Why Alibaba is storming rural China

When Mao was leading a Communist insurrection against the Nationalist Chinese government in the 1920s and 30s, his basic strategy was to use the country's vast countryside and hinterland to encircle the cities. His guerrilla tactics worked effectively and he won the civil war.

Now it seems many of China's corporate titans are taking a leaf or two out of Mao's strategy book. Huawei, a Chinese telecommunication is a good example. The company marketed its cheap gear in rural and regional areas before it broke into urban markets dominated by foreign competitors.

Now the latest corporate giant to adopt this Maoist strategy is the red-hot Alibaba, which made IPO history last month with its spectacular $25 billion listing on the New York Stock Exchange. The company has announced its ambition to move aggressively into the country's rural market.

Alibaba's chief operating officer Zhang Yong sets out Alibaba's grand ambition with a set of impressive figures. The e-commerce giant is eyeing China's large one billion rural population and intends to spend 10 billion yuan or $AU1.9 billion within the next three to five years to build 1000 county-level operating centres and 100,000 rural services stations.

Alibaba will start the rural expansion project at Zhejiang province; a prosperous eastern region where Alibaba's headquarters is based.  The provincial government has agreed to make developing e-commerce in the region one of its top priorities.  The next province on the radar is Guangdong province, the export powerhouse of the country, according to Caixin, a respected Chinese business publication.

Alibaba's research shows that e-commerce is growing fast in China. The company estimates the size of the rural market could be 180 billion yuan in 2014, almost tripling it to 460 billion yuan in 2016. Rural consumption accounts for almost 10 per cent of Alibaba's online sales.

The research also shows China's countryside has an extremely high mobile internet penetration rate. At 84.6 per cent, it is 5 per cent higher than urban residents. In addition, 84.41 per cent of rural residents like to shop online and spend 500 to 2,000 yuan on average every year. The most internet savvy demographic group is the age cohort 20 to 29.

Alibaba, armed with its vast financial war chest, regards its rural expansion strategy as one of its top three priorities alongside international expansion and Aliyun, its cloud-based computing service.  The company's chief operating officer says the key to its rural expansion strategy is to build basic infrastructure in the countryside and encourage more and more rural residents not only to buy goods online but also to sell their fresh produce.

Apart from expanding Alibaba's e-commerce platform in rural China, the company is also pushing its micro and small financial services arm, which has just been rebranded as Ant Financials, into the countryside at the same time.

Alibaba has lofty ambitions to break into the country's state-dominated banking and financial services sector through its superior cloud-based computing technology as well as its control over a vast databank of customer information and transaction data gleaned from its hugely popular e-commerce platforms.

Jack Ma sees the countryside as the beachhead for the company to break into the state-controlled financial services and banking industry. Alibaba wants to make its Alipay e-payment system available to thousands of rural credit unions and cooperatives, hoping to turn the Alipay system into the preferred platform for rural residents to make transactions on and manage their wealth.

Ant Financials hopes to develop 100 million rural Alipay users within the next two to three years, according to Caixin.

Alibaba and Huawei's strategies have clearly shown the importance of the rural market in accessing the country's increasingly crowded and competitive consumer market.  As Beijing spends more resources to develop the country's backward countryside and hinterland areas, it is most likely to be the new growth area in the future.