Efficiency gains

In the long run, the adoption of international business-to-business (B2B) standards in mainland China is likely to bring about substantial operational efficiencies to both local and foreign businesses. This is all the more so given that demand for B2B solutions should increase in countries such as China, where businesses are particularly inefficient: the greater the obstacles, the theory goes, the more advantages B2B has to offer.

Slow on the uptake
In practice, however, uptake remains excruciatingly slow, and is unlikely to increase in the near future. According to one estimate, China accounted for just 2.1 percent of Asia's total estimated online revenues last year. This is because Chinese businesses remain so backward that in most cases they have yet to arrive at a threshold where the advantages of B2B software can be under-stood, let alone implemented.

In addition, B2B take-up in China has been impeded by a number of other factors:

Chinese businesses have no real tradition of squeezing out the last drop of operational efficiency, and tend to be especially averse to investing in intangibles such as information technology (IT). Instead, companies are more likely to focus on more prosaic, low technology concerns.

Chinese managers, especially at the local level, have little exposure to IT, and are suspicious of its benefits. It is hard to convince them of the benefits of complex software solutions when their businesses have barely got past the stage of buying a personal computer. On top of this, China suffers from an acute shortage of local IT technicians.

The economic advantages of B2B solutions are not so apparent in an economy based on cheap labour. Automating repetitive procedures is all well and good, but Chinese labour is anything if not cheap and in many cases it may prove more efficient to hire local workers rather than to adopt a technology solution.

Because state-owned enterprises have been especially slow technology adopters, the B2B torch has been carried instead by the nation's small and medium-sized enterprises (SMEs). This is a problem because, although state-owned enterprises now account for only about 30 percent of industrial production, big business typically acts as a catalyst for B2B adoption throughout the economy. Smaller companies lack the necessary resources to drive adoption to the point where it becomes self-sustaining.

China has a relationship-based business culture that sits uneasily with the hands-off nature of e-commerce processes.

Despite these impediments, there is little question that over the longer term, China will prove an ideal market for B2B applications. In part, this is a result of the fact that both local businesses and the economy in general suffer from so many deep-rooted structural inefficiencies that they have more to gain eventually from implementing reforms. More important, however, is the particular way in which the Chinese economy has developed, focusing especially on the mass production and export of retail and consumer commodities. These are exactly the types of activity from which extra value can be squeezed by applying B2B solutions.

This does not mean, however, that the Chinese market for B2B will develop in the same way it has elsewhere. In the West, multinational companies have found that the internet is used most effectively as a means to either improve customer service or stream-line communications, both internally and vis-a-vis customers. Demand for B2B products is therefore greatest in these areas.

Unreceptive to technology
In China, the market is quite different. First, because local businesses remain so unreceptive to IT, the most popular strategies are often quite simply those that are easiest to adopt: either stand-alone products or ones that can be outsourced at minimal cost. Most important, they must be capable of implementation without requiring significant structural changes to users' businesses.

Second, China's export-based economy suffers from particular types of inefficiencies. Supply chains are physically long because of the sheer size of the country. This problem is compounded by the fact that China's light industries tend to be highly fragmented (especially in the most important sectors, textiles and consumer electronics) and that they typically outsource production of components rather than produce them in-house. On top of this, domestic distributors remain grossly inefficient and suffer from high levels of corruption and bureaucracy.

It is no coincidence, therefore, that China's most successful B2B businesses so far are those that smooth the export process by providing online facilities that aim to lessen the impact of these problems. At this stage, these operations usually come in one of two flavours.

The simplest is the classic ?neutral? online exchange model, such as Alibaba.com or Meetchina.com, which offer online market-places where buyers and sellers can meet, then complete trades offline. Somewhat more specialised are the offerings of companies such as Hong Kong-based Li & Fung or Global Sources, which combine the online exchange approach with their traditional expertise in sourcing products on behalf of their clients.

Both of these models have their strengths and weaknesses. Neutral exchanges are simple, cheap and accessible – anyone with a computer and modem can benefit from their services. Their main problem is that they suffer from a weak business model. Although there are certainly first-mover advantages, there are also very low entry barriers to this type of business, meaning that incumbents are at risk from newcomers that can set up competing exchanges and launch a war of attrition by charging lower fees.

Lack of stickiness
In addition, such sites lack ?stickiness,? in that they offer no incentive for members to return. Once a purchaser finds a suitable partner, he can continue the relationship offline and save the associated cost. So far, revenues for such marketplaces in China are either non-existent or based mainly on advertising or membership fees. Either way, few if any are profitable, resulting in serious concerns as to their long-term viability.

Companies offering the second, ?clicks and mortar? model benefit from the fact that the services they offer in addition to an online exchange (such as being able to select suppliers, from a qualifying pool, or verify factory production capacity and quality control) are hard to duplicate. They are therefore ?sticky' in that their expertise encourages buyers and sellers to keep coming back.

On the other hand, they suffer from the fact that historically, their orientation has been towards large-scale buyers. This is fine as far as it goes, but B2B in China has probably the greatest potential for smaller scale businesses, which are not so easily served by this type of model.

In any event, while debate continues to rage over which of these business types will prove more successful, the fact is that the real `killer application' in this field has yet to be developed successfully. What those involved in the Chinese export market really need is a `total supply chain management' solution that eliminates the greatest number of inefficiencies in one fell swoop. In other words, the holy grail in the China B2B quest is an online transaction engine that stretches across the entire supply chain, allowing all fulfillment functions – financing, shipping, insuring, quality control, customs clearance, etc – to take place online and in one place.

This sounds simple enough, but making it happen will be no small feat. Although existing exchanges tout varying degrees of online fulfillment, so far none, either in China or Asia, can yet claim to have perfected a truly efficient transaction engine.

The benefits? Assuming these issues are resolved, they are quite real. According to the exchanges themselves, once transactional facilities are in place, traders can expect to reduce the cost of fulfillment by as much as 30 percent. Applied across the entire export sector, that would imply savings of billions of dollars annually. Even if that is overly optimistic, the transparency of the online fulfillment process provides significant savings in terms of the time and effort normally required of this kind of process.

For the supply chain, this means that an end-to-end solution will finally become available. Take as an example, a buyer in New York wants to buy, say, 15,000 pairs of shoes. He logs on to an e-marketplace (or possibly enlists the help of an online sourcing agent), makes various choices and presses a button on his computer. At that point a contract is agreed and the shoes are then financed, insured, quality checked, shipped, cleared through customs and ultimately delivered according to a schedule that can be followed online along each stage of the designated route. Conceivably, goods could also be resold and redirected while they are en-route to the original buyer, turning export products into commodities that will further lower costs for purchasers.

Those familiar with the current reality of completing this kind of transaction in China may find this scenario too good to be true. But the fact is that technology to make it hap-pen exists now. Moreover, the major Chinese online exchanges are within sight of creating workable fulfillment engines.

Depending on just how determined the Chinese authorities are to push manufacturers to adopt these types of solutions, they will be arriving sooner or later at a marketplace on a computer screen near you.