6 Feb 2017
E-commerce: Challenges and Opportunities for Exporters
As a well-established hub for finance and trade, Hong Kong is home to many traders who have a wealth of experience in conducting import and export business. Thanks to efficient management, the bilingual environment and an internationally-recognised legal regime, it also has a strong reputation as the ideal trading platform for international suppliers and buyers.
In the wake of the global financial crisis of 2008 and the recent economic slowdown on the Chinese mainland, many Hong Kong trading firms have experienced a sharp decrease in their international orders. The business outlook is becoming increasingly tough for those companies whose profit margins are under threat due to an over-dependence on a number of now-dwindling traditional sales channels.
In response to this situation, the older generation of traders has sought new ways to acquire customers and generate revenue. A small number has identified e-commerce as a potential new channel. According to the e-commerce survey conducted by the Hong Kong Trade Development Council in 2016, only 12% of the surveyed exporters were involved in e-commerce exports. With the explosion of e-commerce and online shopping, integrating e-commerce into the traditional export channels has not only become important for companies to achieve a competitive advantage, it is now vital to their survival in today’s global environment.
E-commerce as a Disruptive Force
Before the era of e-commerce, the disparity of information between various countries justified the existence of a middleman in order that trade could be conducted. Commonly, exporters adopted a business-to-business (B2B) model, which saw them focus on a few business partners or customers within their chosen markets. These partners were mostly large importers, regional distributors, wholesalers or resellers. Trading firms would maintain long-term relationships with their overseas partners and, as such, had a reasonable understanding of their requirements. The partners would place bulk orders with the Hong Kong exporters, who would then help to inspect the goods produced by the manufacturers, ensuring they reached the required procurement standards. They would also monitor production schedules in order to ensure that delivery deadlines were met. As such, the exporters had no direct contact with their end customers.
E-commerce export, though, is a completely different process, the accessible nature of which has changed the structure of the market. The highly-connected digital world enables buyers to search for products, obtain product specifications and conduct transactions directly from a foreign seller without physically leaving the country. For sellers, it provides an opportunity for them to showcase and market their products directly to their eventual customers via a virtual marketplace.
The rise of e-commerce has disrupted the import-export paradigm. The role of the middleman has diminished, with transactions now conducted between a buyer and a seller via an online platform, rather than being facilitated by a chain of middlemen in line with the conventional B2B export model.
Traditional exporters were accustomed to selling their goods in bulk to a few business partners or customers in the destination countries. Now, they are required to deal with small, fragmented orders from many customers, who may be small businesses or individual end-consumers.
Evolution of Supply Chain
In general, e-commerce has led to a shorter product cycle because, in a sense, time passes much more quickly online than it does in the traditional business cycle. In order to maintain their market share, exporters have to make sure that their products can reach the market faster than those of their competitors.
The large-scale container-based model of international supply chains lacks the necessary flexibility to facilitate cross-border e-commerce. The main weakness of the traditional supply chain is that transit time from order to receipt is usually lengthy and large bulk orders are necessary to achieve cost effectiveness. E-commerce is driving changes in many areas of the supply chain network, particularly with regard to product design and development, procurement, production, inventory, distribution and after-sales service support (such as customer complaints and returns).
The back-end operation of traditional exporters also needs to be revamped in order for this new supply chain network to work effectively. The systems of logistics information and product flow have to be adapted accordingly in order to ensure the flexible and reliable distribution of products to individual customers. Some of the problems can be solved by employing an international courier who can perform value-chain activities efficiently or by undertaking the end-to-end electronic integration of the entire export system.
The Rise of Electronic Payments
Many different kinds of payment processes now exist, unlike the previous practice that saw traditional international trade transactions usually conducted via the banking system. In the e-commerce world, though, electronic payment is much more prevalent. There are currently hundreds of payment gateways and acquiring banks in the world, with the East and the West having their own sets of preferred payment methods. Credit cards, debit cards and PayPal are the most popular payment methods in the Western world, while a far wider variety of options is available in the East. In China, for example, the leading payment gateways are Alipay, WeChat Pay and UnionPay (CUP).
In order to accommodate a wider customer base, exporters should seek to provide as many payment options as possible. However, the process of setting up relationships with assorted payment gateways and local banks can result in additional costs, as well as causing delays in the time it takes for the goods to reach their market. In Hong Kong, there are a number of payment solutions providers which offer one-stop services, such as creating an online shopping portal and a shopping cart, the integration of a payment gateway and the generation of transaction reports. These can all help exporters manage their e-commerce business more efficiently. When making a decision on which payment solutions to adopt, exporters should consider a whole range of factors relating to user friendliness, security and multi-currency support.
Digital Marketing and Promotion
Traditional exporters who used a conventional B2B trading model did not have to deal directly with their end-line consumers. In the e-commerce era, though, exporters will need a much deeper understanding of their chosen market. In reaching out to a large group of unknown consumers or small businesses within the overseas market, exporters should consider the qualities of various popular online marketing tools.
One of the most important online marketing tools is SEO (Search Engine Optimisation), as digitally-connected customers and buyers rely heavily on search engines to find goods and to assess the suppliers’ capabilities. Having no presence on the results pages of major search engines will inevitably result in the loss of business. Once exporters have decided on their target markets, it is of paramount importance for them to engage a marketing expert who understands the local culture and local consumer buying behaviour. They should also consider using SEO, SMO (Social Media Optimisation), O2O (Online-to-offline), email marketing and content management if they wish to develop an effective presence within a given local market.
