ELECTRONIC COMMERCE

1. SUMMARY:

CHINESE OFFICIALS BELIEVE ELECTRONIC COMMERCE (EC) HOLDS GREAT POTENTIAL FOR CHINA AND HAVE CAREFULLY STUDIED RECENT U.S. AND EU STATEMENTS ON THE TOPIC. HOWEVER, THE CHINESE GOVERNMENT CONCEPT OF EC FOCUSES ON ELECTRONIC DATA INTERCHANGE (EDI) VIA DEDICATED NETWORKS AND IS ORIENTED TOWARDS WHOLESALE PROCUREMENT RATHER THAN INTERNET-BASED RETAIL SALES.

INTERNET AND RETAIL ELECTRONIC COMMERCE IN CHINA ARE HANDICAPPED BY THIS GOVERNMENT FOCUS ON DEVELOPMENT OF A CENTRALLY-CONTROLLED EC SYSTEM AND THE LACK OF CONVENIENT METHODS TO MAKE PAYMENT-- WHICH EXPERTS SAY IS AS MUCH A CULTURAL ISSUE AS A TECHNICAL ONE. END SUMMARY.

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NOTE: SOME OF THE ABBREVIATIONS USED IN TEXT:
CNTPDC-- CHINA NATIONAL TRADE POINT DEVELOPMENT CENTER
CHINA INTERNATIONAL ELECTRONIC TRADE NETWORK
EC-- ELECTRONIC COMMERCE
EDI-- ELECTRONIC DATA INTERCHANGE
END NOTE

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ELECTRONIC COMMERCE ALREADY PLUGGED-IN

2. CHINESE OFFICIALS HAVE FOR SEVERAL YEARS BEEN AWARE OF THE GREAT POTENTIAL OF EC TO FACILITATE INTERNATIONAL TRADING BETWEEN CHINESE ENTERPRISES AND FOREIGN COMPANIES. CHINESE OFFICIALS SEE THE MAIN ROLE OF EC IN CHINA AS AN ELECTRONIC TRADE FAIR WHERE CHINESE ENTERPRISES CAN INTRODUCE THEIR PRODUCTS AND CAPABILITIES TO FOREIGN COMPANIES, JUST AS IN YEARS PAST, ANNUAL TRADE FAIRS PERFORMED THIS FUNCTION. IN THIS ROLE, EC IS PARTICULARLY WELL-SUITED TO COUNTRIES SUCH AS CHINA WITH ITS VAST LAND AREA AND UNDERDEVELOPED COMMUNICATION AND TRANSPORTATION INFRASTRUCTURES.

3. IN 1996, CHINA ESTABLISHED THE CHINA NATIONAL TRADE POINT DEVELOPMENT CENTER (CNTPDC), WHICH OPERATES WITHIN CHINA ON THE CHINA INTERNATIONAL ELECTRONIC TRADE NETWORK (CITN), A DEDICATED COMPUTER NETWORK. THE CNTPDC IS LINKED INTERNATIONALLY THROUGH THE GLOBAL TRADING PROGRAM NETWORK, A UNITED NATIONS-SPONSORED NETWORK CREATED TO TO IMPROVE TRADING EFFICIENCY IN DEVELOPING COUNTRIES.

LATER IN 1996, MOFTEC ESTABLISHED THE CHINA INTERNATIONAL ELECTRONIC COMMERCE CENTER TO ASSIST CHINESE ENTERPRISES IN THE USE OF EC TO CONDUCT INTERNATIONAL TRADING. EDI NETWORKS SUCH AS CITN AND THE GLOBAL TRADING PROGRAM NETWORK USE A DIFFERENT TRANSMISSION PROTOCOL THAN THAT USED BY THE INTERNET. THESE NETWORKS WERE DESIGNED PRIMARILY TO FACILITATE WHOLESALE INTERNATIONAL TRANSACTIONS WHERE BOTH THE FORMAT AND CONTENT OF THE DATA TO BE TRANSMITTED ARE RESTRICTED TO THAT REQUIRED TO COMPLETE CERTAIN COMMON STANDARDIZED FORMS.

CHINA INTERNATIONAL ELECTRONIC COMMERCE CENTER

4. CHINA'S INTERNATIONAL ELECTRONIC COMMERCE CENTER HAS OVERALL RESPONSIBILITY FOR CONSTRUCTION AND OPERATION OF ELECTRONIC TRADING NETWORKS IN CHINA AND CONDUCTS PLANNING ON THE ROLE OF ELECTRONIC COMMERCE IN CHINA'S ECONOMIC DEVELOPMENT AND INTERNATIONAL TRADE.

