the heart of China’s e-commerce sector is feeling the pain of the price war

To the unsuspecting foreigner, Beixiazhu looks like any unremarkable Chinese village. But for years, it was the place to be for ambitious traders hoping to strike gold in the country’s booming live-streaming e-commerce industry – until competition boiled over, driving out sellers as quickly as they arrived.

The frenzy started around 2019 as live streaming e-commerce took off on short-video platforms like Kuaishou Technology and ByteDance’s Douyin. Beixiazhu, located on the outskirts of Yiwu in eastern Zhejiang province, the global capital of wholesale, became an ideal launching pad for followers eager to tap into a growing industry that promised fame and fortune with just a live stream.

Today, the legacy of that period still remains in the 99 houses once occupied by live broadcast vendors in Beixiazhu. Signs advertising “super supply chains” and “hot-selling viral live-streaming products” remain displayed in store windows. On a weathered wall, a fading painted slogan can still be seen: “Without dreams, why come to Yiwu?”

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But the agitated crowds have disappeared. Shopkeepers, as they hurriedly packed orders, slowed their pace.

Ads in Beixiazhu promoting courses for aspiring live streamers and “super supply chains” for merchants. Photo: Wency Chen alt=Ads from Beixiazhu promoting courses for aspiring live broadcasters and “super supply chains” for traders. Photo: Wency Chen>

One business owner, pointing to a narrow path outside his shop, said the place was full of cars and live broadcasts. If a product went viral, everyone would jump on it, selling it at a lower price to beat each other. Eventually, it got to a point where no one was making any money and everything collapsed, he said.

This type of competition is called local juanword that has entered the Chinese cultural lexicon in recent years. Derived from the Chinese term for involution, it describes a society or industry caught in a relentless rat race with no real progress as people subjugate each other until all resources are exhausted.

The surge in volatility was one of the key factors behind the Chinese government’s sudden shift in economic policy late last month, as excessive competition threatens to disrupt Beijing’s aim to improve its supply chain. It comes after the nations’ top leadership stated unequivocally over the summer that “involution-style” competition should be avoided.

The story continues

The fall of Beixiazhu serves as a cautionary tale for China’s e-commerce sector, which has been embroiled in a fierce price war since last year amid a post-pandemic economic slowdown and sluggish domestic spending.

Outside one of the dozens of buildings in Beixiazhu were once occupied by live broadcasts. Photo: Wency Chen alt=Outside one of the dozens of buildings in Beixiazhu were once occupied by live broadcasts. Photo: Wency Chen>

Industry giants from Douyin to Taobao and Alibaba Group Holding’s Tmall Group have tweaked their recommendation algorithms to prioritize prices. JD.com has launched a major subsidy campaign and doubled down on its budget shopping platform. Alibaba owns the South China Morning Post.

Discount shopping platform operator PDD Holdings, the operator of Pinduoduo and its cross-border sibling Temu, has capitalized on China’s spending slump to attract more budget-conscious consumers, resulting in a staggering 90% increase in both profit and revenue in 2023 .

The race to low prices is keenly felt in Yiwu.

Located just a 10-minute drive from Beixiazhu, Yiwu International Trade Market is known as the world’s largest wholesale center for small manufactured goods.

A bird’s eye view of the Yiwu International Trade Market. Photo: Wency Chen alt=A bird’s eye view of the Yiwu International Trade Market. Photo: Wency Chen>

Covering 6.4 million square meters (69 million square feet) in five large districts, the vast market is a maze of intersecting alleyways and some 75,000 booths. About 2.1 million items are sold there, according to official figures. So important is the site to China’s economy that President Xi Jinping visited it last year as part of his inspection tour of Zhejiang.

In 2023, Yiwu’s export volume will grow 16 percent year-on-year to reach more than 500 billion yuan, with cross-border e-commerce contributing about 121 billion yuan, according to government figures.

On a recent day, business was bustling in the market. Shoppers traveling from all over the globe hawked the prices. Others hurried through the corridors, broadcasting their latest discoveries live to the online audience. piles of merchandise were pulverized on the floor, ready to be packed: no fancy branding, just low prices. A flower-shaped hair claw cost 1 yuan ($0.14), a Stanley glass sold for about 10 yuan, and a pair of yoga pants cost about the same.

But while business is booming, many small traders said they are finding it increasingly difficult to make money.

