November 19, 2015 12:00 pm JST

Cross-border e-tailing has bright future in China: William Ding Lei, CEO of NetEase

JENNIFER LO, Nikkei staff writer

China's e-commerce market is packed with big players. To succeed requires new thinking, according to NetEase CEO William Ding Lei.

     The gaming and Internet company is struggling to profit from the cross-border virtual mall it launched in March, Kaola.com. But Ding -- one of China's five wealthiest information technology entrepreneurs, alongside Alibaba Group Holding's Jack Ma Yun, according to the Hurun Rich List 2015 -- is optimistic nonetheless.

     "It's small but growing," he said in an interview during the Nikkei Global Management Forum. "E-commerce is less than 5% of our business. We are yet to break even, but when it comes to cross-border transaction volumes, we have overtaken Alibaba's Tmall by two times."

     NetEase, which earns the bulk of its revenue from online games, is best known for top-grossing mobile titles such as "Fantasy Westward Journey," available in Apple's Chinese App Store. It also handles "World of Warcraft," licensed from Activision Blizzard of the U.S.

     Though cross-border shopping still accounts for only a fraction of e-commerce spending in China, it is the fastest-growing segment, expanding at a rate of more than 20% a year, according to official figures. The market is projected to be worth 6.5 trillion yuan ($1.02 trillion) in 2016.

     Kaola specializes in selling foreign goods to Chinese customers. It seeks to differentiate itself from Alibaba's Taobao -- a marketplace comprising small retailers -- which has drawn scrutiny over sales of counterfeit goods. "We are like a supermarket," Ding said. "What we sell is carefully chosen based on prices and [the preferences] of Chinese consumers. Alibaba doesn't do sourcing."

     In Ding's view, the key to guaranteeing quality is to procure directly from overseas retailers. Partners include Japanese trading house Mitsui & Co. and South Korean retail chain E-mart. In the summer, Kaola announced a tie-up with kitchenware retailer Nakayamafuku to sell Japanese frying pans and pressure cookers in China; lately, Chinese tourists to Japan have been buying such products in droves.

     Kaola also procures so-called fast-moving consumer goods from Japan. These are relatively inexpensive products sold in supermarkets and pharmacies, typically with quick turnover. Examples include snacks, coffee, green tea, cosmetics and disposable diapers.

     Still, Kaola must contend with Alibaba's Tmall, a platform for domestic and international brands to sell their wares. JD.com, another Chinese e-tailer, in June launched a section focusing on Japanese products.

     A latecomer to the e-commerce market, Kaola has had a hard time drawing traffic. As of November, the site was ranked 362nd in terms of popularity in China, according to Alexa Internet. Alibaba's Taobao and Tmall placed third and sixth, respectively; JD.com came in 14th.

     Despite a third quarter in which net revenue more than doubled to 6.67 billion yuan, NetEase's gross profit margin for its e-commerce and email business was close to zero, compared with 68% for its online games business.

     "Even the world's largest e-commerce company, Amazon, struggled to make a profit of $100 million in the last quarter, given its sales volume," Ding said. "I think online gaming is still the world's most profitable business."

     As an Internet pioneer -- NetEase started out in 1997 as China's first free email service -- Ding said one challenge facing startups is that even big businesses are copycats. "China lacks legal protection for innovation and companies imitate with no sense of shame," he said. "They even feel proud of it. This is a very annoying thing."

     Ding takes heart from expectations for continued brisk growth in cross-border e-commerce. The recently announced two-child policy, he said, should fuel domestic demand further.

     The CEO hopes to push up Kaola's annual sales to the 50 billion to 100 billion yuan range in the next five years. "We might need just three years to achieve it," he said. "Who knows?"

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