Online revolution killing retailers in China

Beijing

HUNCHED over the counter of his tiny, gadget-filled stall in Beijing's vast Hailong Electronics City, Wang Ning bemoans a week without a single sale.

"It's dying," says Wang, shaking his head as he looks out at abandoned stores and torn promotional posters in what was once the busiest market in the Zhongguancun district, known as China's silicon valley. "There are more sales staff than customers around here. Everyone buys online now."

The six football-field-sized floors are dotted with shuttered shops, victims of the rise of Internet-based businesses like Jack Ma's Alibaba Group Holding and billionaire Richard Qiangdong Liu's JD.com, which started out in Zhongguancun almost two decades ago.

The online revolution promises to boost productivity and could create 46 million new jobs in China by 2025, many of them higher-skilled, according to a report by New York-based McKinsey & Co in July. The losers will be as many as 31 million traditional roles, the equivalent of the entire employed population in Britain.

While such creative destruction is a global phenomenon, its speed and scale in China is unparalleled, said Cao Lei, director of the China E-Commerce Research Center, a private research agency based in Hangzhou, the hometown of Alibaba.

"The Internet helps improve productivity and efficiency, but it can be quite painful for traditional businesses," Mr Cao said. "Bookstores fail first, then clothing chains, then consumer electronics stores, then air-ticket booking offices, and in the future, bank branches and other traditional services facilities may fail."

The online shift could contribute up to 22 per cent of the nation's productivity growth by 2025 and make up 7 per cent to 22 per cent of the total increase in gross domestic product from 2013 to 2025, McKinsey found. By 2025, that could translate into as much as 14 trillion yuan (S$3.01 trillion) in annual GDP.

That's no consolation for Li Feng, who has a store on the fourth floor of Kemao Electronics City, just across the street from Hailong Electronics mall.

"The market was packed with people when it first opened in 2004," said Mr Li, looking up from the TV drama he was watching, for want of customers. "Business has gone from bad to worse in the last five years. The impact from online sales is huge."

Mr Li has shut down the retail side of his business and now tries to eke out a living providing IT services to existing corporate customers, he said, as fellow shopkeepers played poker in the otherwise empty stall next door.

JD.Com's Mr Liu started renting a booth in Zhongguancun in 1998 with an initial investment of 20,000 yuan. Back then, China had 2.1 million users connected to the web via 747,000 computers, according to China Internet Network Information Center, the government body tasked with managing online resources. By the end of June 2014, the number of users had jumped to 632 million, with 83.4 per cent of them able to access the Internet via smartphones.

JD.com's Mr Liu is now worth an estimated US$7.3 billion, according to Bloomberg Billionaires.

"US traditional retail networks are strong, but Chinese consumers long faced an archaic, inefficient brick-and-mortar network," Josh Gartner, a Beijing-based spokesman for JD.com, said in a Feb 3 phone interview. "Consumers flock to superior service."

Alibaba has created 14 million jobs directly and indirectly, Mr Ma said in an interview with Charlie Rose at the World Economic Forum in Davos, Switzerland, last month. Mr Ma is the world's 13th richest person with an estimated US$35 billion fortune.

The expansion of Internet-related businesses is "where our hope lies," Ma Jiantang, the head of the National Bureau of Statistics, said at a press conference in Beijing on Jan 20 after releasing GDP data that showed the slowest annual expansion since 1990.

At least 300 wholesale markets in Guangzhou are teetering on the edge of survival, especially cloth and garment markets, the Guangzhou Daily reported in December. The biggest of those can house hundreds of outlets and thousands of staff.

"Clashes between the old and new economies" will intensify, said Ouyang Rihui, the deputy dean at the Academy of Internet Economy, a research agency within the Central University of Finance and Economics in Beijing. He said the loss of retailers is just the beginning of the effect of technology on jobs.

"The real challenge for China will be at the front end of production - imagine a day when most manufacturing is automated," said Ouyang, who helped the government draw up plans to develop the Internet economy.

"At the end of the day, the new economy will win." BLOOMBERG