Alibaba to Transform China's 'E-conomy'

Alibaba Group's plans to revolutionize China's retail industry, investing US$16 billion in logistics and support by 2020, will open up China'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 IPO, Alibaba and partners such as delivery service firms and life insurers will pump cash into revamping China's fragile supply chains and big new data centers to process reams of consumer information.

While Alibaba 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 by 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 coattails and reaping the rewards with their own online stalls on Alibaba's websites.

CEO Jonathan Lu says Alibaba expects to nearly triple the volume of transactions on its marketplaces to about 3 trillion yuan (US$490 billion) by 2016, overtaking Wal-Mart Stores Inc 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 southwest of Shanghai, is simple: adapt or die.

"The old companies that aren't willing to transform will be wiped out by competition," said 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 5 years, up from just 6 percent last year.

"The pot is huge and most retail growth, and the fastest growth, is going to be in e-commerce," said 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."

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.