Editor’s note: This originally appeared on China Tech Insights, an English research unit affiliated to Tencent’s Online Media Group.

Founded in 1997, the tech conglomerate NetEase is most well-known as China’s second largest gaming publisher after Tencent. Apart from PC and mobile games, it operates an array of other businesses, including e-mail services, a news portal, several mobile apps, a music streaming service, several e-commerce platforms and an online dictionary Youdao, just to name a few. Financial Times 2016 report described four Chinese tech giants BANT (Baidu, Alibaba, NetEase, and Tencent) as the answers to FANG (Facebook, Amazon, Netflix, and Google).

Screenshot of Yanxuan’s official website

Screenshot of Yanxuan’s official website

The new and popular online marketplace Yanxuan showcases styles such as normcore and simplicity, with natural hues and basic daily accessories to be purchased. Yanxuan was launched by one of China’s long-standing internet companies, NetEase, and its products look much like the widely-known Japanese brand MUJI at first sight. What they share in common are the similarities in their products’ aesthetic and style, with the ultimate goal of initiating a lifestyle and conducting some standards of values through their products. However, Yanxuan built its success through a totally different road from MUJI, or even Taobao and JD.com, while steadily becoming an outstanding representative of the industry. Yanxuan was once under the background of the stagnant growth rate of the overall e-commerce industry in China, it has seen rapidly soaring GMV (Gross Merchandise Value) quarter by quarter since its beta version was launched in 2015. China Tech Insights did a case study of Yanxuan and looked into the new trend of China’s e-commerce sector behind the success of the product.

An introduction of Yanxuan and the reason it caught our sight

Yanxuan is the latest trending e-commerce site launched by NetEase in April 2016, with a beta-tested version incubated in November 2015. It is more of a self-run e-commerce brand itself, resembling Amazon’s house brand Amazon Basics, rather than a platform for merchants and brands to base on.

With a slogan of “a better life doesn’t have to be costly”, it is dedicated to help build a more affordable yet quality life to young city dwellers by providing selected basic daily life products, ranging from home products, home textiles, kitchen ware and household appliances to daily life consumption products such as body& hair care, basic items of apparels, among others. Now products sold on Yanxuan are limited to nine main categories and the SKUs (Stocking Keeping Unit) are controlled around 7,000 items, according to Chinese media reports.

It boasts an ODM (Original Design Manufacturer) model, through which it partners with big manufacturers in China to design and manufacture products, which are then eventually sold directly from its own e-commerce platform to customers. The same big manufacturers in China contracted by Yanxuan are also the original producers for global brands. Yanxuan claims that in this way, it can provide quality goods with lower cost by eliminating the brand premium and cutting the cost of layers of distributors and retailers, and so forth. For instance, a pair of slippers are sold at RMB 29 on Yanxuan(which is claimed to be manufactured by the same manufacturer used by MUJI); a similar pair on MUJI’s official Tmall store are sold at RMB 89, and a similar pair of slippers sold by a random Taobao shop has a price tag of RMB 39.

Yanxuan has been quickly gaining traction after its launch, becoming a sudden hit among many Chinese consumers. First, let’s have a direct look at the search index chart (Fig 1) of “Yanxuan” from Baidu’s Index (the equivalent of Google Analytics). The first high point of searches came in November when the yearly online shopping Carnival Double 11 was launched. The curve steadily increased all the up into 2017.

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Fig. 1

Secondly, let’s take a look at its GMV statistics (Fig. 2). Even though the charts are providing essential information, they are not the only metric to measure the performance of an e-commerce company. Yanxuan disclosed that, as of 2016 Q3, its monthly average GMV reached RMB 60 million. According to an August report by news site Qdaily, Yanxuan ranked around 10 domestically in terms of GMV, however, its growth rate tripled that of the e-commerce industry on the background that the growth rate of the industry (in terms of transaction volume) has steadied at around 20% in three consecutive years. In 2017 Q2, NetEase saw RMB 3.35 billion revenue from its e-mail, e-commerce and other businesses, a 68.9% year-over-year growth, contributed largely by its new e-commerce site Yanxuan.

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Fig.2

In terms of user base, according to NetEase’s 2016 Q3 financial results (Fig.3), Yanxuan gained 30 million registered users as of the end of September, which was just within half a year after its launch.

