BEIJING - The nation's e-commerce market is expected to reach 1.5 trillion yuan ($220 billion) by 2014, Deutsche Bank said in a recent report.

The business-to-consumer (B2C) and consumer-to-consumer (C2C) segments are expected to grow by a compound annual growth rate of 42 percent to 1.523 trillion yuan, and will account for 7.2 percent of all domestic retail sales by 2014. Internet penetration is expected to grow by 59.3 percent to 812 million individual users.

"E-commerce is one of the most exciting subsets within the Chinese Internet space," said Alan Hellawell, head of Asian telecommunications, media and technology research at Deutsche Bank.

"We expect this to change significantly as the Internet population grows and more consumers turn to the Internet for their business and personal consumption needs," he said.

B2C providers are expected to aggressively expand their product categories, while market consolidation will occur as competition among product providers intensifies from current low levels.

Strength of logistics and other value-added services will become more important for consumers in China than the breadth of product categories or depth of specific offerings in the next five years, the bank said.

"Three key factors will determine the success of e-commerce in China. They are: successfully marketing a product, inventory management and the ability to efficiently and cheaply deliver the goods. The third factor, logistics, has not proved a bottleneck to growth so far, but improvements need to be made to keep pace with the growing demands of the e-commerce sector in China," Hellawell said.

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However, China's warehousing is unable to meet the demands of e-commerce, with a lack of appropriate providers with the necessary warehouse management systems and hardware required for online businesses. As such, significant investment is being made to build efficient distribution networks to plug this gap.

Deutsche Bank distinguishes between 'platform' e-commerce models - where companies will outsource warehousing, transportation and delivery to third parties - and 'self-build' models, where companies will create their own warehousing and delivery capabilities.

"We prefer the platform approach as it is more cost-efficient and scalable. This scalability allows volumes and business to increase more quickly, which are critical for both e-commerce platforms and logistics partners," said Hellawell.

China has 404 million Internet users, according to the China Internet Network Information Center, having grown by 86 million, or 28.9 percent, between 2008 and 2009. In 2008, Internet-related industries generated a turnover of 650 billion yuan, which Deutsche Bank estimates grew by 36 percent year-on-year to total 884 billion yuan in 2009.

There are currently 20,700 e-business websites according to the China e-Business Research Center, which Deutsche Bank expects will grow to more than 23,000 by the end of 2010, with total sales revenue of 20 billion yuan.