An E-Tailer with a Lot Riding on Bicycles
By Bruce Einhorn
Peggy Yu once thought that the key to e-commerce success in China was to emulate Amazon.com (AMZN ). A 38-year-old native of Sichuan province with an MBA from New York University, Yu is the co-founder of Dangdang.com, a Beijing-based retailer that sells more than 300,000 different Chinese books, CDs, DVDs, and computer games online. Yu launched Dangdang in 2000 with her husband, Li Guoqing, at a time when e-commerce was in its infancy in China. (The name, Dangdang, is a play on the Chinese word for cash register, Yu says.) She did her homework, studying the SEC filings of Amazon and other American dot-coms to learn the details of the business.
As a student of American e-commerce, Yu tried to get Chinese customers to point, click, and buy. That wasn't easy, in a country where credit cards aren't very popular and people don't have the tradition of ordering things from catalogues. (For more on the obstacles facing dot-coms in China, see BW, 3/15/04, "China.net.")
Still, Yu was determined to give it her best shot. "I really pushed very hard for online payment," she recalls. "I was giving away coupons, credits for people who paid with credit cards." The problem wasn't just that shortage of credit cards. Even those who had cards and wanted to use them online encountered difficulties.
For instance, Yu says that she learned that the servers in different provinces and cities run on different schedules. So a bank in southeastern Fujian province may shut down at 12 midnight, while one in Shanghai may run 24 hours. "But neither the consumer nor Dangdang know about that," says Yu.
Moreover, China's postal service was not reliable, and there was no credible nationwide alternative like FedEx. The whole thing quickly became exasperating. "It was pretty much a Mission: Impossible situation," says Yu.
So Yu and Li, Dangdang's co-presidents, shifted their strategy. As Yu puts it bluntly, "we faced reality." Instead of depending on customers to use credit cards, Dangdang focused more on encouraging would-be buyers to pay via money orders or even old-fashioned cash-on-delivery (C.O.D.).
To make sure the packages arrived safely, Dangdang arranged for a fleet of delivery men to zip around China's biggest cities on bicycles. These "bicycle boys," as Yu calls them, distribute about 15 to 20 orders a day, delivering their packages to the customers' offices or homes. If the order is C.O.D., they then collect the cash, give it to the courier company, which then transfers the money to Dangdang.
In some ways, this system is better for Dangdang than if people paid via credit cards. "It works out very well," says Yu. "First, Dangdang doesn't have to pay the financial charge that retailers [pay] to banks [for credit card payments]." Typically, retailers in China pay close to 3% or 4% finance charges for credit-card transactions.
Dangdang has to pay its courier companies a 5% shipping charge, but Yu says that's not a problem since it's simply tacked onto the original price of the item. "It's paid by the customer," says Yu. "C.O.D. really works. It gives us a method to provide service to customers -- and to get our revenue collected."
How can she be sure her trusty bicycle boys won't run off with the money? For the courier companies to get business from Dangdang, they have to make safety deposits equal to three days worth of revenue, which can range from $6,000 to $12,000. Says Yu: "If they miss one single payment, then we can just cut them off."
That hasn't happened. The courier companies have a similar security system with the bicycle boys, mostly migrant workers from the countryside who have joined the millions of Chinese flocking to the prosperous big cities along the coast. The workers have to pay a deposit with the courier companies to secure their jobs.
A lot is riding on the honesty of those delivery boys. Any day, the amount they carry can be more than their month's salary -- about $66. And, says Yu, it could be "two or three times more for the efficient ones."
THE DARK TOWER.
Since they get paid according to how much they deliver, they need to work fast: According to Yu, few of them like to deliver to big office towers, where security guards might slow down their progress. One particular black spot: The Motorola building in Beijing. "It's got 16 floors," explains Yu. "The wait there can be 40, 50 minutes."
In China, a land of 1.3 billion people, Dangdang's delivery strategy makes sense. But America is a different story. "With the labor costs in China so low, I think it is possible," says Yu. "I don't think it's possible in a labor-expensive country like the U.S."
The new tactics seem to be working. Dangdang is one of the few online retailers to have survived the aftermath of the Net crash in 2000. While there were about 300 online booksellers back in 2000, there are only a handful left today, says Yu.
LEARNING TO WALK.
She won't comment on press reports that the privately-held company recently got an $11 million infusion from an American venture-capital fund, but will say that more than 2 million customers have purchased from Dangdang, with an average order today of about $10.
Back in the early days, "we were e-commerce babies," she adds. But now, "we are entering the toddler years." For that, Yu owes thanks to all those bicycle boys racing around town.
Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online
Edited by Douglas Harbrecht