Business Model Innovation (Part 2) · 18 hours ago · business innovation and acceleration of industrial upgrading Internet giants eye on the next blue ocean market, B2B business

Business Model Innovation (Part 2)

Winnie Lo

E-com

merce . B

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ess Mo

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vation

s August 2020

Overview of the innovative B2B business models in China

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Key takeaways

2

Unlike the winner-takes-all B2C market, B2B market is fragmented and distinctly characterized. Digitization and innovation in B2B businesses in China are in progress, with different paces in various supply chains, verticals and support services. No single service provider can dominate all market segments for the time being. Huge growth in China’s B2B market is expected.

Key drivers of innovation in China’s B2B business:

Zoom in: A lot of B2B business innovations aim at solving the pain-points facing supply chains and streamlining the four flows in supply chain

What’s next: Some buzzwords are frequently mentioned by China’s B2B business guru in the midst of the Covid-19 outbreak, e.g. digitization, supply chain resilience, B2B (export) e-commerce, branding, mergers and acquisitions, etc.

Map 6: Digitization in financial sector

Map 3: Supply chain visibilityMap 4: Enterprise digitization

Source: Fung Business Intelligence

Changes in consumer expectation drive B2B business transformation

02

The government supports B2B business innovation and acceleration of industrial upgrading

Internet giants eye on the next blue ocean market, B2B business

Technological advance leads to digital transformation

Map 1: Distribution in FMCG Map 2: Apparel supply chain

Process flow Information flow

Map 5: Innovations in B2B logistics

Logistics flow Cash flow

B2C business innovations emerged at the “consumer”, “product” and “channel” levels*. B2B business operators have to satisfy the changed consumer demand by reforming product and channel management, with the aid of various support services and technology

3* For detail of innovative B2C business models, view also Fung Business Intelligence’s Report, Jan 2020: “Overview of the innovative B2C business models in China” Source: Fung Business Intelligence

B2C commerce

DATA

B2C innovations

Consumer

Channel

Product

B2B commerceB2B production

B2B services Logistics services Financial servicesEnterprises services

B2B infrastructure (AI, Blockchain, Cloud services, Data)Technology

Sourcing & distribution

Marketing

Branding

Customer relationship

Product design

Manufacturing

Order management

ABCD

Changed

consumer

demand

Changed

consumer

demand

Changes in product management Changes in channel management

Vertical platforms

Digitization and innovation in B2B businesses in China are in progress, with different paces in various supply chains, verticals and support services. Unlike the winner-takes-all B2C market, no single B2B service provider can dominate all market segments. China’s B2B market has huge potential

4* IOT = Internet Of Things; BOM = Bill Of Materials; MRO = Maintenance, Repair and Operations* Selected innovative companies in China’s B2B market* Icon source: Internet Source: Fung Business Intelligence

B2B commerceB2B production

B2B services Logistics services Financial servicesEnterprises services

B2B infrastructure ABCD (AI, Blockchain, Cloud services, Data)Technology

Integrated marketplacesSmart Manufacturing

FMCG Fresh produce CommodityFabric/ Apparel(including BOM, MRO & distribution)(including automation, robots, machine tool,

IOT, manufacturing software, etc.)

Innovation in China’s B2B business

Key drivers of innovation in China’s B2B business:

1. Changes in consumer expectation drive B2B business transformationChinese consumers today are empowered by mobile technology and have different lifestyles and consumption practices from those of their previous generations. To differentiate from the competitors, many B2C operators are exploring various ways to enhance their supply chain capabilities. Some of them engage in upstream B2B business. Some seek assistance from innovative “to B” solution providers.

6*MOQ = minimum order quantitySource: Fung Business Intelligence

Upstream Downstream

Upstream Downstream• Accept small quantity, rapid replenishment orders

• Mass production• Accept large-size orders with certain MOQ* requirement• Long production lead time

Supply driven

Demand driven

• Demand for diversified, customized goods/ services• Demand for short production and delivery lead time

Pas

tN

ow

& F

utu

re

Box 1. Different buying behaviours of B2B and B2C customers

7

SupplierCompany/ Group

Individual/ family

Buying decision:Complex, tendering for high value order

is needed

Product price:Lower unit price (wholesale price)

Product quantity: Higher, meet with

suppliers’ MOQ

B2Bbusiness

Source: Fung Business Intelligence

B2Cbusiness

Buying expectation:Good quality and

services experience, quick response

Buying expectation:Good quality,

specialized services and efficiency

Buyer’s loyalty:Higher, stick to trusted

supplier base

Transaction risk:Higher for bulk order

Product quantity: Lower, as low as

single unit

Buyer’s loyalty:Lower, relatively

price sensitive

$

Transaction risk:Lower for buying

single unit

Product price: Higher unit price

(retail price)

