Alibaba, JD.com, and Pinduoduo have rolled out their respective C2M initiatives in recent years. JD’s C2M unit, Jingzao, set up in 2017, now boasts over 10 million users who shop on Jingzao for products including electronics, clothing, food, and kitchen utensils.
When the COVID-19 pandemic hit China, JD found that consumers became more concerned about food safety. They searched for keywords such as sterilization, separate dry and wet storage, and microcrystalline (used for meat preservation) when purchasing refrigerators. JD passed these valuable data to Midea and recommended it to produce a refrigerator with the said functions. The enhanced refrigerator was released during the 2020 618 shopping festival and proved to be a big hit, with daily average sales between 1st and 18th June up four times YoY.
Similarly, Alibaba noted from search data that more consumers were looking for alcohol-based car-cleaning supplies, in particular portable sanitizing sprays that contained at least 75% alcohol in plastic bottles. Alibaba then contacted Odis, a Guangdong-based auto-care products manufacturer, and helped it adjust production lines in three days to manufacture the portable sprays. To help Odis test the market receptiveness before productions, Alibaba also ran a Tmall campaign, which saw more than 200,000 orders within 24 hours.
In April 2020, Daniel Zhang, Alibaba CEO, announced that the company would help manufacturers create 10 billion new orders and transform 1,000 manufacturers into “Super Factories” with total output exceeding RMB 100 million within three years.
The GMV of the Chinese C2M industry was RMB 17.52 billion (~USD 2.72 billion), a mere 4.1% penetration of the overall market, and is expected to grow at 24.4% to reach RMB 42 billion (~USD 6.52 billion) in 2022.
Why did C2M take off in China?
To understand the popularization of C2M in China, one should examine the state of manufacturing and profile of online consumers in China.
China is often nicknamed “the world’s factory.” In 2019, its manufacturing output accounted for more than 28% of the world’s total, nearly as much as the United States, Japan, and Germany combined. Official statistics suggest that there were more than 3.4 million factories in China in 2019.
Despite China’s dominance in world output, its manufacturing sector is often characterized by low margins. Take Foxconn, Apple’s contract manufacturer, as an example. Foxconn’s gross profit margin is in the single-digit percentage points while Apple’s hovers around 40% (Figure 5).
China’s factories have long been engaged in the lower value-added tasks of processing and assembly and therefore lack the bargaining power to raise profit margins. While some have picked up design abilities, they lack the capabilities and channels to market their goods and generate brand awareness in an effective and cost-efficient manner. Simply put, China’s factories are trapped with low margins and are in dire need of transformation.
Another problem plaguing Chinese factories is excess inventory. Take the fashion industry as an example. Brands typically predict trends half a year to a year in advance and arrange for productions accordingly. However, demand forecasting is complex, especially when consumers are young, as is the case in China. By the time the products hit the market, consumers’ tastes may have changed.
Customers may return unpopular goods, and factories are stuck with unwanted inventory. On the other hand, out-of-stock products may not be replenished in time, as production cycles are long. To minimize the risk of not meeting consumers’ demand, factories tend to overproduce and may also end up with excess stock. Losses from excess inventory may amount to 20% to 30% of annual sales.
Therefore, C2M’s appeal is that by collecting consumer preferences and requirements in advance, manufacturers can better understand consumers’ needs to guide their production. Manufacturers can produce on-demand and reduce their inventory pressure to achieve zero inventory in some cases.
C2M also shortens production cycles and allows manufacturers to become more agile to changes. For instance, JD’s C2M model can reduce market research time by 75% compared with traditional offline means and the overall new product launch cycle by 67%.
Additionally, Chinese factories can now use C2M as a channel to build their independent brands and establish a direct relationship with customers to provide pre-sales and after-sales services, thereby building an additional revenue stream. More importantly, as factories become brand owners, they have more leverage to negotiate with the e-commerce platforms on higher profit sharing.
On the consumer end, trends in demographics and consumer behavior have also contributed to the rise of C2M in China. China’s online shopping population is young, and the post-80s are the dominant users. For instance, the post-80s made up more than 80% of the Chinese online shopping app users in March 2019 (Figure 6).
The post-80s are likely the only child in their families, and these consumers place more emphasis on individuality and diversity rather than chasing trends blindly. C2M can utilize consumer data and insights to produce more tailored and customized products to target these young shoppers.
I also came across this research that examined the relationship between the “de-branding” phenomenon and per capita GDP. The “de-branding” phase is where consumers care less about brands and more about simple styles and high price-performance (性价比) of goods. The research found that stores like Japan’s Muji and Uniqlo and United States’ Costco emerged when the per capita GDP in the respective countries was around USD 20,000 (Figure 7). And the top 15 cities in China have output levels at or above this level (Figure 8).
While it is debatable whether stores like Muji, Uniqlo, and Costco are indeed representative of the “de-branding” phenomenon, the research provides an interesting perspective to consider the correlation between consumers’ wealth and spending behavior. Chinese consumers are moving towards demanding quality products at lower prices, and they celebrate individuality over standardization.
Unfortunately, traditional manufacturing lacks the flexibility to meet such customization needs. The bespoke customization that we typically hear of is generally costly and limited to luxury products.
C2M is a sweet spot that allows manufacturers to use big data to profile users and analyze their consumption patterns. In this way, manufacturers can produce even everyday items tailored to consumers’ needs and bring the goods to market at low prices.
By skipping the intermediaries and eliminating the possible price increases at each step, C2M can offer goods at lower prices to end-users. Take clothing sold on Biyao as an example. The markup rate ranges from 2.12% to 15.9%. On the other hand, traditional models may see markup rates of 400% to 600% for domestic brands and 1000% for global brands (Figure 9).
Underpinning the shifts in manufacturing and consumption behavior also lies technological advancements in big data and AI that enable more accurate mining of user insights to guide production.
A final point to note is that C2M should not be confused with M2C (manufacturer-to-consumer). While these concepts are similar in that the manufacturers sell directly to consumers, a key difference is the search process to understand market demand.
A challenge in realizing M2C is the manufacturer’s lack of capability to discern what consumers truly want. The manufacturer would have to dedicate a massive amount of resources to find consumers and analyze their spending patterns, possibly negating the price savings from eliminating the intermediaries and bumping up the overall cost of production.
C2M delegates the process of “finding consumers and predicting market receptivity” to e-commerce platforms that provide these consumer insights. In this way, the Chinese factories need not worry about identifying market demand and can focus on showcasing what they are good at — that is, producing the goods. Such is the beauty of C2M.
