It takes a village: E-commerce treasures PHL can learn from China

China’s economic transformation from a backward giant into a superstar brings with it a key lesson: it does not want any village left behind. This success is replicable, including in the Philippines.

Through mass entrepreneurship in China’s rural villages, underpinned by an enabling environment, China is able to ensure that inclusive growth is permeating across the country. Implementation of mass entrepreneurship is made possible (in part) by Taobao, an e-commerce customer-to-customer (C2C) platform created by Alibaba. Taobao, translated as ‘finding treasures’, sought to encourage young people to return to their rural villages and inspire current villagers to launch their products (and buy other villagers’ products) using the platform. There are many stories documenting this success.

In many parts of the developing world, inclusive growth is also an important development agenda. The Philippines is no different. Further, the country’s development plans recognize the important role of the private sector in inclusive growth, such as in fostering innovation and entrepreneurship. In this light, a ‘Taobao’ implemented based on the Philippine context is an attractive concept to consider.

What exactly is a Taobao?

Taobao is an e-commerce platform meant to connect rural and urban markets. Its value lies in its ability to create flourishing villages. AliResearch defines Taobao village as a cluster of rural villagers who use the e-commerce platform actively to generate an annual e-commerce transaction volume of 10 million RMB (1.5 million USD) or more. Active participation in the platform is measured by having 10 percent or more of village households using Taobao or 100 or more active online shops opened. By end-2017, there are over 2,000 Taobao villages (compared to 1,311 in 2016 and just 20 in 2013). Taobao villagers also support job creation: an additional active Taobao village shop creates 2.8 jobs. In 2016 alone, this translated to over 840,000 job opportunities.

Taobao village expansion is a story of base-of-the-pyramid entrepreneurship, and this can be attributed to learning and network effects. For one, entrepreneurs teach other potential entrepreneurs to launch their business. Some entrepreneurs may produce similar products, while others can create upstream (e.g. as suppliers to apparel entrepreneurs) and downstream businesses (e.g. as shippers of furniture shop owners). The first Taobao village in China (Dongfeng Village in Jiangsu province) started out with a village returnee who established his first low-cost furniture store. This subsequently inspired the creation of other companies owned by other village entrepreneurs.

Opportunities: What is in ‘store’ for the Philippines?

The Department of Trade and Industry (DTI) created programs such as One Town One Product (OTOP), Industry Cluster Enhancement (ICE), as well as other programs supporting growth of micro, small, and medium enterprise (MSME). Both OTOP and ICE aim to stimulate product development in various towns and provinces across the country. Yet, MSMEs in the countryside often remain disconnected to large consumer markets available in cities (e.g., Manila, Cebu). The Taobao platform can serve as a complementary option to achieve the government’s objective.

Filipinos also lament the so-called ‘exodus’ from rural to urban areas (and abroad). Soap operas often narrate the opportunities and challenges of migration, while highlighting the dichotomy between urban and rural areas—the former as having more opportunities and the latter as having less of it. The creation of Taobao villages is likely to re-invigorate towns by enticing graduates back to help their communities develop business opportunities. Further, in line with the challenges of city congestion, mass entrepreneurship in rural areas can put a downward pressure on cities, which face increasing social and environmental costs. At the firm-level, preventing this ‘exodus’ through creation of connected villages can help sustain survival of existing firms and create new firms.

One important assumption of the Taobao model is the availability of demand, from which there is a large-enough market that can buy these rural-based products. Estimates show that Philippine e-commerce jumped 22 percent from 1 billion USD to 1.2 billion USD (about Php 60 billion) in revenues between 2016 and 2017. Google and Singapore’s Temasek estimate the digital potential to be US$200 billion  in Southeast Asia, of which Philippines could garner US$19 billion (about P920 billion) by 2025.

There are cross-border trade opportunities as well. Alibaba’s Taobao collection, for example, is being sold in key Southeast Asian markets including the Philippines (this is done through the Lazada group where Alibaba is its primary investor). In accessing Lazada’s Taobao collection, Filipino online consumers will be familiar with affordable and fashion-forward Korean- and Japanese-style apparels (manufactured by lesser known Chinese brands), and these styles are not exactly found in Western or Philippine brands.

Currently, the largest e-commerce player in the Philippines is Lazada. Lazada captures over 90 percent of the market share in the business-to-consumer (B2C) platform and serves over 550 million consumers across six Southeast Asian markets. Yet, there is no significant market player in the customer-to-customer (C2C) market in the Philippines at the moment. Moreover, existing platforms are more likely to serve city-based entrepreneurs, and this provides an opportunity for e-commerce platforms to capture rural markets.

Challenges: Looking within and beyond the ‘store’

Potential benefits to this model are undermined by challenges, which reduce the incentives of private e-commerce players to invest in rural areas. To fill this gap, the role government plays in creating an enabling environment is all the more crucial.

E-commerce platforms necessitate access to reliable internet and speed. While Philippines’ access to internet is one of the highest in the world (with 67 million internet users, or 63 percent of the population), disparities between rural and urban access provides the rationale for emphasizing rural connectivity improvement in the National Broadband Plan 2017. Further, the country has the slowest average internet speed among Asia-Pacific countries. This hurts the quality of internet usage and undermines e-commerce.

Logistics performance is equally weak. The Philippines ranked lower in all aspects of logistics performance than the East Asia and the Pacific average, such as the areas of quality of trade and transport infrastructure, quality of logistics services, and timeliness of shipments to deliver goods.

The Philippine electronic payment structure is in its infancy, as most Filipino consumers prefer to pay based on cash-on-delivery (COD). Yet, successful e-commerce models around the world rely on secure and reliable e-payment transactions as part of their business models. This is the case for China, Singapore, and Malaysia.

Individual capabilities to use technology (i.e., being technologically-savvy), especially in rural areas, can also be problematic, although communities can use existing infrastructure to enhance firm capabilities. This includes availing government support in being trained how to use e-commerce platforms, engage in product development and marketing, among others.

Finding Taobao’s treasures

The value of Taobao is not merely in its ability to connect demand and supply electronically, but in its ability to make rural villages an important market. Yet, even if a similar e-commerce platform is created in the Philippines but is not able to create entrepreneurial villages as in China’s, the platform itself is valuable. In a world where technology is set to define the future and affect jobs (whether positively or negatively), the ability to embrace technological opportunities is all the more crucial.

E-commerce is not the panacea to inclusive growth. On the one hand, it could reduce the rural-urban gap through enabling channels that increase incomes and create jobs for the rural society. On the other hand, it could just be a platform to raise technological awareness.

Anne Ong Lopez is a graduate of the Harvard Kennedy School and works for the World Bank on entrepreneurship issues. All views and errors are her own.