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Cheap, convenient and increasingly secure, the internet is rapidly replacing the street market as the first port of call for China’s bargain hunters. In the first half of 2010, the value of e-commerce transactions reached US$31 billion, more than double from a year earlier. During the same period, one-third of China’s online users, 350 million people, bought items on the internet. And according to a recent study conducted by Deutsche Bank (DBK.FWB, DB.NYSE), online business-to-consumer (B2C) and consumer-to-consumer transactions will account for 7.2% of all domestic retail sales by 2014.
 
Despite these growth numbers, B2C companies face serious logistics challenges. Much of the e-commerce industry relies on China’s domestic express delivery industry, a saturated market of some 5,000 registered service providers (kuaidi), that is plagued with reliability problems.
 
The uncertainty of service can lead to huge losses. China’s online gold rush, after all, is heavily dependent on businesses’ ability to differentiate themselves with safe, timely delivery of goods to consumers.
 
Growth spurt
 
Over the past 10 years, China’s logistics sector has been facing a constant battle, coming from virtual non-existence, to developing an industrial framework that underpins much of the country’s manufacturing and retail activity.
 
"A decade ago, there was only EMS and China Post [for B2C logistics]," said Ernest Na, director of B2C e-commerce at Arvato Logistics Services’ China division. "The first city to develop a few strong B2C logistics firms was Yiwu in Zhejiang province, where there were a lot of manufacturing and online B2C companies. Things were being sent all over the world from Yiwu, so you’ll find that many of the main delivery firms are registered there."
 
Other major delivery companies have sprung up across China as well – like Zhongtong and Shanghai Yuantong – which are trying to develop alongside the boom in private online companies.
 
Keeping stock
 
E-commerce logistics is not simply a matter of delivering goods to the consumer. Increasingly, the biggest logistical challenges facing online B2C businesses are further up the supply chain.
 
"The biggest problem is inventory management," Na explained. "Any seller can fulfill 10 orders a day, but the biggest companies are taking 10,000 orders a day. Companies have to look at their requirements and decide whether to take on logistics in-house or to outsource."
 
Many large-scale retailers are taking matters into their own hands, overseeing every stage of their goods’ journey from factory to doorstep. Online clothing retail giant Vancl.com recently invested in its own logistics department to not only expand its order base, but also to overcome local logistics and kuaidi companies’ inconsistent service.
 
Taobao, an online marketplace owned by Alibaba Group (which operates a B2B business, Alibaba.com, 1688.HK) launched a new online logistics platform,  e56.taobao.com, allowing logistics service providers and Taobao sellers to exchange order and transaction information, shipping data, and seller ERP systems.  The company also announced plans to build distribution centers with third-party logistics service providers in more than 20 provinces across China – yet another sign that Taobao is assuming more control over its retail supply chains.
 
Getting lucky
 
While big league companies may be able to take full control of their operations, small B2C companies lack the resources to do it themselves and must rely on local delivery services.
 
Shanghai’s expatriate-oriented online supermarket Smartdirect.cn promises customers delivery within three hours – relying on a fleet of delivery motorcycles operated by a third-party company.
 
Moritz Fischer, Smartdirect’s operations manager, said the company has been fortunate enough to find a reliable partner with experience delivering wine and food.
 
"Not every company can do that. These aren’t pieces of rubbish that you can just throw into a mailbox. Frozen foods are a particular problem," Fischer said. "There are still many companies that send a man on a bicycle with a styrofoam box filled with water and frozen Coke bottles."
 
While it’s possible to cut costs by partnering with a cheap logistics provider, small online B2C companies have to search carefully for a kuaidi firm that can deliver.
 
"If the customer isn’t happy, they will return the goods. At the end of the day you really need to provide good service," Fischer said.
 
Much of the B2C logistics industry is still playing catch up. Although such issues can be attributed to growing pains in an industry struggling to keep up with itself, they are also a symptom of a lack of a long-term game plan.
 
China’s internet penetration is predicted to grow by 59% to 812 million users in the next four years. But if the industry fails to reform, B2C e-commerce may find itself with a ball-and-chain rather than a supply chain.