E-commerce: The International Trade Enabler
In spite of all these challenges, e-commerce has considerable advantages in terms of convenience, business efficiency, low costs, and fewer geographical restrictions. The use of electronic methods can make the process of initiating and conducting international trade a great deal easier, faster, and less expensive. A whole range of trading activities can be conducted via the virtual marketplace without buyers and sellers having to be in close physical proximity. Such activities might include finding the right supplier, specifying product requirements and quality, negotiating on price, arranging deliveries and marketing products.
E-commerce can improve the accessibility of information throughout the supply chain process. This includes the integration of production planning, scheduling, and inventory control within the procurement process. As a result of the accessibility of this data, suppliers have a much better knowledge of their consumers’ needs. In the meantime, buyers and final consumers can receive feedback from their suppliers very promptly on a number of issues, including transaction and delivery status.
As electronic technology has evolved, it has enabled the calculation and pre-payment of duties and taxes. With the inclusion of these additional charges, buyers and/or final consumers now know the true cost of every purchase at the time of purchase. E-commerce can also promote international trade by enabling direct and efficient ordering of low quantities of items.
A number of products that traditionally required physical delivery can now be delivered directly to a customer in digital form, via an electronic network – including a variety of media products such as music, films and computer software. Equally, e-commerce can convert non-tradable services into tradable ones. Some notable examples here are research and development, inventory management, accounting, translation, personnel management, marketing and advertising. In the future, international cross-border trade across a wide range of industries – such as financial, legal and telecommunications services and customised software – will increasingly be carried out electronically.
The removal of intermediaries from the trade process, a consequence of the rise of e-commerce, has had a significant impact on the way that traditional exporters conduct their business. They now have higher business risks due to online payment fraud and/or bad debts from unfamiliar individual customers. Last-mile delivery within a narrower time-frame creates additional challenges to those using traditional export models.
Due to the relatively high upfront capital costs that are required to upgrade their existing systems, many traditional exporters often resist change and this can prevent them from meeting the challenges of the new economy.
A number of traditional exporters in Hong Kong have major reservations with regards to offering their entire product range online, not least because of the possible impact on their existing partners, including overseas importers, distributors and retailers. They are also concerned as to how their current business partners will react to the implementation of an e-commerce sales channel.
Some traditional exporters may prefer to keep their current retail channels, in part due to their lack of knowledge about consumer behavior in their target markets, a problem exacerbated by any language barriers. Additionally, they are not confident that they can manage the last-mile delivery stage. According to a recent government survey, the most common reason for not adopting e-commerce is that companies are ‘inclined to maintain current business model’ (89.2%). Indeed, mobbing into e-commerce sales requires a whole series of changes and this creates a significant challenge for most traditional exporters. The main barriers here are outdated technology and infrastructure, a reluctance to upset trading partners, a lack of information and a lack of understanding as to how to start the process.
Opportunities for Hong Kong Exporters
For many years now, Hong Kong industries have endeavored to move up the value chain by engaging in brand development. Brand building, however, traditionally requires a huge marketing budget and a degree of long-term investment. In the conventional B2B model, where exporters can survive by dealing with a few trading partners in overseas markets, brand building has not been a top priority.
In the e-commerce era, where many electronic marketing tools are available, building a brand has become far easier. Businesses of all sizes are able to develop their brand building programmes around the world at relatively low costs. Electronic marketing has the advantage of capturing the attention of clearly-defined target market, which results a better return for every dollar spent on advertising. Businesses can increase their brand awareness with a very specific audience group, regardless of where in the world they are based. For instance, search engine features enable businesses to reach an audience that is already actively seeking out a certain product or service. Electronic branding campaigns are becoming increasingly effective as the ability to track and understand users’ browsing behavior continues to advance. By using electronic marketing, such as web advertising, SEO, social media marketing, email marketing, and content marketing, businesses are able to steadily build a positive brand reputation and develop customer rapport.
As brand building and marketing are of paramount importance in the digital world, Hong Kong industries are advised to make concerted efforts to better utilise their resources. Exporters working in the same industry might consider creating a vertical online platform, allowing the creation of a single unified advertising campaign that can be implemented across the board. In 2013, a Hong Kong manufacturer created onemalltime, a vertical platform for selling watches and jewellery online. Since then, more than 100 companies and brands have started selling on the platform. The main benefit of a vertical platform is that vendors can serve a specific audience and its particular set of needs. From the consumers’ perspective, finding products on a vertical platform can simplify the process of shopping and thus enhance the user experience.
Of course, competition might exist among merchants on the same platform, but such competition is still far less extreme than that which businesses could face as members of a third-party mega-marketplace. Through an effective strategy and appropriate positioning, a vertical platform can minimise overheads and maximise the user’s ability to reach a worldwide audience.
There is vast potential here for a wide number of consumer products, as Hong Kong is a well-established sourcing and trading hub for many products, such as precious jewellery, watches, consumer electronics, eyewear products, garments, gifts and toys. Hong Kong products – and not just those that are physically manufactured in Hong Kong – have a reputation for reliability and quality across the world.