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Alibaba’s S$600b marketplace set to expand China’s e-conomy

HANGZHOU — The Alibaba Group’s plans to revolutionise China’s retail industry, investing US$16 billion (S$20 billion) in logistics and support by 2020, will open up the country’s vast interior and bring access to hundreds of millions of potential new customers.

Alibaba’s monitoring room, located at its headquarters in Hangzhou province, contains a cloud computing system that tracks in real time all the business activity across the group’s major platforms, including Alibaba, Taobao and Alipay. Photo: Bloomberg

Alibaba’s monitoring room, located at its headquarters in Hangzhou province, contains a cloud computing system that tracks in real time all the business activity across the group’s major platforms, including Alibaba, Taobao and Alipay. Photo: Bloomberg

HANGZHOU — The Alibaba Group’s plans to revolutionise China’s retail industry, investing US$16 billion (S$20 billion) in logistics and support by 2020, will open up the country’s vast interior and bring access to hundreds of millions of potential new customers.

With an extra US$15 billion or so in its pocket from a likely initial public offering, Alibaba and partners such as delivery service firms and life insurers will pump cash into revamping fragile supply chains and big new data centres to process reams of consumer information.

While the company 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 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 coat-tails and reaping the rewards with their own online stalls on its websites.

Chief Executive Officer Jonathan Lu says Alibaba expects to nearly triple the volume of transactions on its marketplaces to about three trillion yuan (S$600 billion) by 2016, overtaking Wal-Mart Stores 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 south-west of Shanghai, is simple: Adapt or die.

“The old companies that aren’t willing to transform will be wiped out by competition,” said Mr Zeng Ming, Alibaba’s Chief Strategy Officer. “Most traditional retailers now understand if they don’t move online, their time is limited.”

Analysts predict e-commerce will account for a fifth of total retail sales in China within five years, up from only 6 per cent last year.

“The pot is huge and most retail growth, and the fastest growth, is going to be in e-commerce,” said Mr Boaz Rottenberg, Managing Director of China-based market researcher Maverick China. “If you look at all consumer spending, a big chunk is online. It’s disproportionate compared to other countries.”

As the country’s economy slows from years of double-digit growth and in places where government policies have failed, Alibaba aims to level out uneven distribution of wealth, with rural villagers having few opportunities and small businesses struggling to get loans.

Using data to gauge supply and demand, it 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 three 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 financial 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 Mr Praveen Sengar, a Singapore-based analyst at research firm Gartner.

Alibaba, which was founded in 1999 and has grown from a small business-to-business site, is uniquely positioned to do this.

Mr Jack Ma, the group’s billionaire founder and former CEO, has the ear of the ruling Communist Party and met Premier Li Keqiang over two days last year to discuss the future of Chinese private enterprise.

His group has fought off foreign rivals to dominate the country’s e-commerce sector and now controls over three-quarters of a market that is forecast to grow at 32 per cent 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 the vast hinterlands, where infrastructure is poor and Internet penetration is only 28 per cent.

“We are creating for the first time a truly nationwide, cross-territory single market across China. We are liberating its consumption power,” says Mr Brian Li, Alibaba’s Vice-President.

Other retailers are alive to these opportunities.

Haier’s e-commerce revenue jumped almost six-fold to 633 million yuan, or 2 per cent 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.

And Alibaba is not the only e-commerce company investing in logistics and data.

JD.com, or Jingdong, holds a near one-fifth share of China’s business-to-consumer market and its courier services allow it to distribute its high-value products to customers in big cities within 24 hours — giving it an edge over Alibaba, which sells mainly lower-cost items, said Mr Bryan Wang of US research firm Forrester.

“(Alibaba’s plan) is nice, eye-catching, grand stuff, but Jingdong can offer 24-hour delivery for many cities now. Do they really need 24-hour delivery to the middle of nowhere?” he said.

Instead, Alibaba’s efforts may be about much-needed improvements to customer experience as it comes under pressure from Jingdong and others. “Alibaba is already at its peak,” Mr Wang said. REUTERS

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