Many wonder if it's all a stunt and whether reductions are genuine
 

Xu Yunmei was never an online shopper. She distrusted Internet transactions and believed in "what you see is what you get".
 

But as massive online price campaigns started to dominate the office conversation, she was persuaded to make her first online purchase using a co-worker's e-bank services and it didn't feel so bad.
 

"It's easier than I thought. As price reductions are frequently in the headlines these days, I thought I should just swim with the tide," said Xu, 37, a civil servant in Shanghai.
 

A Bain & Co study verified the high growth potential in sales of home appliances online. It suggested many non-e-commerce shoppers expect to make their first online purchase in 2012 and the first category on their minds is electronics and appliances.
 

On Aug 14, a micro blog by Liu Qiangdong, the charismatic president of Beijing Jingdong Century Trading Co, which runs online retailer Jingdong Mall, accelerated the trend by starting what may be the largest price war targeting major home appliances.
 

"We are striving to maintain zero gross margins for three years and undercut our rivals by 10 percent," the blog read, heralding its launch.
 

It's been two weeks since major home appliances chains, whether the digital arm of brick-and-mortar shops or traditional e-commerce stores, pledged to outdo one another on pricing.
 

But it remains to be seen whether the blitz will stoke an industry reshuffle in the rapid growing yet embryonic sector.
 

The size of China's overall e-commerce market will expand dramatically through 2013, growing at a compound annual rate of 48 percent to hit 1.5 trillion yuan, according to forecasts by Bain.
 

This growth will be fueled by an expected increase of more than 60 percent in the e-commerce customer base and a projected 40 percent or more surge in customer spending. That is why many e-vendors are eager to grab a share in the explosive market.
 

Apart from sparking the latest round of discounting, Jingdong Mall made an unusual move by recruiting 5,000 agents to check prices at rival outlets of Suning Appliance Co and Gome Electrical Appliances Holding Ltd. The company pays a 3,000 yuan ($471) monthly salary and gives out tailor-made outfits.
 

But the competitors have not been ambivalent about their attitudes. On the same day, Suning stated that all of its items are already priced lower than those on 360buy.com. Gome also announced all of its online items would be priced 5 percent lower than those of Jingdong.
 

There's a reason for Liu's bellicosity. One week before the "war" broke out, Suning, the top electronics vendor by sales, initiated a so-called "Beijing Strategy" aiming to unify prices of its online and offline products.
 

The move was widely perceived by industry insiders as a targeted general offensive on its long-time rival Beijing-based Jingdong Mall.
 

According to a company document e-mailed to China Daily, it aims to achieve sales revenue of 100 million yuan by 2013, topping the market share in the capital city.
 

The tactic will be later extended from Beijing to Shanghai, Guangzhou, Shenzhen, Chongqing and other major Chinese cities, according to Sun Weimin, vice-president of Suning.
 

Meanwhile, Jingdong has also felt the pinch of Suning's online platform, which has gained huge momentum since its establishment in 2010.
 

Min Juanqing, executive deputy director of Suning's marketing department, said the online store has maintained an impressive 70 percent month-on-month growth since the first half of this year and aims to drive up annual revenue to 20 billion yuan.
 

According to research firm Analysys International, while it accounted for a mere 3.4 percent in overall business-to-customer online transactions in the second quarter, compared with Jingdong's 15.5 percent, its pace of growth is worth noting.
 

Promotion or ploy
 

So prices are slashed, at least according to advertisements. But data from etao.com, a website that tracks and compares prices of online products, depicted a different picture.
 

Among the 2,200 electronic appliance products for sale at Jingdong Mall, only 158 items, or 7.2 percent, had been reduced in price and about 30 percent of the supposedly lower-priced items were out of stock.
 

In general, the price cut is limited to 10 percent.
 

The sizzling fight may result in a win-win situation for merchants to push up sales in a concentrated period of time, said Analysys International researcher Chen Shousong, especially by luring new customers like Xu who is not "price-sensitive".
 

Traffic rocketed from the day the price campaign kicked off, according to data tracked by Analysys International. Jingdong attracted 1.8 percent of global traffic on Aug 15, compared with 0.75 percent two days earlier.
 

Suning and Gome rose to 0.8 percent and 0.2 percent from 0.15 percent and 0.03 percent.
 

Breaking down to items, Suning gives the most discounts on TV sets while Gome provides the best bargain prices for fridges. Jingdong Mall is more balanced among all appliances.
 

Wang Zikui, just married, is well positioned to watch the fray. As she looked to buy some home appliances online, she found only a small fraction of goods were on sale at bargain prices.
 

"In my case, only one Sony TV set was 500 yuan lower than shopping malls. A Panasonic fridge that I like was even 200 yuan more expensive online," said Wang, 28, who works with a publishing house in Shanghai.
 

"I have been checking prices almost nonstop for two months so that I can observe the fluctuations in prices. But the majority of shoppers won't be as familiar (with the prices). So I think what they are trying to do is to create a surge in shopping and drive up their sales," she said.
 