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Fig.3

How will Yanxuan’s business model serve and provide premium goods at low cost?

As mentioned above, Yanxuan adopts the ODM model to achieve what it was meant for. That is to sell premium products at a lower price. In essence, what works best is Yanxuan’s full involvement in optimizing every link of the value chain, which includes such steps as research and design, the purchase and manufacturing of raw materials, storage and logistics, distributing, marketing, online sales, and after-sale services.

Exactly how involved is Yanxuan in the whole process?

First of all, Yanxuan was able to take advantage of the temporary decline when many China’s manufacturers were experiencing a harsh time seeking for a transformation to boost profits. They have been caught in the situation of gliding profits under the background that China is experiencing a slowdown in economic growth, as a result of underpricing from global branding businesses. These global branding businesses shifted their manufacturing center from southeastern coastal China to SE Asian countries. Yanxuan approached those manufacturers with cooperation terms of a higher gross margin than what they are earning.

Secondly, the partnering manufacturers of Yanxuan are ODMs. ODMs are those who design and sell products to branding businesses, and manufacture the products as specified, while in the end, the products will be rebranded by those branding businesses for sale.

Yanxuan would usually decide what items to launch before choosing which manufacturers to cooperate with. It has its own team of buyers to decide, select and purchase the most popularly daily used items within the various categories. This is then followed by a business development team which approaches manufacturers for cooperation. There are certain standards of criteria for choosing manufacturers, including its ranking in the industry, its scale, its experience in partnerships with international branding businesses, and much more. According to a 2016 report by DT Finance, approximately 43.6% of the manufacturers who have partnered with Yanxuan are experienced in manufacturing for global big names.

Samples, designed by manufacturers, will go through a process of tests and modifications by Yanxuan’s team before mass production orders can be placed. Suggestions of modification will be made in designs, usage of raw materials, functionality, customization, and so on. Products generally become finally ready for sale after being first assembled together, packaged and placed in the warehouse for storage (coupled with rounds of quality examination).

Yanxuan can control the quality of goods by being a part of the process or processes between the product design and manufacture stages. They also make the head decisions in order to cut cost by making optimizations in the latter stages, which include distributing, marketing and online sales. This technique resembles Xiaomi innovative smartphone retailing strategy, which was done by directing sales through self-owned online platforms. By doing this, Yanxuan limits the brand premium as well as the cost of layers of intermediary distributors. In terms of marketing, Yanxuan already has a head start due to its association with NetEase’s email service and its online content platforms.

Yanxuan’s is attaching more and more value to its own designing capability, whether that may be product design or visual design (including product packaging, website UI, etc.). According to Chinese reports, in May there were more than 100 employees of its own designing team, and several hundred contracted designers from all over the world. One of its next strategic focus is increasing the proportion of original product designs.

The reasons behind the ever-growing importance of the designing capabilities under the ODM model includes the following. First, it includes an effective way to get rid of the blame of copycatting from global brands and to build up its own brand recognition among consumers with differentiation in product design. Secondly, it includes the rising aesthetic needs from Chinese customers. It is widely known that China is experiencing a trend of consumption upgrading. Yanxuan targets young city dwellers, who pursue a high-quality life while still being price sensitive. Yanxuan provides satisfying goods in terms of quality, good taste, and affordable price. According to data tracking service Jiguang, 70% of Yanxuan users come from first-tier and second-tier cities, with Beijing, Shanghai, Hangzhou, Guangzhou and Shenzhen topping the list. In terms of age, those between the ages of 20–29 accounts for 33%, and 54% for the 30–39 age group. Individuals with a bachelor’s degree and above take up as high as 96.77%.

Apart from Yanxuan, e-commerce giant Alibaba and phone maker Xiaomi also followed the trend to launch their own self-operating platforms earlier this year. In regards to some of their products sold, it was clear that they mimicked the steps taken by Yanxuan, in dedicating themselves to providing a better quality life for all Chinese consumers. However, in the road of being an initiator, challenges go side by side with chances. First of all, such a heavy operating model means risks in the supply chain management and a high demand for cash flow. The second problem is how to effectively increase SKUs (stock keeping units) and expand in scale since the CEO of NetEase aims to increase its GMV to 20 billion RMB in 2018. Long-term challenges also include building a more recognizable brand and its own R&D (Research and development) capacity to increase bargaining power against manufacturers.