ONE of the hottest spots in China's flourishing online consumer market is electronics and electrical appliances, but analysts warn that portals rushing to cash in on the trend may face more pitfalls than they expect.

Taobao.com, the country's largest online consumer-to-consumer shopping site, is planning to set up an e-commerce electrical appliances store, following in the footsteps of Upin365.com, which was founded in 2008.

"We entered the market because we expected e-commerce to show explosive growth," said Ma Qinghu, chief executive officer of Upin365.com.

Surge it has, but Ma's company is hardly breaking even despite monthly sales soaring nearly 10-fold in a year and volumes expected to reach 50 million yuan (US$7.4 million).

"We took it for granted that it is easy to operate an online business," Ma said. "We have faced bottlenecks and other problems, forcing changes in our strategy."

Some industry analysts aren't surprised. Online marketplaces face some stiff competition from conventional brick-and-mortar stores that cater to the traditional Chinese preference for examining, handling and trying out products in person.

"The online portals are not strong enough to challenge the leading position of retail chains like Gome and Suning," said Luo Qingqi, senior director of Pully Consulting, which monitors the household electrical appliances industry.

Fang Xin, an analyst from Guotai Jun'an Securities Co, agreed.

"Judging from the experience in Japan and other overseas markets, online electrical appliances portals complement traditional retailers," Fang said. "They are more a market segment than a market trend."

Still, e-commerce is making inroads in China.

Taobao's consumer-to-consumer trading platform reported 30 billion yuan in consumer electronics transactions last year. That compared with revenue of 45.9 billion yuan for Gome Electrical Appliances, China's second-largest consumer electronics retailer.

More than 1,000 business-to-business platforms in China recorded a combined volume of 20 billion yuan in 2008, accounting for 2 percent of the country's overall home appliances market.

Lu Renbo, the deputy secretary general of China Electronic Chamber of Commerce, said that number could double this year.

The success of online shopping sites rests on their ability to convince cost-conscious consumers that shopping by computer saves money and time, and gives them a quick and easy way to compare prices and products.

Cost savings

Alex Shen, 27, is the kind of consumer who underpins the hopes of Taobao, Upin365.com and other online sellers. Shen bought a 4,900 yuan Hitachi air conditioner, a 1,000 yuan DVD player and a 400 yuan Galanz oven with the click of his mouse, even though there's a Gome retail store just around the corner from his home.

"It saved me several hundred yuan, which equates to about a 10 percent discount," Shen said. "And that doesn't take into account the time and energy I saved comparing products with just a few clicks."

But there's a catch. Many appliance suppliers, fearful of disrupting their business ties to large retail stores, are reluctant to sell too many products through e-commerce. Even Shen complains that a full-range of products isn't available when he shops online.

"Prices of goods on Websites often appear lower than those in traditional retail stores," said Pully's Luo. "So suppliers are reluctant to risk offending Suning and Gome by offering large volumes of their products online. They don't want Suning and Gome to boycott them as sourcing channels."

Those concerns may force online retailers to tweak their marketing strategies.

"One alternative to avoid the conflicts is to provide tailored products for online consumers," Luo said. "But that may be a bit of a dead end because it is costly to customize products for a relatively small group of consumers."

Another strategy may be enticing offline retailers like Gome and Suning to enter e-commerce in a big way, creating a very large, attractive market.

"Participation by Gome and Suning could further accelerate online business development," said Ma from Upin365.com. "Even if that reduced our market share, we could make more money than now."

But both retail giants, which have a lot of money invested in physical stores and interior fittings, have been reluctant to embrace e-commerce wholeheartedly.

Low profile sites

Gome does have an online site, established in 2003, but it's not pushing that market. It lists 20,000 types of products under about 500 brands, but online sales account for less than 10 percent of its total revenue.

Suning also has its own online sales channel but has decided to maintain a low profile.

A Suning official told Shanghai Daily that the online platform is used mainly for product display. "It would be easy for us to make it a leading online sales channel with our brand image, technology and customer experience," the official said. "But its prospects remain unclear despite all the attention e-commerce is currently getting."

It's not cheap to set up online markets. Inventories need to be built up and stored, computerized systems for routing orders to and from warehouses need to installed, and products purchased online need to be transported across cities and provinces and then delivered to the buyers.

"To build the logistics, distribution systems and inventories involves a huge sum of money, and we aren't talking about small sums," said Pully's Luo.

Upin365.com has set up logistics centers in Shanghai, Beijing, Shenzhen and Zhengzhou. But it takes four days or more to transport purchased goods to consumers who live outside those major cities. Ma said the company plans to build distribution centers in as many as 300 cities on the mainland in three to five years.

"We need investment to improve our supply chain and logistics system," said Ma. "We are hoping to secure venture capital next year."

There are some signs that venture funds are looking seriously at the Chinese e-commerce market.

Reports say 360buy.com, China's largest business-to-consumer electronics and home appliance marketplace, is in talks on a US$60 million investment from the Tiger Fund, a US$20 billion hedge fund.

The Website has already received a combined investment of US$31 million from Capital Today and Bull Capital Partners.

According to Liu Qiangdong, chairman of 360buy.com, the Beijing-based portal is forecasting annual sales of 4 billion yuan this year and may seek to go public, possibly on Nasdaq, in 2010.

The company says it receives more than 25,000 online orders daily and operates distribution services in 24 Chinese cities, with plans to expand.