Alibaba to transform China's 'e-conomy' with $500 bln marketplace

By Paul Carsten

HANGZHOU, China (Reuters) - Alibaba Group's plans to revolutionise China's retail industry, investing $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 $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 centres 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 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."

GRAPHIC: China online retail http://r.reuters.com/dan73v

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.

Alibaba, which was founded in 1999 and has grown from a small business-to-business site, is uniquely positioned to do this. Jack Ma, the group's billionaire founder and former CEO, has the ear of China's ruling Communist Party, and met Premier Li Keqiang over two days last year to discuss the future of Chinese private enterprise.

Ma's group has fought off foreign rivals to dominate China's e-commerce sector, and now controls over three-quarters of a market that is forecast to grow at 32 percent a year up to 2015, according to Bain & Co. With less than half the population online, there is huge growth potential. Traditional and Internet retailers have struggled to reach China's vast hinterlands where infrastructure is poor and Internet penetration is just 28 percent.

"We are creating for the first time a truly nationwide, cross-territory single market across China. We are liberating its consumption power," says Alibaba Vice President Brian Li.

RISKS

Other retailers are alive to the opportunities.

Haier's e-commerce revenue jumped almost six-fold to 633 million yuan, or 2 percent of total revenue, in the first half of this year, while Suning Commerce Group's e-commerce business doubled to 10.6 billion yuan over the same period. GOME's online revenue now accounts for 5-6 percent of its total first half revenue of 27 billion yuan.

"Consumers will start to demand better customer experience, and both market places and branded websites will have to respond to differentiate from the competition," said Andrew Stockwell, vice president of Asia Pacific at Forrester. "Brands, especially for luxury and high-profit margin products, would prefer to have customers transact with them on their own websites."

Businesses bypassing Alibaba's services would take more of the profits on transactions, own customer data and control the overall customer experience.

GOME sees Alibaba's plans improving logistics for both traditional retailers and e-commerce firms. "The essential thing about retail is the supply chain. That and logistics networks take years to build, and we have built them for 20 years," said Helen Song, a spokesperson. "The pressure on GOME is not from e-commerce, it's from the fact that we didn't do our own thing well enough."

And Alibaba isn't the only e-commerce company investing in logistics and data.

JD.com, or Jingdong, holds a near one-fifth share of China's business-to-consumer market, and its courier services allow it to distribute its high-value products to customers in big cities within 24 hours - giving it an edge over Alibaba, which sells mainly lower-cost items, said Forrester's Bryan Wang.

"(Alibaba's plan) is nice, eye-catching, grand stuff, but Jingdong can offer 24-hour delivery for many cities now. Do they really need 24-hour delivery to the middle of nowhere?" he said. Instead, Alibaba's efforts may be about much-needed improvements to customer experience as it comes under pressure from Jingdong and others. "Alibaba is already at its peak," Wang said.

BIG DATA

To expand its own e-commerce business, Alibaba recognises it has to do more than just e-commerce.

Through its range of products, customers can pay for online purchases and invest their savings in funds through AliPay; businesses can get loans, and companies and local governments can store data on Alibaba's cloud computing services. It also has an online shopping search engine, a mobile operating system, Internet TV set-top boxes, a digital mapping service, and an 18 percent stake in Sina Weibo, China's most popular micro-blogging service.

The data from these businesses is crucial to Alibaba.

Alibaba has three data centres in China, and in a single day can process more than 1 petabyte of data - three times what it takes to store the entire U.S. population's DNA.

"There's great value in pulling together data about users," says Alibaba's Zeng. "We have a unique understanding of how to leverage the power of technology to really push economic transformation in China."

(Additional reporting by Beijing Newsroom; Editing by Ian Geoghegan)

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China's Q3 GDP growth fastest this year, but outlook dim

By Aileen Wang and Kevin Yao

BEIJING (Reuters) - China's economy grew at its quickest pace this year between July and September in a rebound fuelled largely by investment, although signs are already emerging that the pick up in activity may lose some vigour.

Gross domestic product in the world's second-biggest economy rose 7.8 percent from a year earlier, official data showed, marking only the second quarter in the last 10 in which growth has accelerated.