Perhaps that is what propelled more players to engage in the price war, including New York Stock Exchange-listed e-commerce China Dangdang Inc and Tencent Holdings Ltd's 51buy.com.
 

Price wars are generally a good thing for customers but an abuse of dominance by one or more parties or collusion regarding prices does not indicate healthy competition, according to Veronica Lockyer, a Shanghai-based counsel specializing in anti-trust cases at law firm Orrick, Herrington & Sutcliffe LLP.
 

"There have been many allegations that the companies involved in the price war first raised prices before lowering them or that they have not lowered prices or at least not to the extent they have claimed," she said.
 

Shoppers have also realized the ongoing price-cutting competition by the e-retailers is just another gambit in the battle for supremacy.

An unscientific poll on Sina Corp's popular micro blog service Weibo showed that nearly 4,000 respondents dismissed the price war as hype and only a little more than 400 responders believed the price fight was for real.
 

Some even questioned whether it's more of a show for investors.
 

Jingdong's strategy may have derived from its initial public offering attempt, which it delayed this year citing market turbulence.
 

Jingdong's Liu has emphasized the role of investors in a rather dramatic way.
 

"As I've said, no matter how much money we need, our investors will say 'yes'," Liu declared, dismissing rumors that the company is running out of working capital. He even boasted that Jingdong still has more than 8.7 billion yuan in cash.
 

Meanwhile, Suning recently announced it would issue as much as 8 billion yuan of corporate bonds to replenish its working capital and adjust its debt liabilities.
 

The money will be allocated to execute a 10-year development plan to open 2,000 outlets across China and significantly elevate online sales.
 

In general, to endure a three-year zero margin "is unlikely to be sustainable" in the long run, Lockyer said.
 

"However, online giants such as 360buy.com may be better able to withstand this price war than traditional bricks-and-mortar retailers who are more recent entrants to the online market."
 

But Qiu Lin, a researcher at Guosen Securities in Hong Kong, believes Suning has more firepower than Jingdong due to its fundraising capabilities and also because brick-and-mortar stores usually show a higher profit margin.
 

The gross profit margin of Suning's e-commerce website went down from 7 percent in the first quarter this year to 4 percent in the second quarter, while the company as a whole reported a profit margin of more than 10 percent.
 

As Suning achieved a 1.74 billion yuan net profit in the first half, a 4 percent gross margin is acceptable because it would lead to just less than a 1 billion yuan loss for the online business.
 

"But assuming that Jingdong achieves sales of 47 billion yuan in 2012, it still needs to maintain the gross profit at 4 percent to sustain its development," he forecast.
 

But the squeezed margin also leads to losses for investors in the long run, Qiu said.
 

"As merchants are subsidizing customers with money from shareholders and private equity funds, they will have to consider how long this can last."
 

Service is the key
 

Against the backdrop of the ongoing price war, the Ministry of Commerce has announced it will introduce more regulations to better guide the development of the nation's e-commerce market.
 

The ministry had in the past issued at least two specifications to regulate the behavior of e-commerce companies and more national standards will be announced as the industry's turnover increases, according to Wang Desheng, deputy director of the ministry's department of circulation industry development.
 

But he did not elaborate on the details of the rules, or clarify whether the price war is against any existing regulations.
 

But Lockyer believes it could be considered against Chinese law as indicated by the Commerce Ministry's recent statement warning companies to obey the laws and regulations regarding competition in their marketing activities.
 

"Most obviously there could potentially be a breach of the Provisions on Prohibiting Price Frauds that specifically prohibit marking up prices for price reduction reasons, providing fraudulent discounted prices and lying about price reductions to coax others into buying," she said.
 

A fraudulent discounted price is where the discounted price indicated by the seller is equal to or higher than the lowest price at which the same product has been sold from the same premises within the past seven days.
 

But in China, price wars are not, in principle, against any laws, she added.
 

As the e-commerce segment starts to mature, price wars are gradually losing out to other critical indicators such as shopping experience, according to Serge Hoffmann, a Bain partner in Hong Kong.
 

"In the past, consumers cited cheaper prices as the major reason they went online. But a large number of consumers now are motivated by convenience and product variety," he said.
 

For retailers, this means that after initial price wars, holding on to shoppers requires delivering superior customer service and focusing on cultivating customer loyalty, he added.
 

Shoppers' purchasing decisions, according to Hoffmann, are increasingly influenced by the retailer's credibility, reliability and overall service, specifically whether it has an easy return and exchange policy, safe and convenient payment system and fast, dependable delivery.
 

Traditional stores should differentiate themselves from online-only players by providing an improved value proposition, for example allowing customers to return web purchases to stores and showcasing their online products with store demos, he said.
 

But the reality is, despite the generous discounts offered by merchants, online buyers found they are getting discounted service as well.
 

Dong Juan, a 34-year-old company employee in Shanghai, has been checking on a 42-inch Skyworth TV since the price reductions began but she failed to buy it because the item was always sold out.
 

"They don't keep enough in stock and just pay lip service," she said. "They simply want to catch people's attention."
 

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