Alibaba to transform China’s economy by $500 billion market
HANGZHOU - Reuters
An employee walks past a logo of Alibaba Group at its headquarters on the outskirts of Hangzhou, Zhejiang province. REUTERS photoAlibaba Group’s plans to revolutionize China’s retail industry, investing $16 billion in logistics and support by 2020, will open up China’s vast interior and bring access to hundreds of millions of potential new customers.
With an extra $15 billion or so in its pocket from a likely IPO, Alibaba and partners such as delivery service firms and life insurers will pump cash into revamping China’s fragile supply chains and big new data centers to process reams of consumer information.
While Alibaba sees itself as a catalyst for change, its plans also lay the groundwork for retail rivals to chip away at its business further down the line. By encouraging retailers to be more Internet-savvy, and by building the networks to distribute goods nationwide, Alibaba is showing bricks and mortar rivals how to grow online without depending on its sites.
Companies such as GOME Electrical Appliances, Haier Electronics Group Co and Chow Tai Fook Jewellery Group have branched into e-commerce, riding Alibaba’s coattails and reaping the rewards with their own online stalls on Alibaba’s websites.
CEO Jonathan Lu says Alibaba expects to nearly triple the volume of transactions on its marketplaces to about 3 trillion yuan ($490 billion) by 2016, overtaking Wal-Mart Stores Inc as the world’s biggest retail network.
And the message to retailers from the group’s sprawling campus headquarters in Hangzhou, less than an hour’s train ride southwest of Shanghai, is simple: adapt or die.
“The old companies that aren’t willing to transform will be wiped out by competition,” said Zeng Ming, Alibaba’s chief strategy officer. “Most traditional retailers now understand if they don’t move online, their time is limited.”
E-commerce share in retailing to rise
Analysts predict e-commerce will account for a fifth of total retail sales in China within 5 years, up from just 6 percent last year.
As China’s economy slows from years of double-digit growth, and where government policies have failed, Alibaba aims to level out an uneven distribution of wealth, where rural villagers have few opportunities and small businesses struggle to get loans.
Using data to gauge supply and demand, Alibaba plans to pinpoint where to invest resources, such as new warehouses, and how best to shift the goods traded on its online marketplaces Taobao and Tmall - think e-Bay and Amazon.com - which accounted for 3 billion of the 5.69 billion parcels moved around China last year.
With its logistics and data firepower, Alibaba aims to deliver products faster and to more people than anyone else. It is also creating a network of fina ncial services to facilitate online commerce, through which buyers can pay for their purchases, and companies and individuals can take out loans.
“Alibaba is responsible for making the e-commerce market as big as it is. By building logistics and support systems around it, it’s a way of transforming the entire retail industry and taking it to the next level,” said Gartner analyst Praveen Sengar.
Alibaba, which was founded in 1999 and has grown from a small business-to-business site, is uniquely positioned to do this. Jack Ma, the group’s billionaire founder and former CEO, has the ear of China’s ruling Communist Party, and met Premier Li Keqiang over two days last year to discuss the future of Chinese private enterprise.
Ma’s group has fought off foreign rivals to dominate China’s e-commerce sector, and now controls over three-quarters of a market that is forecast to grow at 32 percent a year up to 2015, according to Bain & Co. With less than half the population online, there is huge growth potential. Traditional and Internet retailers have struggled to reach China’s vast hinterlands where infrastructure is poor and Internet penetration is just 28 percent.
Haier’s e-commerce revenue jumped almost six-fold to 633 million yuan ($103.4 million), or 2 percent of total revenue, in the first half of this year, while Suning Commerce Group’s e-commerce business doubled to 10.6 billion yuan over the same period. GOME’s online revenue now accounts for 5-6 percent of its total first half revenue of 27 billion yuan.
Supply chain is key
“Consumers will start to demand better customer experience, and both market places and branded websites will have to respond to differentiate from the competition,” said Andrew Stockwell, vice president of Asia Pacific at Forrester. “Brands, especially for luxury and high-profit margin products, would prefer to have customers transact with them on their own websites.”
Businesses bypassing Alibaba’s services would take more of the profits on transactions, own customer data and control the overall customer experience.
GOME sees Alibaba’s plans improving logistics for both traditional retailers and e-commerce firms. “The essential thing about retail is the supply chain. That and logistics networks take years to build, and we have built them for 20 years,” said Helen Song, a spokesperson. “The pressure on GOME is not from e-commerce, it’s from the fact that we didn’t do our own thing well enough.”
And Alibaba isn’t the only e-commerce company investing in logistics and data.