Alibaba to transform China's 'e-conomy'

Next level

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 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 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.

The 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.

"We are creating for the first time a truly nationwide, cross-territory single market across China. We are liberating its 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 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.

"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.

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 Forrester's Bryan Wang.

"(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," Wang said.