Alibaba to transform China's 'e-conomy' with $500 bln marketplace

Reuters

By Paul Carsten

HANGZHOU, China, Oct 14 (Reuters) - Alibaba Group's plans torevolutionise China's retail industry, investing $16 billion inlogistics and support by 2020, will open up China's vastinterior and bring access to hundreds of millions of potentialnew customers.

With an extra $15 billion or so in its pocket from a likelyIPO, Alibaba and partners such as delivery servicefirms and life insurers will pump cash into revamping China'sfragile supply chains and big new data centres to process reamsof consumer information.

While Alibaba sees itself as a catalyst for change, itsplans also lay the groundwork for retail rivals to chip away atits business further down the line. By encouraging retailers tobe more Internet-savvy, and by building the networks todistribute goods nationwide, Alibaba is showing bricks andmortar rivals how to grow online without depending on its sites.

Companies such as GOME Electrical Appliances,Haier Electronics Group Co and Chow Tai Fook JewelleryGroup have branched into e-commerce, riding Alibaba'scoattails and reaping the rewards with their own online stallson Alibaba's websites.

CEO Jonathan Lu says Alibaba expects to nearly triple thevolume of transactions on its marketplaces to about 3 trillionyuan ($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 sprawlingcampus headquarters in Hangzhou, less than an hour's train ridesouthwest of Shanghai, is simple: adapt or die.

"The old companies that aren't willing to transform will bewiped out by competition," said Zeng Ming, Alibaba's chiefstrategy officer. "Most traditional retailers now understand ifthey don't move online, their time is limited."

Analysts predict e-commerce will account for a fifth oftotal retail sales in China within 5 years, up from just 6percent last year.

"The pot is huge and most retail growth, and the fastestgrowth, is going to be in e-commerce," said Boaz Rottenberg,managing director of China-based market researcher MaverickChina. "If you look at all consumer spending, a big chunk isonline. It's disproportionate compared to other countries."

NEXT LEVEL

As China's economy slows from years of double-digit growth,and where government policies have failed, Alibaba aims to levelout an uneven distribution of wealth, where rural villagers havefew opportunities and small businesses struggle to get loans.

Using data to gauge supply and demand, Alibaba plans topinpoint where to invest resources, such as new warehouses, andhow best to shift the goods traded on its online marketplacesTaobao and Tmall - think e-Bay and Amazon.com - which accounted for 3 billion of the 5.69 billion parcelsmoved around China last year.

With its logistics and data firepower, Alibaba aims todeliver products faster and to more people than anyone else. Itis also creating a network of financial services to facilitateonline commerce, through which buyers can pay for theirpurchases, and companies and individuals can take out loans.

"Alibaba is responsible for making the e-commerce market asbig as it is. By building logistics and support systems aroundit, it's a way of transforming the entire retail industry andtaking it to the next level," said Gartner analyst PraveenSengar.

Alibaba, which was founded in 1999 and has grown from asmall business-to-business site, is uniquely positioned to dothis. Jack Ma, the group's billionaire founder and former CEO,has the ear of China's ruling Communist Party, and met PremierLi Keqiang over two days last year to discuss the future ofChinese private enterprise.

Ma's group has fought off foreign rivals to dominate China'se-commerce sector, and now controls over three-quarters of amarket that is forecast to grow at 32 percent a year up to 2015,according to Bain & Co. With less than half the populationonline, there is huge growth potential. Traditional and Internetretailers have struggled to reach China's vast hinterlands whereinfrastructure is poor and Internet penetration is just 28percent.

"We are creating for the first time a truly nationwide,cross-territory single market across China. We are liberatingits consumption power," says Alibaba Vice President Brian Li.

RISKS

Other retailers are alive to the opportunities.

Haier's e-commerce revenue jumped almost six-fold to 633million yuan ($103.4 million), or 2 percent of total revenue, inthe first half of this year, while Suning Commerce Group's e-commerce business doubled to 10.6 billion yuanover the same period. GOME's online revenue now accounts for 5-6percent of its total first half revenue of 27 billion yuan.

"Consumers will start to demand better customer experience,and both market places and branded websites will have to respondto differentiate from the competition," said Andrew Stockwell,vice president of Asia Pacific at Forrester. "Brands, especiallyfor luxury and high-profit margin products, would prefer to havecustomers transact with them on their own websites."

Businesses bypassing Alibaba's services would take more ofthe profits on transactions, own customer data and control theoverall customer experience.

GOME sees Alibaba's plans improving logistics for bothtraditional retailers and e-commerce firms. "The essential thingabout retail is the supply chain. That and logistics networkstake years to build, and we have built them for 20 years," saidHelen Song, a spokesperson. "The pressure on GOME is not frome-commerce, it's from the fact that we didn't do our own thingwell enough."

And Alibaba isn't the only e-commerce company investing inlogistics and data.

JD.com, or Jingdong, holds a near one-fifth share of China'sbusiness-to-consumer market, and its courier services allow itto distribute its high-value products to customers in big citieswithin 24 hours - giving it an edge over Alibaba, which sellsmainly lower-cost items, said Forrester's Bryan Wang.

"(Alibaba's plan) is nice, eye-catching, grand stuff, butJingdong can offer 24-hour delivery for many cities now. Do theyreally need 24-hour delivery to the middle of nowhere?" he said.Instead, Alibaba's efforts may be about much-needed improvementsto customer experience as it comes under pressure from Jingdongand others. "Alibaba is already at its peak," Wang said.

BIG DATA

To expand its own e-commerce business, Alibaba recognises ithas to do more than just e-commerce.

Through its range of products, customers can pay for onlinepurchases and invest their savings in funds through AliPay;businesses can get loans, and companies and local governmentscan store data on Alibaba's cloud computing services. It alsohas an online shopping search engine, a mobile operating system,Internet TV set-top boxes, a digital mapping service, and an 18percent stake in Sina Weibo, China's most popularmicro-blogging service.

The data from these businesses is crucial to Alibaba.

Alibaba has three data centres in China, and in a single daycan process more than 1 petabyte of data - three times what ittakes to store the entire U.S. population's DNA.

"There's great value in pulling together data about users,"says Alibaba's Zeng. "We have a unique understanding of how toleverage the power of technology to really push economictransformation in China."

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