Last Updated:2014-07-14
By Geoff Raby
Last month, a visiting board of directors from one of Australia’s biggest companies heard directly from those at the vanguard about the achievements and ambitions of China’s fast-developing e-commerce industry – an industry with the potential to reshape corporate China.
What surprised the visitors most, as they heard from representatives from businesses ranging from the giant Alibaba to small start-ups, was not that e-commerce in China had grown so rapidly, nor that some firms had achieved astonishing scale, but rather that the representatives were young, mostly spoke American-accented English, and were robust private entrepreneurs.
The surge in e-commerce in China over the past decade is, like much else in China’s economic development, textbook growth theory. In this case it is catch-up. China as a poor developing country – with per capita incomes around 15 per cent of the United States and having been only trying to reform and open its economy for past 35 years – still lies well inside what economists call the “global production possibility frontier".
This simply means that China can draw down on the global stock of knowledge by adapting existing technologies to its own circumstances without having to invest disproportionately in early stage, slow-yielding, basic research and science.
China is also less encumbered by ageing infrastructure – such as land-line based telephony – and so technologically is less path-dependent than more developed countries. In other words, as in Africa and elsewhere in the developing world, being a relatively late starter has potentially big advantages. Stages of technological and industrial development can be skipped, especially if markets are free enough to give the right price signals. All of this is working together, with a huge and still relatively youthful market, to create the conditions where entrepreneurs can create new industries and, in some cases, build vast fortunes in just a few years.
The explosion of e-tailing
Our visiting directors heard that Tmall last year became China’s No. 1 retailer by turnover valued at nearly $60 billion, almost one-third more in value than China’s second-biggest, largely bricks and mortar retailer, Suning. Walmart, which has been in China for nearly two decades, was eighth with turnover of $12.4 billion.
According to a recent McKinsey Report, electronic retailing (“e-tailing") is expected to reach $410 billion by next year – at least three times greater than in 2013. By 2020, the same report estimates that the total value of e-tailing in China could well equal that of the USA, Japan, Britain, Germany and France combined.
The reasons for the explosive growth in e-tailing and e-commerce more generally are many; but include much more recent experience with the high-street – that is, less tradition and commitment to this way of shopping where customers place a high value on personalised service; the ubiquitous bargain; and the fact that customers can pay cash on delivery and very easily exchange goods.
But in China two factors stand out. One is the deep penetration of smartphones. In the tier-one and two cities (namely the high-income cities, but also big population centres) smartphone penetration now exceeds 50 per cent of the population; and more than 60 per cent of shoppers browse on their mobile phones. It is something of an exaggeration to say China’s urban population has been “born mobile", but it does help to capture the phenomenon of urban China today.
How much things in this space have changed, and how quickly, can be seen from Alibaba’s prospectus for its upcoming NYSE IPO – tipped to be one of the biggest ever. In its prospectus, “mobile" is mentioned 304 times, “online" 264, “internet" 144 and the old-fashioned fixed-place computer just 36 times.
Logistics on the rise
Alibaba advises that this year the firm intends to invest $US3 billion ($3.2 billion) in its mobile businesses. But the mobile business itself is changing – and fast. Alibaba’s vice-chairman, Joe Tsai, argues it is time to move out of the e-commerce “comfort zone" into where the boundaries between e-commerce, communications and social networking all become blurred. One other distinguishing feature of China’s e-commerce world is the highly efficient private logistics firms that have shot up in parallel with the e-commerce boom. Almost unknown five years ago, the streets of the major cities are now overrun with tricycle delivery vans daily bringing hundreds of thousands of packages to customers on the promise of same-day service. It’s not surprising then that one of the biggest personal investments made by Alibaba’s founder, Jack Ma, was in a Chinese logistics firm.
China’s business world is changing almost as fast. Those who are building new businesses are private entrepreneurs. Outside e-commerce, several years ago Lenovo took over IBM’s PC business and is fast building a global food business. The biggest M&A in Australia in 2012 was by Tianqi from Chengdu, a lithium battery manufacturer. And Huawei and ZTE are household names in Australia.
The old state-owned sector is not going anywhere soon but it will increasingly be left to wither on the vine as entrepreneurs who have the business acumen and flexibility capture the commercial opportunities created by new technologies.
Geoff Raby is Chairman and CEO of Geoff Raby & Associates and a former Australian Ambassador to China.
This article first appeared in the Australian Financial Review:
