China e-commerce market heats up as government approves foreign entry

Chinese government says it will allow foreign-owned e-commerce companies to operate in the Shanghai Free Trade Zone as part of a pilot program, but competition will be tough against local giants JD.com and Alibaba.

The Chinese government has opened its e-commerce doors to foreign investors as part of a pilot program, but potential new entrants will face tough competition against local mainstays JD.com and Alibaba.

Foreign investment is limited to the Shanghai Free Trade Zone and telecommunication authorities in the Chinese city will oversee the regulation and supervision of foreign players, reported news agency Xinhua, which cited a brief statement from the Ministry of Industry and Information Technology.

No further details were provided by the government body.

Previously, foreign market players would have to establish a joint venture with a local partner to operate an e-commerce business. The mandatory foreign-local partnership is prevalent in other segments including cloud computing, but the government has been gradually letting in foreign capital to boost the local economy. Last year, foreign game console makers were allowed to sell their wares if they registered with the free trade zone.

The latest move will likely see China's lucrative e-commerce market hotly contested, but potential market entrants will face a tough time challenging the foothold of dominant local players, in particular, current market leader Alibaba.

U.S. players such as Amazon have barely made a dent in the Chinese market, and eBay exited the market after investing millions of dollars--though it reportedly tried again in 2012 through local partner Xiu.com.

There may be a window of opportunity for foreign players, though, with Alibaba potentially distracted with its current bid for the U.S. market. Market entrants can also find success if they are able to plug the one gap most e-commerce operators including Alibaba are trying to fill--logistics.

In fact, several Chinese e-commerce players in 2013 announced plans to build a 100 billion yuan (US$16.36 billion) logistics network in the country to support 24-hour domestic delivery. Reportedly chaired by Alibaba's Jack Ma, the initiative--which has been dubbed China Smart Logistic Network--would take 8 to 10 years to complete.

Alibaba last year also inked a partnership with China Post Group as part of efforts to beef up its delivery network in the country's lower-tier cities.

JD.com this week also upped its gameplay with a US$1.55 billion deal that will see the Chinese e-commerce operator acquire a 25 percent stake in car sales website, Bitauto. The investment was jointly made with internet company, Tencent Holdings, which owns a 17.6 percent stake in JD.com and will claim a 3.3 percent stake in Bitauto.

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