How to Invest in China's $177 Billion E-Commerce Industry

While you may have heard a lot about Alibaba dominance as China's premier e-commerce retailer, that doesn't mean you should stray away from investing in competitors like Amazon.com (AMZN 1.32%) China and -- the "Amazon of China" -- Dangdang (DANG). Don't forget, China's e-commerce industry stands at $177 billion.

In fact, when you look at the three things Chinese buyers care most about in an e-commerce service, Amazon and Dangdang may actually have a chance.

Here's what you need to know before you invest. 

Three key reasons for online shopping in China
According to the Data Center of China Internet, Chinese consumers cited three reasons as to why they shop online:

Source: Tech In Asia.

Now, I'm sure that Amazon and Dangdang -- by virtue of being e-commerce companies -- allow customers to shop and buy during any part of the day and night. So, let's look at who leads in offering low prices next.

Who offers the lowest prices?
By the economics of scale, Alibaba seems like its product prices should be cheaper than its competitors'. Because of Alibaba's sheer size, it can attract more sellers -- in turn, the company can attract more customers. With so many eyeballs, Alibaba doesn't need to charge buyers or sellers any listing fees -- it makes its money off of advertising and selling premium features. Of course, just because it's cheaper to sell on Alibaba's sites doesn't mean that the actual sellers have lower-priced products. 

After researching product prices on Amazon China, Dangdang, and Alibaba Tmall.com (a business-to-consumer marketplace), it's hard to tell which one actually charges the lowest price. While Amazon China has the lowest price Macbook Pro for about $1,250, there are thousands, if not millions, of products. So, this data point doesn't really mean anything (and I would advise against following this research approach).

We could also get a sense of these companies' product prices by comparing their profit margins, whether it be gross or operational. But that's difficult. First, Alibaba is a private company, so we can't get details on its financials. Secondly, the profit margins are often skewed. For example, Amazon earns 57% of its revenues in North America and bunches the rest as "International sales," making it difficult to determine if Amazon is cheaper than its Chinese competitors and vice versa.

Who offers the most convenience experience?
Now, regarding convenience, Alibaba clearly has Amazon and Dangdang beat.

With business-to-business, business-to-consumer, and consumer-to-consumer websites, it seems like you could find all you need to live on one of Alibaba's websites. Additionally, the company is investing $16.3 billion to build out next-day delivery. Finally, it is also developing a smartphone and mobile operating system to make buying more convenient for China's growing mobile users.

When put all ttogether, Alibaba simply has a bigger and better e-commerce "ecosystem," a series of products and websites to encourage Chinese consumers to buy more and buy from them.

Akin to how most Americans equate online shopping with Amazon, Chinese consumers first think of Alibaba -- and it shows. Alibaba's Tmall.com dominates the e-commerce market with about 40% market share. Meanwhile, Amazon and Dangdang come in far behind in 4th and 5th place, with each holding about 2% of the market share. 

How should you invest in Chinese e-commerce?
Investing on just one factor -- convenience -- is risky. The best thing is to do further research into each company's fundamentals. But if you could only invest on these factors, what should you do?

For now, I would continue watching Chinese consumer habits. If they begin to value convenience more than low prices and anytime shopping and if Alibaba continues to dominate this arena -- as it has with a better smartphone experience -- then you better sell your bets in Amazon and Dangdang.