Online retail sales in the most impoverished areas of China have surged last year by 52% to RMB 120.8 billion with commerce in these areas shaping up to be the next battlefield for Chinese e-commerce giants.
China’s rural areas are home to more than 620 million people or nearly 10% of the world’s population with total online consumption from these areas increasing by 39% in 2017 to RMB 1.245 trillion (USD 180 billion), crossing the RMB 1 trillion mark for the first time. China’s rural residents spent RMB 894 billion in 2016 according to the Ministry of Commerce. Retail sales from rural areas is expected to continue growing by 12% this year, about 1% to 2% higher than that in urban areas.
Rural e-commerce now represents the next frontier for China’s e-commerce giants. However, the question on how to penetrate these areas remain. Efforts by e-commerce giants Alibaba and JD.com to enter the rural market have been faced by roadblocks such as a lack of talents as more young people choose to migrate to larger cities, and the current state of poor logistics services. Logistics costs in rural China can run up to 5 times higher compare to urban areas with many of these areas out of deliverable areas for logistics companies.
In its effort to expand to more rural areas in China, Alibaba has launched the “Rural Taobao” project back in 2014 to bring its high-tech cloud-based logistics services to these areas and to develop what is known as “Taobao Villages”. Alibaba hopes to be able to include more than 1,000 counties and 150,000 villages within the next 3 years.
A “Taobao Village” refers to a cluster of e-tailers who sell their products through Alibaba’s Taobao platform. Such villages aim to bolster the company’s partnerships with these local sellers and bring greater online visibility to these sellers. The annual turnover in one of these villages through e-commerce can hit more than RMB 10 million (USD 1.45 million). The number of “Taobao Villages” reached 2,118 last year across 24 provinces and has contributed to a spike in online retail by 39% in the same year.
Alibaba hopes to bring next-day delivery of merchandise and home installation of large electronic products to rural areas through its “Rural Taobao” project.
Similarly, JD.com is also looking to tap into the country’s rural market with a “blitzkrieg” of convenience stores. JD.com aims to open a million new convenience stores in the country with half of them being based in rural areas.
JD.com is also looking into innovative new technologies to integrate China’s rural community. The company is currently building a network of “drone airports” to bring delivery to rural areas. Drone pilots will work from the company’s rural service centers to guide packages to specific drop-off points. These drones have been said to be able to carry packages weighing as much as 1 ton.
The push by these e-commerce giants into rural markets come at a time when the Chinese government hope to utilize e-commerce as a means of eliminating poverty in these areas. Through e-commerce, business owners in rural China have reached a record of 8.11 million in 2016, creating more than 20 million jobs. This number has since increased to 28 million jobs in rural areas due to e-commerce companies at the end of 2017.
In Wenshan county, southwest of China’s Yunnan province, an average of RMB 8,000 has been generated for each of the 840 families participating in e-commerce, a significant increase considering the average household disposable income per capita in rural areas stands at around RMB 13,400 in 2017. As households have more disposable in rural China, this will in turn help to fuel increased consumption and further drive retail sales in these regions.
To promote further development of e-commerce in these areas, the Chinese government has also implemented some policies to support the growth of this sector.
Firstly, in the construction of infrastructure, the government has introduced the “Broadband China” project to bring full broadband coverage to administrative villages and promote Internet speeds as well as reducing fees. As e-commerce cannot take place without internet access, this move is essential to bringing e-commerce to people living in rural areas and the government has seen success in its efforts.
A report from the Shanghai University of Finance and Economics in June this year showed that 44% of rural families now have computers at home, doubling from less 20% in 2013. 88.4% of surveyed villages have a 4G wireless internet connection with over 92.9% of families owning mobile phones.
Next, the government is also looking to build a cross-regional cold chain logistics system for agricultural products. The proposed logistics system aims to facilitate the formation of a two-way logistics system for the distribution of agriculture products making it easier for such produce the enter China’s major cities. E-commerce in rural areas has traditionally been unbalanced with industrial products typically finding it easier to reach rural areas than agricultural produce to reach cities. The development of new distribution and logistics channels seeks to balance the scales.
The government’s increased focus on building such cold-chain logistics has not gone unnoticed by companies and has drawn investment into its development. China Minsheng Investment Group (CMIG), one of the country’s largest private investment firms is planning to launch a RMB 10 billion fund which will be investing in manufacturing and food processing facilities, cold-chain logistics and e-commerce in rural areas.
However, e-commerce in rural areas still requires time to grow as companies try to shift consumer preferences from brick-and-mortar stores in these areas. As smartphone and internet penetration rates increase in rural china, combined with further development of logistics networks in these areas, such consumer preferences are set to change in the near future.
Rural e-commerce looks on track to transform industrial and supply structures in China’s rural areas bringing it with the yet-to-be unlocked potential of the rural economy.
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