Involution and Stagnation: Five Years of China's E-commerce Industry Treadin...

TMTPOST -- Since 2020, a series of shocks caused by anti-monopoly regulations in China's e-commerce sector have finally come to an end.

On October 27, 2024, Alibaba Group announced that it would pay $434 million to settle a class-action lawsuit in the Southern District Court of New York. Alibaba denied any wrongdoing but decided to pay the equivalent of 3.087 billion yuan to settle the multi-year legal battle.

Prior to this, Alibaba and its closely affiliated Ant Group had faced multiple investigations, fines, and lawsuits. In April 2021, Alibaba was fined 18.228 billion yuan by China's State Administration for Market Regulation (SAMR). In July 2023, Ant Group was fined 7.123 billion yuan by financial regulators. In December 2023, JD.com won a lawsuit against Alibaba over the “pick one from two” issue, with Alibaba compensating JD.com one billion yuan.

However, while Alibaba complied with regulatory demands and underwent significant restructuring, the e-commerce landscape in China had already undergone dramatic changes. From 2020 to 2024, the combined market share of Alibaba and JD.com dropped by over 20 percentage points, with their lost share absorbed by Pinduoduo and live-streaming e-commerce. Pinduoduo's GMV skyrocketed from the thousands of billions in 2020 to nearly 6 trillion yuan by 2024. At the same time, the platforms' bets on consumer upgrades failed, and the logic of “low price wins” swept across the entire industry, reigniting price wars between platforms, which became the primary theme of competition.

On the other hand, the entire e-commerce ecosystem began to show signs of dysfunction: merchants' complaints grew louder, factory profits dwindled, complaints about product quality surged, and influencers were embroiled in a string of scandals. Platform policies like “refund only” triggered endless debates, leading to a consensus across the industry that it was undergoing a state of involution.

In the eyes of many industry participants, the past five years have been a period of stagnation for China's e-commerce sector.

DecliningMarket Concentration

One of the most noticeable trends is the continuous decline in market concentration within China's e-commerce industry. In 2014, the combined GMV of Alibaba and JD.com accounted for 80% of the total e-commerce market share, with a stark lead over the second-tier companies. However, by 2023, the former duopoly had transformed into a five-way battle, with five companies now making up the same 80% market share: Alibaba (32%), Pinduoduo (17%), JD.com (15%), Douyin (11%), and Kuaishou (5%).

In 2023, Alibaba's GMV was around 7.9 trillion yuan (estimated), with limited growth compared to 2020. Meanwhile, Pinduoduo's GMV increased by over 140% to 4.1 trillion yuan, JD.com achieved 3.7 trillion yuan, and both Douyin (2.7 trillion yuan) and Kuaishou (1.18 trillion yuan) crossed the trillion yuan threshold, continuing to grow at a rate far higher than the industry average.

In most industries, competition generally evolves from decentralization to concentration, shifting from "many contenders" to "oligopoly." The Chinese e-commerce market followed this pattern after the exit of early competitors like eBay, Joyo, Newegg, and YHD. However, the market has fragmented again in recent years.

Typically, this kind of shift in an industry occurs when there is a major technological breakthrough or a paradigm shift in the business model, such as the switch from feature phones to smartphones or from gasoline to electric cars. However, in the past five years, the e-commerce sector has not experienced such a transformation, nor has it occurred in other countries' e-commerce markets.

The most widely accepted explanation for this fragmentation in China's e-commerce sector is the “publicization” of its infrastructure.

The rise of Chinese e-commerce has been driven by two critical infrastructures: logistics and payment systems. Both have been developed by companies like Alibaba, JD.com, and SF Express, in cooperation with the national transport network. Alibaba was the trailblazer in digital payments, followed by Tencent and the banking sector, which collectively made electronic payments ubiquitous in China. Today, these two infrastructures are world-leading.

Additionally, the e-commerce ecosystem includes millions of small and medium-sized sellers, as well as an extensive network of marketing, warehousing, outsourcing, after-sales, and SaaS services. Thanks to this thriving supply chain and robust infrastructure, the Chinese e-commerce industry has seen a significant increase in the diversity of products offered and a consistent reduction in fulfillment costs.

However, the “publicization” of these mature infrastructures has also meant that established players face lower barriers to entry for new competitors. For example, China now has at least seven national e-commerce delivery networks (including SF Express, JD Logistics, and more), most of which are third-party services that new e-commerce platforms can access to quickly match the delivery efficiency of established players.

In contrast, in the U.S., Amazon's logistics advantage is more monopolistic, which helps it maintain its market dominance. New players like Temu and SHEIN in the U.S. rely heavily on pricing strategies due to this logistical barrier, and live-streaming e-commerce is much less developed.

In China, once a new platform reaches a certain scale, it can fully leverage the mature infrastructure—logistics, payment systems, and the vast network of small and medium-sized merchants—making it possible to quickly catch up to older platforms in terms of supply-side efficiency. As a result, the gap between new entrants like Pinduoduo and Douyin and giants like Alibaba and JD.com is no longer a decisive factor in competition.

The Price War andaRat Race

The period from 2014 onwards, when the market stabilized, saw established giants like Alibaba and JD.com expect to dominate without intense competition. However, new entrants leveraged mature e-commerce infrastructure and low-cost traffic to launch a fresh wave of challenges, employing various strategies but with a common focus: delivering instant gratification to consumers.

One example of this is the reshaping of the shopping experience by embedding e-commerce into social and content platforms like Douyin and Kuaishou. Instead of searching for products and scrolling through pages of results, users are now accustomed to buying while chatting, watching live-streams, or scrolling through short videos. This reduces cognitive load and makes shopping much more seamless.

In terms of after-sales, platforms leaned heavily in favor of consumers by imposing penalties and “refund-only” policies on merchants, particularly when consumers are unsatisfied with a product and can receive a full refund without returning the item. This extreme consumer-friendly stance has led to a flurry of debate, with many questioning its long-term sustainability.

However, nothing drives consumer satisfaction like low prices. Low prices became the most powerful tool in an environment where the economy faced resistance to consumption upgrades. From 2018 onwards, “low price” became the common denominator of consumer demand in China. In fact, one investor remarked that if a platform could own the “low price” mindset, it could be worth $50 billion.

The platform that capitalized on this mindset was Pinduoduo. Through its algorithm-driven aggregation of generic products and its “hundred-billion subsidies” model, it successfully created the perception of being the cheapest platform. By 2020, Alibaba and JD.com, facing weaker consumer demand, had to adopt similar price-focused strategies, and policies like “refund-only” spread to other platforms as well.

However, platforms like Pinduoduo, which had come late to the game, quickly realized that the low-price strategy and “refund-only” policies neither gained them a large enough customer base nor did they prevent a massive backlash from merchants. By the second half of 2024, many platforms, including Alibaba, began scaling back their low-price-first strategies, signaling the end of this industry-wide movement.

Furthermore, the low-price strategy, against the backdrop of efforts to curb involution and deflation, sparked controversy in the manufacturing sector. The excessive pursuit of low prices has eroded profits across the value chain, leaving manufacturers with the dilemma of either engaging in the price war or exiting the market altogether.

For merchants and manufacturers, the extreme pursuit of low prices has severely harmed the sustainable profitability of the industry, while for consumers, it has led to a higher proportion of counterfeit and subpar products flooding the market.

China’s e-commerce sector in the past five years is characterized by stagnation, marked by increased fragmentation, an intensified price war, and the unsettling impacts of involution. As the industry adapts to these challenges, its future remains uncertain, shaped by the ongoing struggle for consumer attention and the sustainability of its business models.

(1 yuan equals US$ 0.14)