The world around us is driven by commerce. When someone demands a particular good, they purchase it from a supplier. This supplier then takes the proceeds from that sale and purchases something for which they have demand. This cycle has persisted throughout history and forms the foundation for marketplace economies. What has changed over time, though, is the ‘where’ and ‘how’ of commerce.
E-commerce, the buying and selling of products and services online, has revolutionized retail in the 21st century. China in particular has embraced this sales channel. Over the past two decades, the nation has transitioned into a predominantly digital consumer economy and it is expected that Chinese e-commerce will surpass 50% of total retail sales in 2021. Not only has e-commerce fundamentally changed the way in which consumers purchase goods, but it has also become a hotbed for technology innovation and led to the expansion of consumer trends like e-commerce livestreaming.
Online auctions are another manifestation of China’s e-commerce innovation. Though online auctions only account for a small portion of China’s massive retail market value, the emerging market segment is being driven forward by young wealthy bidders and debt sales.
What Are Online Auction Marketplaces?
Auctions are public sales in which assets or services are sold to the highest bidder, and what makes them popular is the perception amongst both buyers and sellers that they will get a good deal. Online auction marketplaces are the 21st century variant in which digital buyers and sellers are connected on a singular listing and payment online platform. They boast some of the most successful businesses since the advent of the internet, with eBay and Overstock as two of such well known examples in the US.
What’s Driving Adoption for China’s Online Auction Segment?
A Rising Tide Lifts All Boats
China’s e-commerce retail sales are estimated to reach more than 50% in 2021 in a historic milestone for the nation’s digital economy. This trend is only set to pick up pace in the future, with online transactions in China projected to reach 58% in 2024. Given that China’s e-commerce sales are estimated at US$1.5 trillion, this figure would be substantial enough to rival the gross economic value of many small countries.
The pandemic has also accelerated the shift to online shopping. The retail sector has been particularly transformed, with e-commerce becoming the main engine driving China’s retail landscape as once under-served demographics are now beginning to enter into the online market.
E-Commerce as a Percentage of Total Sales
As more consumers come online to shop, marketplaces have begun experimenting with innovative sales methods. Online auctioning is one such avenue that has begun gaining traction. Globally, the online auction market is set to grow by US$1.6 billion between 2021-25, with China forming a key market.
Ali Auction is the auction platform of Chinese e-commerce giant Taobao. Ali Auction generated US$80 billion in revenues in 2018, placing it as China’s largest online auction platform by sales. As a percentage of China’s e-commerce market, online auctions still only account for 10% or less of total sales. However, given the quickened pace of internet penetration throughout the pandemic, many are bullish on the future of this market segment.
Chinese Internet Users Continue to Grow
Demographics of Online Auction Bidders
Chinese e-commerce companies originally set out to make auction sales appealing to the general public; however, current demographics of online auction users skew towards the wealthier segment of China’s population.
Still, China is a massive and diverse market and bidders vary by region and item category. In the Tibetan Autonomous Region, for example, over 80% of all bidders are male. This fits with national statistics, which showed that men were generally more engaged in online auctions across Beijing, Shanghai, Zhejiang, Jiangsu, and Guangdong, with a majority of bidders between the ages of 26 and 35. Online bids in Shanghai led in the jewelry segment, while Beijing returned the largest number of bids for luxury items. Despite these differences, most bidders tend to be younger Millennials and Gen-Zers with higher disposable incomes or wealthier social backgrounds.
What Are Users Bidding On?
It is well known that Mao Zedong’s grandson, Chen Dongsheng, acquired a 13.5% share in the fine art auction house Sotheby’s through Taikang Life Insurance. By 2020, Asian buyers accounted for 30% of Sotheby’s online art auctions. Much of this upsurge has been attributed to younger Chinese buyers who are more risk tolerant, have diverse tastes that diverge from previous generations, and look beyond what is considered mainstream art.
Loans are another popular example of goods auctioned on Taobao’s platform. Specifically, Ali Auction has helped Chinese financial institutions return value from nonperforming loans (NPLs) by selling them on e-commerce auction sites. While an odd good to find snapped up by young wealthy consumers, according to MacroPolo, in the fourth quarter of 2017, Taobao auctioned off US$5 million worth of bad loans. It exceeded China’s most active exchange for NPLs, the Tianjin Financial Assets Exchange.
Alibaba vs. eBay: How Taobao Came to Dominate Chinese Online Auctions
Much of China’s success in e-commerce began with the 2003 launch of Alibaba’s online shopping platform, Taobao. With an initial investment of CN¥450 million from Alibaba, Taobao quickly became a dominant competitor and sought to become the biggest C2C auction platform in China. In the years that followed, Taobao fought a bitter war with eBay’s China-based arm, Eachnet, which entered the Chinese market in 2002. Within its first year alone, Taobao saw subscriber growth of nearly 800% to reach 3 million registered users.
In 2004, Alibaba’s third-party mobile and online payment platform, Alipay, joined the battlefield. Alipay can be likened to China’s equivalent of PayPal, in which it provides users with e-wallet services across various devices. When a buyer makes a purchase, funds paid are effectively held in escrow until the product is delivered. The payment platform is a nearly indispensable component of modern Chinese society, and, at the time, revolutionized online payments and brought convenient one-stop online shopping to the masses.
In the mid-2000s, Taobao and Eachnet were the dominant auction sites within China. Within four years of entering, however, eBay exited the Chinese market amid fierce competition. Unfortunately for the company, Chinese internet users more than doubled within the same period, thus leaving behind a growing untapped market exclusively for Taobao.
Looking Forward: A Stake in China’s Debt
China’s online auction market is still maturing and does not yet generate the same level of sales as the broader e-commerce market. Nevertheless, it has picked up steam due to the pandemic and has filled an interesting – if not unexpected – niche demand. In 2015, Taobao released a nonperforming loan marketplace and has been auctioning off bad debt transparently ever since.
The market is growing as well. In 2020, China’s total debt was estimated at 270% of total GDP. NPLs as a percentage of China’s total gross loans reportedly stand at 1.84%; however, the industry suffers from severe data transparency issues and the true rate of NPLs are estimated to be much higher. In addition, much of the monetary policy that the PBOC enacted during the pandemic called for higher bank lending to corporates, lowered loan requirements, and pass-through bad loan terms. As a result, NPLs are likely to increase over coming years as this debt turns sour.
Typically, China’s state-owned asset management companies are responsible for buying and distributing large packages of NPLs to prevent a buildup of systemic bad debt. Recently, however, one of China’s biggest debt collectors, Huarong Asset Management, is facing its own liquidity crisis and had to be bailed out in mid-2021. Many of China’s other debt collectors are teetering as well.
With significant debt levels on the horizon but few avenues through which to absorb it, there exists an opportunity for other platforms to build a presence in the market. Online auction platforms may be the answer. This unique opportunity, when paired with noisy growth in the overall e-commerce market, may present online auctions with the runway to develop into one of the more exciting e-commerce segments in years to come.