B2B Marketplaces in China: A Glimpse into the Future

By Nicholas L. Johnson

What will fully-mature B2B markets in the US and Europe look like? Just look at present-day China.

Specialized B2B marketplaces have taken over in China, which is already home to the largest eCommerce market in the world. While unicorns like Alibaba and Tencent are the big story in terms of generalized eCommerce outlets, several Chinese startups have risen up over roughly the past decade to solve the fragmentation problem inherent in B2B industries. They have begun to dominate verticals such as agriculture, food services, chemicals, industrial machinery, and maintenance, repair, and operations (MRO).

B2B is maturing in the West as well, as more and more legacy B2B firms slowly embrace the marketplace model. Nonetheless, China is still far ahead. In 2015, the Chinese B2B markets reached a peak US$6.6 billion in deal value across 400 private equity and venture capital deals.

By looking at how things are playing out in China, Western B2B firms can get a sense of where the B2B distribution industry as a whole is headed, and this glimpse into the future makes clear why the platform approach will continue to be the key to success.

The B2B Marketplace Scene in the US, And Why It’s Still Behind China

Four giant generalized marketplaces, and indeed four of the world’s largest tech companies, are currently taking up the oxygen in US B2B: Amazon Business, Alibaba, Walmart, and eBay.

B2B distribution is a $6-8 trillion industry in the US and essentially powers the entire American economy. The trend towards marketplaces is no accident. Advantages such as a wide selection of products, better price transparency, lower prices due to competition between third-party sellers, and a centralized trading portal, make marketplaces very attractive to commercial buyers.

Taking down a generalized marketplace the size of Amazon or Alibaba would mean adding tens of millions of SKUs in short order…no small feat. Nonetheless, as we’ve written before, there is still vast opportunity and room for specialized retailers and distributors to compete by adopting a platform model and dominating specific verticals.

This is what has happened in China at breakneck speed. The combination of aggressive government subsidies and R&D investments, deeply entrenched industrial clusters, robust local competition among B2B vendors, and a healthy tech and innovation ecosystem have been the perfect storm for fast-growing B2B marketplaces to achieve dominance within specific market segments.

In the same way China “leapfrogged” the West in healthcare and payment services, the evolution of fragmented Chinese B2B markets into self-contained, platform-dominated verticals is a preview of coming attractions for the US and Europe.

Examples of Fast-Maturing B2B Distribution Verticals in China

Recently, we’ve pulled together a list of the 30 largest Chinese B2B marketplaces organized by funding. Alibaba, unsurprisingly, sits atop the rest at $9 billion.But here are just a few specific vertical industries in China, each featuring at least one company that has risen to near-monopoly status within its niche

Steel and Metals

China is the world’s #1 steel producer, quickly approaching 1 billion metric tons of steel output by 2030. The steel and metals industry is a leading-edge market in China and one of the first to gain a foothold since the early 2000s, despite some volatility in the past few years. It has benefited in no small part by government subsidies, vigorous public and private investment, and huge, accelerating demand for construction materials.

The two marketplace giants in steel trading are Ouyeel and Zhaogang.com, which have raised US$431.9 million and US$379.4 million, respectively. These leaders represent the aggregation of a big market of fragmented distributors and have cemented their place at the top.

Industrial Products/Parts and MRO

Revenues in Chinese machinery reached US$3.62 trillion in 2017, and China is one of the world’s largest machinery exporters, totaling US$406 billion in 2017. And much of the growth in the global MRO market is concentrated in China.

Tiebaobei is a platform that serves second-hand engineering machinery; it has raised CN¥300 million. HAIZOL, which facilitates the trade of custom industrial components and parts, has garnered US$20.9 million. 

Zhenkunhang has raised US$374 million and focuses on MRO and industrial products such as fasteners, adhesives, lubricants and raw materials, similar to Grainger in the US.

Agriculture and Food Services

The agriculture market is the most mature B2B space in China, and it is rapidly expanding along with the food service and distribution industry. The Chinese “agrifood” market brought in US$5.8 billion in funding across 283 deals in 2018, with 60% year-over-year growth in the number of deals.

Farmers Business Network and Indigo Ag are American analogues as far as B2B agriculture marketplaces go. Their outsized success, spoken for by their respective $1 billion and $3.5 billion valuations, points to the similar maturity of B2B agriculture in the US.

After Alibaba, the agricultural platform Meicai is arguably the largest B2B distributor in China. It has raised US$793.4 million and focuses on connecting farmers to business buyers. Maihuolang, a rising competitor, has raised US$150 million. Haishangxian, a platform honing in on the seafood ecosystem, has raised US$28 million.

These are just a handful of examples. Other flourishing B2B verticals in China represented in our Top 30 include chemicals, plastics, auto parts, beauty and cosmetics, import/export trading, and textiles.

Specialized B2B Marketplaces Will Become the Norm in the West

What’s happening in China is a glimpse into the future for Western B2B markets. The advantages of online marketplace platforms for the business buyer are too great, and the supply-side fragmentation that exists without them too problematic, for the evolution not to happen.

While a unique set of factors enabled Chinese B2B marketplace platforms to mature at astonishing speeds, it only makes sense that markets in the West will soon reorganize around similar patterns.

Older firms and whole industry verticals in the US and Europe might be slower to adapt, but given the win-win proposition of the marketplace model — a streamlined customer experience and unmatched scalability — it’s only a matter of time.

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