Westerners Look to Alibaba to Ride China's E-Commerce Wave

During the past 20 years, China has developed into one of the world's leading economies, and that growth is predicted to continue. Still, many Western companies have been hesitant to venture into the territory. Alibaba, China's biggest online commerce company, whose recent IPO was valued at $25 billion, the largest in history, is changing that.

"Even though young brands and others have been so focused on [the Chinese market], there are still thousands and thousands of Western companies who don't know anything about the China market domestically or never attempted to try and do business there," says Steve Papermaster, chairman and CEO of the Powershift Group, a venture capital and consultancy firm. "They're just now dipping their toes in the water."

One reason some have kept a distance is the perceived risk in planting physical roots abroad. As illustrated by companies whose overseas efforts have failed, it's hard to predict what will or will not work in China. Investing in real estate and other necessary logistics can result in a huge loss.

But with the rising popularity of e-commerce, more conservative outfits now have the opportunity to test-drive the market without making sizable initial investments. Many have been turning to platforms such as Alibaba's Tmall to do just that. In fact, 2,000 of the 70,000 retailers on Alibaba are foreign brands.

Originally known as Taobao Marketplace, Tmall gives Western companies the option to set up a brand in an aesthetically appealing virtual space, thus establishing a presence in the culture and promoting their products. Companies can sample the market incrementally to see how they fare.

In China, Tmall now controls the e-commerce market and leads competitors such as Amazon and eBay. One reason the company has been successful is that it has done a good job at protecting its users against the counterfeit merchandise that has flooded much of the Chinese online market, analysts say. More customers turn to Alibaba because it is trustworthy and will take action against merchants caught selling these goods. Likewise, Alibaba gives buyers access to instant messaging with retailers, which customers appreciate.

According to Alexa, a site that tracks Web traffic for businesses, as of mid-December, Tmall was the fifth most visited Web site in China and the 19th most visited globally. But China is still lagging in its adoption of e-commerce. The country is just beginning to see a shift toward digital commerce and the market is still wide open. Papermaster points out "for the domestic market in China, e-commerce is still 10 percent or less of the market in general. So the [remaining] 90 percent is up for grabs for anybody—Chinese companies, mom and pops, Western brands, everybody and anybody."

Still, Papermaster suggests that companies shouldn't expect to be entirely free from establishing a physical presence. Though it seems counterintuitive, he expects mobile payment methods to create an increasing demand for traditional stores. With mobile commerce platforms such as Appconomy, customers will benefit from the same rewards and incentives that make online shopping so appealing, while enjoying a more social experience. "Mobile will be just as disruptive to legacy e-commerce as e-commerce was disruptive to traditional retailing prior to that," Papermaster says.

Mobile, he adds, "puts the online experience in the hands of consumers wherever they go."

*****

Those who want to make a dent in China are going to have to figure out how to tackle the emerging economy. "Western companies that want to have access to the markets in China...need to test out ways to go into e-commerce—and maybe that's by getting access through Alibaba or Tmall, or [through establishing a] physical presence…or maybe a hybrid.” Without that, “ [they’re] going to be shut out of the market,” Papermaster says. “ [They’re] not going to be part of the next wave of growth.”