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China’s Hunt for Growth in the Countryside

China's Hunt for Growth in the Countryside

Alibaba, the e-commerce giant, is turning to the immense interior in search of fresh profits


By Dexter Roberts and Lulu Yilun Chen | August 27, 2015


From Bloomberg Businessweek


Tuguan village in remote Yunnan province feels about as far from the turbulence of modern China as you can get. A one-lane, bumpy dirt road runs through it, past whitewashed farmhouses, most with a painting of flowers and bamboo on the outside wall and traditional sweeping rooftop eaves. Tuguan is home to some 170 families of the Bai ethnic minority, who grow table grapes and tamarinds. During steamy afternoons, most residents loll in the shade or nap in their house to escape the heat.

But on a hot day in June, one spot in Tuguan is bustling. At the local convenience store, a dozen sun-tanned villagers are clustered around a new Lenovo computer and wall-mounted flatscreen Skyworth monitor, checking out the latest online deals on mobile phones, toothpaste, pesticide dispensers, and more, all for sale on Alibaba Group's new rural e-commerce platform.


Zhang Yibin, a lanky, chain-smoking grape farmer with two gold teeth, has bought a fan, a pesticide dispenser, and a 13,600 yuan ($2,122) Zongshen three-wheel motorcycle online in the less than two months since Alibaba opened a Taobao rural service center in town. (Taobao is Alibaba's consumer e-commerce business.) "Online, the price is cheaper, the choice is better, and it is far more convenient," Zhang says, noting he didn't have to make the half-day trip to the dealer to get his three-wheeler, which he uses to move irrigation pipes and haul fertilizer. He says he wants to sell his grapes online "to everyone in China."


China's e-commerce market had revenue of 2.79 trillion yuan in 2014, an increase of 49.7 percent from the previous year. But in the global market rout on Aug. 24, Alibaba's stock fell 3.5 percent in New York, for the first time dropping below its initial public offering price of $68. The company's slowing growth and China's decelerating economy have made investors anxious.

Even with the economic slowdown and stock market collapse, e-commerce sales grew 37.7 percent in the first seven months of 2015. In hopes of keeping up the momentum of online selling, Alibaba and its rivals are starting to look beyond the market of young, well-educated urbanites and head for the countryside, where about half of all Chinese hail from. "The developed cities can't keep delivering double-digit growth rates forever—it is just the law of Mother Nature," says John Choi, head of Greater China Internet research at Daiwa Capital Markets in Hong Kong.


Last October, Alibaba announced plans to invest 10 billion yuan in logistics, hardware, and training to push its e-commerce model into 100,000 villages in the next three to five years. It's opening warehouses and working with delivery companies and local officials.


At the heart of Alibaba's strategy is the Taobao rural service center, where villagers can become comfortable buying goods and paying mobile phone and utility bills online, and pick up items they bought on Taobao. Alibaba provides computers and monitors, ensures timely delivery of purchases, and trains villagers to serve as its representatives in the centers, which are often in convenience stores. "Alibaba has wanted to expand in rural regions for a long time," says Yu Xianghai, senior director of rural e-commerce initiatives at Alibaba. "In this process, we are nurturing the culture and habit of shopping online."

The plan is to start by selling popular items such as washing machines, televisions, and apparel while gradually developing a digital platform for farmers to sell vegetables and fruits to the cities. "We thought, Would it be possible to first sell to them, and so solve the issue of talent and infrastructure? Then when the timing is ripe and the infrastructure is built, we can try to solve the other end of the problem," Yu says.


About three-quarters of Chinese in first-tier cities such as Beijing, Shanghai, Guangzhou, and Chongqing are already online, but in rural areas it's 19 percent, according to a survey by McKinsey Digital, which helps companies shape their digital strategies. Even so, rural Chinese have an affinity for e-commerce. Close to two-thirds of rural Chinese who do use the Internet say they have purchased items online; that compares with 72 percent of users in the cities. "It's not just coastal, first-tier cities where things are happening, as one might expect," says Hong Kong-based Alan Lau, Asia Pacific head at McKinsey Digital.


 Until now, shopping in rural China has been characterized by limited choice, inflated prices, and shoddy quality, says Jiang Hongyu, director of rural development at Alibaba rival JD.com. With historically lower incomes, dispersed populations, and poor logistics, the hinterlands haven't attracted many brick-and-mortar stores.


More Internet-savvy migrant workers are returning home. "We are finding that rural consumers have really high demand for quality products today," Jiang says. JD.com plans to open more than 500 rural service centers by yearend.


The companies' rural forays fit in with government policy. Beijing wants to boost household consumption as a share of gross domestic product from slightly more than one-third today; in the U.S., it's about 70 percent. China's government will "support migrant workers, college graduates, and army veterans who wish to return to their rural hometowns to start new businesses" and "encourage e-commerce in rural areas" the Xinhua News Agency reported on June 10 after a meeting on rural entrepreneurship that Premier Li Keqiang presided over.


"Our farmers have already started to become rich and want to buy products," says Xu Dongzhu, director of the agriculture department for the county where Tuguan is located. Xu has appointed three of his staff to help Alibaba. "Later, farm produce will be sold on the Alibaba platform, and that will help increase the income of farmers, bringing more prosperity to all of us," he says.


The bottom line: Alibaba is spending 10 billion yuan building a network of e-commerce centers in rural China.