China’s Economic Petri Dish: Why Alibaba Will Revolutionize “New Retail” and Become the World’s 5th Largest Economy by 2036


If you are Amazon, a major brick and mortar retailer or retail focused real estate developer, this post is your wake up call.  In 2012 Jack Ma, founder of Alibaba made an aggressive $16 million (100 million RMB) wager on the future of Chinese retail with Wang Jianlin, head of Dalian Wanda Group, a leading privately-held conglomerate (major retail developer) based in China.

Ma has consistently argued that brick and mortar businesses would be replaced by online shopping.  On the other end, Jianlin argues that physical retail stores will never become obsolete and will instead see the industry settle on a “win-win” somewhere in the between the two extremes.  The bet itself is of little significance compared to the transition we are seeing in the retail industry, globally.  While I agree with Jianlin, that physical stores will be a prerequisite for a successful retail platform, the traditional retailers of the world are behind the 8-ball when it comes to adapting, anticipating and creating economies compared to major online retailers like Alibaba, Baidu, Tencent, and Amazon.  Even Alibaba has begun incorporating brick and mortar sites to support omnichannel capability.

This post will outline why traditional retailers are in danger of losing major ground to eCommerce and omnichannel platforms focused on creating a “New Retail” experience on a “unichannel” platform that connects online and offline retail.

“The impact of online-to-offline (the O2O) revolution is being highly underestimated and stands to take legacy retailers almost completely by surprise.” – Fortune Magazine

The term “New Retail” was coined by Jack Ma in 2016, or in his words “the integration of online, offline, logistics and data across a single value chain.” In the last few years Alibaba has seen unprecedented growth and massive scaling initiatives across consumer verticals, including a $2.6 billion acquisition of a major department store chain and a strategic alliance with state-owned supermarket, The Bailian Group, based in Shanghai.  The Bailian Group has an enormous amount of unused retail space that Alibaba intends to use in its “unichannel” strategy.

Alibaba plans to invest $15 billion in technology infrastructure throughout China over the next decade to make technology more accessible to those citizens living in rural and developing areas.   By 2036 Alibaba expects to be servicing 2 billion consumers (1/3 of the world’s population), support 10 million small businesses, and create 100 million jobs which would place Alibaba #5 in the world’s top economies.  By investing in tier 2 and tier 3 cities throughout China, Alibaba seems to be using these markets as a proving ground for future international expansion.  Here is a link to see an illustration of their strategy.

What is so special about Alibaba/Competitive Advantages:

China’s One Belt One Road Initiative (OBOR)  – In an effort to collaborate with other Eurasian countries and grow regional economies, subsequently strengthening China’s position in the global economy, China has taken a different approach than what we’ve seen from western world trade organizations in the past.  People have likened the OBOR to a slow and steady beat versus the typical “sledgehammer” economic imperialism techniques used by the west.

Heavy capital reserves – $20.86 Billion in cash reserves according to Marketwatch.

Government protections create a captive market – The Chinese government has made it incredibly difficult for US companies to compete effectively in the Chinese market.  Additionally, China’s government used Alibaba’s Tmall and Taobao to complete billions of dollars in transactions between government agencies in Alibaba’s early days which has allowed them to capitalize on a huge market where there are very few competitors like Baidu.

Deep consumer database – Other retailers do not have the deep level of consumer data Alibaba, Tencent and some of the other omnichannel retailers have gathered.  Brinck and mortar retailers are at a major disadvantage when it comes to creating or developing new customer experiences.

What does all this mean?

Basically, China has (intentionally or by accident) created a Petri dish of markets for major Chinese-based companies like Alibaba to leverage the captive Chinese market and use it as a Petri dish (springboard) for testing integration, growth and scaling initiatives within social media, search engine, online and offline platforms.  This unique atmosphere and captive market of Chinese citizens also allows for faster and more seamless development across multiple verticals.  As Alibaba continues to grow over the next decade, I expect international growth is merely a matter of time.  Another reason for Amazon to be scared.

Please keep the conversation going.  I want to hear what you think!


Resources:

  1. http://www.scmp.com/business/companies/article/2097691/alibaba-aims-become-fifth-largest-economy-2036
  2. http://www.thedrum.com/news/2017/10/17/jack-ma-outlines-new-strategy-develop-alibaba-economy
  3. http://www.alizila.com/understanding-the-alibaba-economy/
  4. https://www.investopedia.com/news/alibaba-aims-become-worlds-fifth-largest-economy-2036-baba/
  5. http://www.alibabagroup.com/en/ir/pdf/170608/StrategicPerspectiveontheAlibabaEconomy.pdf
  6. https://www.theatlantic.com/international/archive/2013/01/a-16-million-bet-on-the-future-of-chinese-retail/266883/
  7. http://fortune.com/2017/06/26/china-alibaba-jack-ma-retail-ecommerce-e-commerce-new/
  8. https://www.forbes.com/sites/jaysomaney/2015/10/18/chinese-government-has-a-huge-stake-in-alibaba/#151ce38025b8
  9. https://www.marketwatch.com/investing/stock/baba/financials/balance-sheet
  10. http://theduran.com/alibaba-founder-jack-ma-highlights-how-one-belt-one-road-differs-from-western-trade-schemes/