TOGETHER WITH THE CNTPDC, IT DEVELOPS STRATEGIES TO FACILITATE USE OF EC, PROVIDES TECHNICAL SUPPORT AND OPERATIONAL SERVICES FOR THE NETWORK, ASSISTS CHINESE ENTERPRISES IN DESIGNING AND CREATION OF 'ELECTRONIC BILLBOARDS' (ADVERTISEMENT/HOMEPAGES), PROVIDES E-MAIL AND DOCUMENT EXCHANGE SERVICES, AND OFFERS INTERCONNECTION WITH OTHER NETWORKS VIA ITS GATEWAY SERVICES. IN ADDITION, THE ELECTRONIC COMMERCE CENTER SERVES AS A CLEARINGHOUSE FOR INFORMATION EXCHANGE ON NATIONAL LAWS AND REGULATIONS RELATED TO INTERNATIONAL TRADING.

5. ACCORDING TO INDUSTRY SOURCES, EDI NETWORKS ARE WIDELY USED IN EUROPE TO TRANSMIT STANDARDIZED INFORMATION ON PRICING, AVAILABILITY, TERMS OF PAYMENT, DELIVERY AND OTHER TRADING INFORMATION. CHINA STILL RETAINS SOME ELEMENTS OF A CENTRAL PLANNED ECONOMY, SUCH AS STATE-OWNED TRADING COMPANIES WITH EXCLUSIVE CONTROL OVER THE IMPORT OR EXPORT OF CERTAIN PRODUCTS. AN EDI SYSTEM PERMITS THE PRC GOVERNMENT TO RETAIN SOME CENTRALIZED CONTROL AND MONITORING CAPABILITY OF ITS INTERNATIONAL TRADE.

INVESTING IN THE WRONG TECHNOLOGY

6. HOWEVER, INDUSTRY SOURCES BELIEVE THE CURRENT TREND, ESPECIALLY IN THE U.S., IS FOR MANY COMPANIES TO SWITCH FROM DEDICATED NETWORKS TO OPEN, INTERNET PROTOCOL-BASED METHODS OF PROCUREMENT, TRADING AND SALES. U.S. COMPANIES GENERALLY PREFER THE FLEXIBILITY OF USING INTERNET PROTOCOL, WITH ITS MUCH BROADER RANGE OF COMMUNICATION POSSIBILITIES, TO THE FORMALITIES AND HIGH USER FEES ASSOCIATED WITH EDI NETWORKS.

FEARING LOSS OF CONTROL

7. THIS TREND PRESENTS MANAGERS OF CHINA'S ELECTRONIC COMMERCE CENTER WITH A PROBLEM: THE GATEWAY SERVICE THEY OFFER (PROTOCOL CONVERSION) TO THE INTERNET ALLOWS ONLY LIMITED INDEXING AND SEARCH FUNCTIONS AND LIMITED ABILITY TO SEND DOCUMENTS AND AUTHENTICATIONS FROM ONE NETWORK TO THE OTHER. IF, HOWEVER, A SIGNIFICANT PART OF INTERNATIONAL TRADE SHIFTS TO USING THE INTERNET, CHINESE ENTERPRISES WOULD THEN NEED TO FOLLOW SUIT OR RISK BEING LEFT BEHIND.

BY CHINESE STANDARDS, THE INTERNET IS CHAOTIC. ITS DISTRIBUTED ARCHITECTURE MAKES CENTRALIZED CONTROL DIFFICULT, FOREIGN LANGUAGE SKILLS WOULD BE NEEDED AT EACH ENTERPRISE (NOT A PROBLEM WHEN USING STANDARDIZED FORMS PROCESSED THROUGH A CENTRAL POINT). ORDERLY MARKET ARRANGEMENTS COULD BE EASILY UNDERMINED.

8. THOSE IN CHARGE OF CHINA'S ELECTRONIC COMMERCE CENTER HAVE BEGUN SOME ADJUSTMENTS TO THE GROWING POPULARITY OF INTERNET-BASED TRADING. MOFTEC HAS RECENTLY ESTABLISHED A INTERNET WEB PAGE (HTTP://WWW.MOFTEC.GOV.CN) WHICH IT PLANS WILL EVENTUALLY HAVE ALL LAWS AND REGULATIONS RELATED TO TRADE AND INVESTMENT IN CHINA. ELECTRONIC COMMERCE DIRECTOR GENERAL ZHANG HOPED THE U.S. GOVERNMENT COULD DO THE SAME: CREATE A SINGLE WEBSITE CONTAINING ALL INFORMATION NEEDED FOR FOREIGN COMPANIES ON TRADE AND INVESTMENT IN THE U.S.

WILL INTERNET-BASED PROCUREMENT DISADVANTAGE CHINESE COMPANIES?

9. ONE ISSUE OF PARTICULAR CONCERN TO DIRECTOR ZHANG WAS THE POSSIBILITY THAT ALL USG PROCUREMENT WOULD BE CONDUCTED VIA THE INTERNET BY THE YEAR 2000. ZHANG WAS CONCERNED THAT THIS MIGHT LIMIT THE ABILITY OF CHINESE ENTERPRISES TO BID ON USG PROCUREMENTS AND SOUGHT SOME REASSURANCE ON THIS POINT.

