Business-to-business (B2B) is still a relatively novel concept in sourcing from China, as most payments are still made via more conventional methods, i.e. bank transfers and Letters of Credit. As Bill Dodson writes at This is China! Blog,

For most companies in China, the websites are little more than brochures for brick-and-mortar operations that provide a service or product that is paid for in ways other than the internet. B2B in the form of e-commerce has been more difficult to monetize - especially in China - because the products on offer have to go through a manufacturing process that may or may not involve design, testing and quality checks.

In addition, international transactions are further complicated by currency conversion issues:

A company cannot simply wire money to a Chinese bank if the supplier does not have a foreign currency account at the bank. The supplier also requires permission to convert the payment into RMB that the bank will hold in the company's RMB account. Such complexity and sophistication are beyond the reach of most suppliers, which are miles away from banks that likely do not support such services in the countryside anyway.

Alibaba's Alipay, originally created to support online auctions at Alibaba Group asset Taobao, however, is China's first attempt at an online payment system, and portals like Alibaba and Made-in-China are increasingly inserting themselves in online transactions between buyers and sellers. Alibaba this week also announced plans for a partnership with Intel to launch a special B2B computer to meet the e-commerce demand of small and medium enterprises in China. The computer will be embedded into Alibaba's e-commerce platform for SMEs, and is expected to be released within the year.

Yet as China's B2B industry grows rapidly and as China expands domestically and internationally, certainly there is room for more than one Alibaba? So concludes Seeking Alpha, while profiling e-Future, a player that is growing at an exponential pace in the B2B industry. In less than one month, e-Future has launched two new websites to go along with its www.99114.com.cn, and as Seeking Alpha reported in March, for the duration of last year e-Future grew by 79%, making it a veritable cash cow due to the fees the company obtains for software contracts provided to customers.

See also Source Juice: Importing over the Internet? Challenges, opportunities, and hedging your bets!

It is now well known that the famous - and hitherto unanimously considered cheap - China price is inexorably inching upwards. In fact, everything in China is going up, from yesterday's estimated earthquake death toll to manufacturing costs to wedding costs and of course, inflation. As China gradually moves up the value chain, however, despite the odd snow storm and earthquake, the inevitably rising China price is detrimental to China's status as the best country for low cost sourcing, compared to emerging opportunities offered by countries such as Vietnam, Turkey, India and others in Central and Eastern Europe.

In a survey for the American Chamber of Commerce's annual white paper, more than two-thirds of member companies agreed last month that China was losing its competitive advantage in global markets due to rising costs, Industry Week reported. The top five business challenges in China were listed as human resources constraints, inconsistent regulatory interpretation, unclear regulation, lack of transparency and bureaucracy. Industry Week earlier this month reported on a recent study of foreign manufacturers in China conducted jointly by the American Chamber of Commerce Shanghai and management consulting firm Booz Allen Hamilton, which found that 54% of companies manufacturing products in China agreed that China is losing its competitive edge to other low-cost nations like India and Vietnam, yet 83% intended to maintain their current operations in China despite the rising costs of manufacturing.

While China is supposedly struggling to hold on to its prime position for cheap low cost country sourcing, new importers often do not realize the full impact of hidden costs of customs and shipping until the first order from China is complete. At Smart China Sourcing, Dylan Blankenship outlined what items need to be included to calculate total landed costs, and how to minimize these. A quote from a factory in China is only the beginning of the calculation, and it is important to clarify the exact terms of sale and what charges are the responsibility of each party, factory and buyer. Smaller importers can often pay less by negotiating to ship containers under a bigger importer's existing contract, helping them to meet their shipping quota. Additional costs may accrue, however, from relevant duty costs, courier/postage of original documentation, customs broker coordination fees, and 'last mile' providers that deliver to the final destination.   

The last few months have seen clear indications of the changed state of China's payment and settlement systems. Research reported in August of this year by Towergroup found that, following a series of modernizations, China now possesses national payment capabilities worthy of an 'economic powerhouse.' In just ten years China's Central Bank has managed to implement three new payment systems using state-of-the-art technology, providing a national network for high-value payments, bulk low-value payments, and national check-image exchange. As China has historically been prone to inefficient and fragmented payment systems, implementing advanced payment products and infrastructure to cope with China's commercial expansion is a significant step. China has also been able to leverage Hong Kong's advanced infrastructure and banking reputation under the "one country two systems" policy while the separate payment systems of China and Hong Kong have become more integrated.

In the wake of payment system modernization, China's Internet payment systems environment is likewise developing rapidly. However according to Chen Lei of China Payments News (in an article last month on gtnews, needs registration) Internet payment systems in China are fundamentally developed and pursued by banks individually, as a nationwide integrated bank card system (China Unionpay) was only set up in 2002. And though growing in popularity, credit cards as yet make up only a fraction of all bank cards in use in China (0.3% of 500 million bank cards at the end of 2002).

Yet it seems that business for online retailers in China is definitely starting to pick up. According to the Internet Society of China (as presented in an article appearing in Business Week last month), consumer e-commerce in China is set to top $1 billion in 2007 and grow at an average of 34% annually over the next three years. The article also presented figures from market watcher iResearch, which projected that online payments by both companies and consumers in China are expected to triple over the next two years to $24 billion. No doubt the spectacular rise of Alibaba.com will provide further impetus to this process.