China’s E-Commerce Key to Soft Landing?
- by Geoffrey Garrett
There’s been a lot of bad news out of China these past several weeks. The stock market has been in disarray and the currency has been dropping like a stone. China’s woes are driving down commodities, weighing on Asia and raising the stakes regarding today’s potential U.S. interest rate hike. The devastating Tianjin hazardous materials explosions of Aug. 12, 2015, couldn’t have come at a worse time.
The big question is not whether Chinese growth will fall, but how Chinese growth will fall. Can China execute a “soft landing”? This means transitioning from the 10 percent annual growth rates of the past couple of decades—built on low wages, manufacturing, exports and investment—to a higher quality and more sustainable rate like 5 percent based on middle-class consumption.
Stick the landing, and China and the world will be in a better place for decades to come. A crash landing is scary to contemplate, as the recent China-led global volatility makes clear.
China’s flight path is clearly getting bumpier with growing worries that the apparently all powerful communist government won’t meet its self-appointed 7 percent growth target this year, despite increasingly frantic efforts to make it so. This turbulence is real, and it will likely continue. But we should also be paying attention to what is going right in the Chinese economy in terms of laying the foundation for its domestic, consumption-based future.
E-commerce is bigger and growing more quickly in China than in the U.S. This is also true for smartphone penetration and the sophistication of social media. But all this tech innovation won’t matter unless it is seamlessly integrated with the world of physical stores, supply chains and distribution networks.
China is emerging as the global leader when it comes to fusing technology and retailing, integrating online and offline buying. And this is being driven by private-sector companies relying on Chinese venture capital and private equity, not by state-owned enterprises and government investment.
Two recent acquisitions tell us how the biggest players are thinking about combining online and mobile commerce with physical infrastructure to serve China’s massive and still growing middle class of several hundreds of millions of people.
Several weeks ago, Jack Ma’s Alibaba (roughly and without exaggeration, China’s Amazon+Ebay+Paypal) took a big stake in Suning, a China-wide, brick-and-mortar retailer that has struggled to go online. This follows Wal-Mart’s move in late June to acquire innovative Chinese online retailer Yihaodian. There were two underlying motivations for these two acquisitions by the world’s biggest online (Alibaba) and offline (Wal-Mart) retailers.
First, online retailers like Alibaba know that minimizing inventory while getting goods to customers as soon as possible after they click “buy” is the key to maximizing the benefits of great sales websites and apps.
Second, offline retailers like Wal-Mart know that they must integrate technology into the in-store experience to deliver the services tech-savvy and tech-dependent customers increasingly demand.
Alibaba likes Suning’s great supply and distribution network throughout China. Wal-Mart was impressed with Yihaodian’s smartphone front-end interface.
These two big plays by Alibaba and Wal-Mart show that where online and offline retail are concerned, it is not “either, or” but “both, and.” Using stores as tech-connected showrooms and getting goods into buyers’ hands quickly are at the heart of contemporary Chinese commerce. This concept is essential to the soft landing for the Chinese economy, and it is just as important to Wall Street and Silicon Valley as it is to Beijing.
At Wharton, we are following this story very closely. It will be a big topic of conversation when I talk innovation with Karl Ulrich, our new vice dean for entrepreneurship and innovation and CIBC Endowed Professor, at the Penn Wharton China Center in Beijing next month. And we continue to learn from Wharton alumni like Gang Yu GRW90, who founded Yihaodian, and Jackie Reses W92, who managed Yahoo’s stake in Alibaba.
Editor’s note: The original version of this article appeared on LinkedIn on Aug. 24, 2015.