Buying decision:Instant, straight

forward

Key drivers of innovation in China’s B2B business:

2. The government supports B2B business innovation and acceleration of industrial upgrading

8

Pain points facing the traditional B2B business in China:• Aging labour force and increasing production costs• Provision of low value-added services along the global value chain

without owning the core technologies, earning a very thin margin• Homogeneous competition in local market• Severe international competition in the globalized era

Made in China 2025

By The State Council2015

A number of regulations promulgated in the recent years are conducive to the development of B2B business in China

To climb from the bottom of the global value chain, B2B business operators have to explore innovative models and transform from being OEM to become ODM or OBM

Product development

& design

Product processing &

assembly

Productbranding

Technical development

Productdistribution

OEM OBMODM

Most of the B2B business operators in

China

Val

ue

-ad

ded

*OEM = original equipment manufacturers; ODM = original design manufacturers; OBM = original brand manufacturersSource: Fung Business Intelligence

Guiding Opinions of the State Council on Deepening Integration of Manufacturing Industry and Internet

By The State Council2016

Integration and Development Plan of Informatization and Industrialization

By Ministry of Industry and Information Technology 2016

Guiding Opinions of the General Office of the State Council on Vigorously Advancing the Innovation and Application of Supply Chains

By The General Office of The State Council2017

Key drivers of innovation in China’s B2B business:

3. Internet giants in China have become more conservative about investing in B2C startups since 2018. They eye on the next blue ocean market, i.e. B2Bbusiness

9Source: Datagoo, Time data, Tianyancha, Wind, itjuzi, compiled by Fung Business Intelligence

In 2019, 8 internet giants newly invested in over 400 startups in China and overseas

10 8 4 4 4 2 11 3 1 1 1 1 1

21 11 12 14 9 7 5 5 1 1 5 6 1 2

20 9 21 16 5 11 9 8 7 8 2 2 2 3 2

9 4 6 7 3 4 1 1 2 2 1

3 4 8 1 1 4 4 1 3

2 1 1 1 1 1

1 1 1 1

7 26 5 5 13 2 9 1 5 1 1 3 4

Baidu

Alibaba

Tencent

JD.com

Bytedance

Meituan

Didi

Xiaomi

Enterprise services

Information technology

Media & entertainment

FinanceLifestyle services

TransportB2B/ B2C

e-commerceMedical &

healthEducation Gaming Logistics

Propertyservice

Social network

Advertising& marketing

AgricultureNew

industryTravel

*number of investment projects

Big data analytics Cloud computingBlockchainArtificial Intelligence

Key drivers of innovation in China’s B2B business:

4. Technological advance leads to digital transformation

10

D A T A

Source: Fung Business Intelligence

Product development and design

• Virtual Design• 3D scanning• 3D printing

• Internet of Things• Augmented Reality/ Virtual Reality• Robotics• Automation

Manufacturing and Quality Control

• Online marketplace• Supply chain finance platform• Sale/ Inventory management system

Sourcing/ Distribution

• Automation • Robotics• Augment Reality/ Virtual Reality• Internet of Things• Unmanned vehicles• Sharing platform

Logistics

Mobile technologyAnytime (24 hours x 7 days); Anywhere (shop, restaurant, home, office, on the road, etc.)

• Product research • Order placement • Consumer financing• Product reviews

Consumers

D A

T A

D A

T A

Software as a Service (SaaS)

• Human resources management

• Enterprise resources management

• Financial management• Supply chain management

• Logistics management• Customer relationship management • (Remote) Office assistance

• E-contract

Zoom in: B2B Business Innovation in terms of the 4 Flows of Supply Chain

A lot of B2B business innovations aim at solving the pain-points facing supply chains and streamlining the four flows in supply chain

12* A supply chain manages four flows, including process flow, logistics flow, information flow and capital flow.Source: Fung Business Intelligence

B2C commerceB2B commerceB2B production

Process flow

Cash flow

Information flow

Logistics flow

1. B2B innovation in process flow

Map 1: E-commerce giants tried to reform distribution processes in China by becoming one-stop-shop intermediates and replacing existing traditional multi-tier intermediates. Many FMCG distribution e-platforms have emerged, linking brand owners and retail stores in cities and villages. It takes time for the downstream users to become familiar with the new tools and compare the quotes from new intermediates and the grandfather pricing offered by traditional distribution partners

13

Source: iResearch, compiled by Fung Business Intelligence

Brand owners

Retail stores/ mom-and-pop stores

Traditional distribution process

Digitized distribution process

Regional distributor

Local agent

Provincialagent

Markup Markup

One-stop-shop services:

Transparent information sharing, order management, consumer relationship management, retail data analytics, logistics management, etc.