(NOTE: ZHANG SEEMED TO BE CONFUSING SOME RECENT USG STATEMENTS ABOUT ELECTRONIC PAYMENTS WITH ELECTRONIC COMMERCE, AND WAS ALSO GREATLY OVERESTIMATING THE IMPORTANCE OF USG PROCUREMENT AS AN ELEMENT IN U.S.-CHINA TRADE. HOWEVER, HIS DEEP CONCERN ABOUT THIS ISSUE IS INTERESTING. END NOTE.) REGARDING THE POSSIBILITY OF COLLECTING TAXES ON ELECTRONIC COMMERCE, ZHANG SAID THAT THE SWITCH TO EC WAS ONLY A CHANGE IN THE METHOD OF TRADE; LAWS AND REGULATIONS ON TAX AND TARIFF TREATMENT WOULD NOT CHANGE AS A RESULT.

10. NOTE: ZHANG'S STATEMENT SEEMED TO IMPLY THAT CHINA WOULD NOT ADD NEW TAXES ON ITEMS PURCHASED ELECTRONICALLY, BUT THIS IS LESS THAN FULLY REASSURING SINCE U.S. COMPANIES COMPLAIN THAT CHINA ASSESSES TARIFFS AND VALUE-ADDED TAXES ON IMPORTED COMPUTER SOFTWARE BASED ON THE RETAIL VALUE OF THE SOFTWARE RATHER THAN THE VALUE OF THE MEDIUM, THE AGREED WTO PRACTICE. END NOTE.

WHY RETAIL ELECTRONIC COMMERCE IS DIFFICULT IN CHINA

11. ALTHOUGH INDUSTRY EXPERTS PREDICT THAT WORLDWIDE RETAIL SALES OVER THE INTERNET WILL GROW RAPIDLY IN COMING YEARS, CHINESE OFFICIALS DISPLAY LITTLE INTEREST IN THIS DEVELOPMENT AND CONCENTRATE THEIR ATTENTION ON WHOLESALE TRADING.

12. DR. FANG MEIQI, HEAD OF THE ECONOMIC SIMULATION CENTER AT RENMIN UNIVERSITY IN BEIJING TOLD EMBOFFS THAT THE MAIN OBSTACLE TO ELECTRONIC RETAILING IN CHINA WAS THE LACK OF A CONVENIENT WAY TO MAKE PAYMENT ON THESE PURCHASES. SHE CITED THE UNFAMILIARITY OF CHINESE PEOPLE WITH MAKING PURCHASES ON CREDIT. FEW PEOPLE IN MAINLAND CHINA POSSESS CREDIT CARDS, AND NEARLY ALL OF THE CREDIT CARDS THAT CAN BE OBTAINED LOCALLY ARE ONLY VALID FOR PURCHASES IN CHINESE CURRENCY.

MANY OF THE CARDS IN USE ARE DEBIT CARDS OR REQUIRE A LARGE BANK DEPOSIT AS A GUARANTEE. INTERNATIONALLY ACCEPTED CREDIT CARDS ARE AVAILABLE ONLY FOR THE FEW INDIVIDUALS OR BUSINESSES THAT CAN OPEN AN ACCOUNT WITH FOREIGN CURRENCY, AND TYPICALLY MAY REQUIRE A MINIMUM DEPOSIT OF USD 200-300 THOUSAND. WHEN ONE OF THE LOCALLY ISSUED CREDIT CARDS IS PRESENTED, MANY RETAILERS STILL INSIST ON SEEING OTHER IDENTIFICATION BEFORE ACCEPTING THE CARD. ACCORDING TO FANG, IN ADDITION TO CONCERN ABOUT FRAUD, MANY CHINESE STILL VIEW THE USE OF CREDIT AS A DUBIOUS FINANCIAL PRACTICE.

13. THE FEW SMALL-SCALE EXPERIMENTS NOW GOING ON WITH INTERNET RETAILING IN CHINA REQUIRE EITHER CASH ON DELIVERY, CASH PAYMENT TO THE POST OFFICE, OR ESTABLISHMENT OF A DEBIT ACCOUNT IN A PARTICULAR BANK. AN INNOVATIVE APPROACH TO INTERNET RETAILING PROPOSED BY THE SPARKICE COMPANY (REF B) CALLED FOR AN INTERNET CAFE THAT WOULD SERVE AS A RETAIL OUTLET ALLOWING CUSTOMERS TO ORDER ITEMS ONLINE THEN MAKE PAYMENT DIRECTLY TO THE INTERNET CAFE. ANOTHER POSSIBILITY INDUSTRY EXPERTS HAVE SUGGESTED WAS FOR THE INTERNET SERVICE PROVIDERS TO ACT AS FINANCIAL INTERMEDIARY BETWEEN THE END-USER IN CHINA AND THE FOREIGN RETAILER.