An unexpected fall in exports in September, and easing growth in factory output and retail sales suggested the economy was already slowing down at the end of the quarter.

Authorities are also expected to cool credit growth as inflation pushes to a seven-month high, another factor analysts say will drag on economic activity.

"The growth peak was behind us in the third quarter," said Ting Lu, an economist at Bank of America-Merrill Lynch. "We believe the People's Bank of China will slightly shift its monetary policy from a moderate expansion in the third quarter to a neutral stance."

After three decades of double-digit growth heavily reliant on exports and investment, China is trying to shift or "restructure" the economic mix so that activity is geared much more to consumption, as it is in more developed countries.

But the latest figures show investment accounted for over half of the expansion so far this year, underlining the challenge Beijing faces to restructure the economy, which it hopes will provide for more sustainable growth in the future.

Reducing reliance on China's traditional growth drivers is expected to crimp the economy, although sluggish global demand has provided an added drag.

In the first nine months of the year, the $8.5 trillion economy grew 7.7 percent from a year earlier, putting it on track to achieve Beijing's 2013 growth target of 7.5 percent, which would still be China's worst performance in 23 years.

The surprise fall in exports came after emerging market demand wilted as choppy financial markets sapped confidence, a trend the government said this week is likely to continue.

The impasse in the U.S. Congress over the government's debt ceiling could be replayed before a new February 7 deadline, shaking confidence once more.

And with the yuan hitting a record high on Friday for the fifth consecutive day, Chinese exporters face the hurdle of a rising currency eroding their competitiveness.

"The economy is facing a complex and uncertain domestic and international environment," Sheng Laiyun, a spokesman for the National Bureau of Statistics told a briefing.

"In addition, we have accumulated chronic structural imbalance problems in our economy and need to deepen reforms."

REBALANCING?

The data shows China is a long way from having consumption as the main driver of its economic growth.

Consumption accounted for 46 percent of growth in the first nine months, compared with 56 percent taken up by investment. Exports, on the other hand, subtracted 1.7 percent from growth.

The government has sped up projects in infrastructure to support growth, although it has stayed away from more aggressive measures to avoid undermining its efforts to steer the economy in another direction.

Overall investment in infrastructure expanded at a red-hot pace of 29 percent between January and September, the second-fastest area of investment growth after agriculture.

Nie Wen, an analyst at Hwabao Trust in Shanghai, estimated government-backed investment could have accounted for around 25 percent of the total in the first three quarters of the year, Usually, it is 15-20 percent, Nie said.

Investment in the property sector, where prices are at record highs despite measures to calm the market, were also especially buoyant, with the housing industry accounting for 16 percent of the economic activity in the first nine months. That is up from 15 percent in the first six months.

Overall investment rose in the first nine months by 20.2 percent from a year earlier, compared with expectations for a 20.3 percent gain.

CONTROL LOAN GROWTH

The figures suggesting the economy lost steam towards the end of the third quarter mirror a fall in power consumption growth, one of the barometers of economic health favoured by China's Premier Li Keqiang.

Factory output in September climbed 10.2 percent from a year earlier, slightly above expectations of 10.1 percent but weaker than August's annual pace of 10.4 percent.

Retail sales rose 13.3 percent from a year ago, slightly missing forecasts for a 13.5 percent rise and down from August's 13.4 percent gain, despite a seasonal spike in car purchases.

To underpin the economy, most analysts believe China will keep interest rates unchanged in the next year-and-a-half.

But with inflation hitting a seven-month high in September of 3.1 percent at a time when the central bank has voiced concerns about a brisk expansion in credit, points to some policy tweaks.

Chinese banks lent more than expected in September, data showed last week, taking total loans issued for the year to 7.3 trillion yuan, a level that could easily breach last year's 8.2 trillion yuan.

Lu from Bank of America-Merrill Lynch said the government could take steps to crimp rapid credit expansion and avoid expanding its "mini stimulus", which has so far included accelerating infrastructure investment.

"This could be as good as it gets," said Mark Williams from Capital Economics in London. "We continue to expect gross domestic product growth to slow next year to around 7 percent."

(Additional reporting by Shao Xiaoyi and Natelie Thomas; Writing by Koh Gui Qing; Editing by Neil Fullick)

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