FMCG e-platforms

Marketplace Self-operated

Markup Markup

Lingshoutong• Launched in 2016• Parent company:

Alibaba

Yijiupi• Established in 2014• Obtained Series-D

funding (2018) and Series-E funding (2019) from Tencent & VCs

Ule.com• Launched in 2017• Parent company:

China Post

Xintonglu• Launched in 2015• Parent company:

JD.com

Huitongda• Launched in 2010• Parent company:

Fivestar Holdings• Invested by Alibaba in

2018, after obtaining Series-C funding from VCs

Huimin• Established in 2013• Obtained Series-C

funding in 2019 from VCs

Principal distributor

Markup

1. B2B innovation in process flow

Map 2: China’s apparel sector is highly fragmented and consists of millions of small-size operators. Some innovative fabric/ apparel B2B models have emerged to tackle pain points facing the industry

Icon source: InternetSource: Fung Business Intelligence

Pain points facing the traditional apparel stakeholders in the non-digitized era

• High level of safety stock and slow cash flow return

• No guarantee on product quality & delivery lead-time

• Long production lead-time of fabric

• Mismatch of demand & supply of fabric & accessories

• Small orders & rapid replenishment requested by downstream operators

• High cost incurred in product personalization

• Long lead-time spent on obtaining design and sample approval

• Discrepancy between design and samples

• Non-standardized products with short shelf-life

• Low digitization level of supply chain (esp. small-sized factories)

• Customers always expect for new design • Small orders & rapid replenishment

requested by downstream operators

• Multi-tier small-sized distributors incurred high transaction costs

• Intellectual property issues in fashion design

• Resistance on digital/ automated changes by factory supervisors & workers

• Keen competition as low entry of barrier

Product design ManufacturingRaw material

sourcing Distribution

Baibu• Fabric sourcing platform• Established in Guangzhou in 2013• Obtained Series-D funding in Dec 2019

Fuliaoyi• Accessories sourcing platform• Established in Shanghai in 2016• Obtained Series-A+ funding in Mar

2018

Lianshang• Fabric & accessories sourcing platform

with QC services• Established in Shanghai in 2015• Obtained Series-Pre-C funding in Jul

2017

Yunejian• Designer platform, order

management and distribution • Established in Hangzhou in 2015• Obtained Series-A funding in Sep

2017

Linctex• 3D design platform• Established in Shanghai in 2015• Obtained Series-A+ funding in Dec

2019

ShenShangTech• Design solution backed by AI• Established in Beijing in 2019• Obtained Angel fund in Dec 2019

Ymhc• Distribution platform• Established in

Guangzhou in 2017

Haoyihulian• Distribution platform• Established in Beijing in 2016• Obtained Series-C funding in Apr 2018

PPwang• Distribution platform• Established in Guangzhou in 2015• Obtained Series-B funding in May 2019

YSD• Smart factory solution• Parent company, Cimpress: established

in Paris in 1995 & listed in Nasdaq: CMPR

Kuaiyi• Manufacturers and buyers matching

platform for kidswear• Parent company, Weilan Technology:

established in Hangzhou in 2019• Obtained Angel fund in Feb 2020

Taofactory• Manufacturers and buyers matching

platform• Parent company, Alibaba: established

in Hangzhou in 1999 & listed in NYSE: BABA; HKSE: 9988

Levels of digitization of the various sectors along apparel supply chain are different. For the time being, no single third-party service provider dominates the market and controls the entire supply chain

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2. B2B innovation in information flow

Map 3: Internet giants offer digitized solutions enhancing supply chain visibility of small- and medium-sized factories. For instance, Alibaba set up 1688.com, aiming at bridging factories and downstream sellers. The B2B platform is empowered by data analytics services with data sourced from its B2C marketplaces, logistics and financial platforms

15

Source: Fung Business Intelligence

Factories E-sellers& web celebrities

Taofactory• Match Taobao sellers and factories,

who are willing to handle small orders, able to offer rapid replenishment with production capacity reserved

• Offer factory inspection services• Pilot run of factory transformation in

2018

Chengxintong• Setup e-store for factories• Offer marketing, customer services

and order management• Establish factory credit system • Provide data analytics services

Manufacturers and buyers matching platform

Changhuotong• Provide digitized distribution

solution for factories, based on the data from various B2C platforms under Alibaba group

• Suggest product and pricing strategies

• New product launch services

DATADATA

DATA

Different functions under 1688.com

2. B2B innovation in information flow

Map 4: Apart from supply chain visibility, many companies seek new solutions to enhance their operational excellence and flexibility. A lot of SaaS startups emerged in China

16* SaaS = Software as a Service. According to Microsoft, SaaS allows users to connect to and use cloud-based apps over the Internet. The service provider manages the hardware and software,

and with the appropriate service agreement, will ensure the availability and the security of the app and data as well. ** CRM = Consumer relationship management, ERP – Enterprise resources planningIcon source: InternetSource: iResearch, compiled by Fung Business Intelligence

Development of SaaS market for enterprises servicesin China (RMB billion)

71%

6

65%

10

29%

13

29%

16

48%

24

40%

34

39%

47

38%

65

2014 2015 2016 2017 2018 2019e 2020e 2021e

CRM SaaS* accounted for around 20% of the entire vertical SaaS market in 2018, followed by customer services and call centre (~15%), ERP (~11%) and enterprise communication (~11%).