“The evolution came too fast in our industry, which led to some unhealthy practices,” said Huang Qianqian, a Yiwu-based merchant who sells mainly to Southeast Asian customers on Shopee, Shein, TikTok Shop and Temu. The main problem in the sector is an oversupply of goods combined with a lack of purchasing power, she said.

Inside the Yiwu International Trade Market. Photo: Wency Chen alt=Inside Yiwu International Trade Market. Photo: Wency Chen>

Further up the supply chain, manufacturers also face slim profits. “In the past, orders from a few big customers were enough for us to make money,” said Zhang Jianhong, the owner of a clothing factory and a market stall in Yiwu, which sells colorful stockings and boldly patterned bodysuits.

Based in Yiwu for more than two decades, Zhang has seen how rising rents and labor costs affect her profit margins, which have fallen to 10 percent from 40 percent. For suppliers like Zhang, the Internet can be a double-edged sword: While an online presence helps attract new customers, it also makes it easier for rivals to copy products and undercut prices.

“Our goal for the next two years is just to survive,” she said, noting that her company prioritizes designs, hoping to create products that stand out.

The juan The phenomenon isn’t going away anytime soon, according to industry observers.

“Global consumer demand in China remains weak with deflation concerns lingering,” said Kenny Ng Lai-yin, strategist at Everbright Securities International. As the country’s housing market collapsed, household wealth fell along with consumer confidence, he added.

China’s retail sales, a gauge of consumer activity, remained sluggish, rising just 2.1 percent annually in August, a month that typically benefits from peak summer travel, according to data from the National Bureau of Statistics. Online sales of goods rose less than 1 percent, while the consumer price index rose just 0.6 percent, suggesting deflationary pressure.

Industrial production rose a less-than-expected 4.5 percent in the same month, while industrial profits fell nearly 18 percent, adding to a recent string of gloomy economic readings.

Economic challenges are reflected in company earnings and investor sentiment.

Alibaba’s core e-commerce unit Taobao and Tmall Group posted a weak 0.85 percent year-on-year revenue growth in the first half of this year, even as its business’ order volume and gross merchandise value domestic e-commerce reached almost double-digit growth compared to last year.

PDD, which reported a doubling of revenue and a nearly 183% rise in annual profit in its first six months, saw its shares fall 25% in one day after the company warned of uncertainties and pressures in decrease in profits amid increasing competition.

“Transaction volume on major e-commerce platforms remains robust, but profitability is under pressure, indicating that both merchants and platforms are willing to sacrifice short-term profits for long-term gains,” Everbright’s Ng said. .

Under Beijing’s warning against involution, e-commerce platforms have tried not to compete solely on price.

Alibaba and ByteDance have started to cut low prices in their referral systems. Douyin, TikTok’s Chinese sibling, will not “simply chase absolutely low prices,” Wei Wenwen, president of Douyin’s e-commerce business, said during an internal meeting in July.

Platforms have also implemented more merchant-friendly policies. Since September, Alibaba’s Tmall has waived its annual software service fee, which previously ranged from 30,000 yuan to 60,000 yuan. Meanwhile, Pinduoduo has pledged to waive 10 billion yuan in transaction fees for “high-quality” merchants, while reducing technology service fees and warehouses and eliminating logistics costs.

In the long term, competition in the industry will increasingly focus on factors such as product quality, service and supporting infrastructure, Ng said.

Live broadcasts from a shop in Yiwu that sells decorations and knitted accessories. Photo: Wency Chen alt=Live broadcasts from a shop in Yiwu selling knitted decorations and accessories. Photo: Wency Chen>

Help appears to be on the way amid the struggles of the e-commerce sector.

Ahead of China’s week-long national holiday, which began on October 1, Beijing unveiled a bold stimulus package aimed at reviving economic growth. It includes measures to reduce borrowing costs and boost the struggling housing market, aimed at boosting consumption and investment.

The stimulus plan is expected to have a bigger impact next year because it takes time for the government to implement policies, according to Ng.

The good news may have come too late for many businesses in Beixiazhu. There, many merchants have already moved in, and some of the surrounding areas of the village are slated for demolition.

The owner of a snack shop said that there were fewer and fewer people left. He plans to leave next month.

However, others prefer to look on the bright side.

“I feel that in Yiwu, optimism prevails,” said Huang, the Yiwu trader who sells to Southeast Asian buyers. “There is confidence that money can still be made. Uncertainty is just part of the game, as always.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.