CRM (~20%)** Customer services & call centre (~15%)

ERP (~11%)**

Enterprise communication (~11%)

Human resources management (~9%)

Office assistance (~9%)

Accounting/ Tax (~9%)

E-contract (~6%)

Others (~10%)

3. B2B innovation in logistics flow

Map 5: With the aid of data analytics tools, AI, IoT, robotics and other advanced technologies, innovations in various B2B logistics segments have developed

17*AI= Artificial Intelligence; IoT = Internet of ThingsSource: Fung Business Intelligence

Innovation in warehouse operations and management

Robotics & automation Warehouse solutions

Pain points• Low efficiency of manual operations• Capacity and labour shortage during peak period• No real-time information sharing between stakeholders• Error incurred and inefficiency of data double handling

Innovation in transportation

Truck matching platformsUnmanned vehicles (drones, trucks, etc.)

Pain points• Low level of cargo tracking and tracing• Mismatch of consigners/ consignees and truckers• Imbalance in inbound/ outbound traffic flow• High operation costs

AI/ IoT solutions

Logistics information system

4. B2B innovation in cash flow

Map 6: Digitization in China’s financial sector enhanced transparency and efficiency of supply chains and reduced risk and cost of B2B financial operations

18

Source: Fung Business Intelligence

Difficult for SMEs without sufficient collateral to obtain bank loan

High financial risk if any supply chain partners with low financial credibility run out of cash

Complex inter-companies financial processes, especially no data synchronization among different systems

Difficult for banks to control supply chain risk by simply examining the financial statements of loan applicants

Inefficient financial operations, as manual and double handling are common

Pain point 1 Pain point 2 Pain point 3 Pain point 4 Pain point 5

Financial challenges facing the stakeholders in the non-digitized era

Thir

d-p

arty

fin

anci

al

serv

ice

pro

vid

ers

Tech

no

logy

co

mp

anie

s

AI Blockchain Cloud services Big data

Innovative financial companies supporting B2B business

Integrated solutions Loan solutions Payment solutions

Stakeholders worry about data security and information leakage

Pain point 6

What’s next?

Here are the main buzzwords in China’s B2B business in the midst of the Covid-19 outbreak

20

Big data analyticsBlockchain

Cloud computing

5GVirtual design & sampling

Smart factory Brand management

Fintech

Digitization

Resilience supply chain

SaaS

Trade war

Enterprises sourcing

B2B live-streaming

New infrastructure

Sustainability

Automation

Robotic Artificial Intelligence

Innovation

Risk management

Crisis management

Healthy cash flow

Private labels

Merger and acquisition

B2B (export) e-commerce

Supply chain finance

Internet of Things

Lower-tier market

Mass customization

Government sourcing

Operational excellence

Data security

Data API*

*API = Application programming interfaceSource: Fung Business Intelligence

Real-time visibility

Remote work

O2O integration

Business reengineering

Ecosystem

Consumer-driven

Value creation

Prospects of China’s B2B business in the post-Covid-19 era

21*ROI = Return on investmentSource: Fung Business Intelligence

Lockdowns have accelerated technology adoption and digitization of companies. Many companies strive for balance between their business transformation plans and ROI of technological projects

Companies make efforts on increasing supply chain resiliency and visibility. More stakeholders are willing to collaborate with each other and act fast, so as to survive in the volatile business environment, and respond quick to the changes in consumer demand and regulatory shifts

More B2B customers expect not only sustainable and quality products, but also excellent producer services. In return, more B2B companies invest in product design and brand building, with ultimate goals of climbing the value chain and earning higher margin

Internet giants keep on enlarging their B2B ecosystem through acquisition, and eye on certain startups of various verticals

There has been a shift from traditional sales to digital sales by B2B companies. On top of domestic B2B e-commerce, the growth of B2B export e-commerce was remarkable. More resources and favourablepolicy supports in B2B e-commerce and export e-commerce are expected

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Contact

Winnie LoSenior Research Manager Tel: (852) 2300 2488Email: [email protected]

Edited by Denise Cheung

Designed by Chung Cheng

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