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Ecommerce Taobao Villages – Impacts and Ways to Replicate

Updated: Jan 11, 2021

In rural China, online purchases are growing three times faster than in urban areas. The growth of ecommerce has in rigorous studies been found to raise consumer welfare in rural China, mostly due to rural netizens’ increased access to the wider variety of products available to their urban peers. But rural Chinese not only shop online; they increasingly sell online as well. Ecommerce sales from rural China have been booming in recent years. In a particularly exciting development, China has birthed multiple Taobao Villages, rural villages bustling with MSME ecommerce sellers that sell their products largely on Alibaba Group’s Taobao platform.

A “Taobao Village” has 100 or more online shops operated by locals and generate $1.5 million or more in annual online sales. According to Aliresearch, as of August 2019, there were 4,310 Taobao Villages across 25 Chinese provinces with altogether 660,000 Taobao shops, nearly ten-fold growth from 2014 levels. The shops have initially focused on the comparative advantages of their villages, such as agricultural products, traditional crafts, or manufactured goods obtained from nearby wholesale markets.

Most Taobao Village shops are very small: two-thirds are run by an individuals without employees and a third have fewer than five employees. While they compete against each other, they also work together and subcontract each other. The employees of these MSMEs are the very same consumers that are driving ecommerce purchases in China’s rural areas – they use their revenue to shop online. The shops have also spurred the rise of a vibrant ecosystem of ecommerce service providers such as IT services, graphic designers, photographers, express delivery services, warehousing, and so on.

The total sales generated by Taobao Villages – and Taobao Towns, which are larger-scale rural townships that deploy the same Taobao Village model – amounted to $100 billion during the year ending in June 2019. Taobao shops have created new jobs for people who might otherwise have left to urban areas and factories to work, and helped reduce income inequality, including among rural and urban areas. Taobao Villages have also created job opportunities for women – about a third of the Taobao shop owners and almost half of the employees are women. According to estimates, almost 7 million jobs were created in the 12 months prior to June 2019 in the Taobao Village ecommerce value chain.

The opportunities to build and work in ecommerce have also stemmed outmigration from rural areas in the agricultural sector. Econometric work shows that individuals that are in agricultural Taobao villages are 26 percent less likely to migrate than individuals from non-agricultural Taobao Villages, controlling for various factors that are likely to influence the migration decision such as demographic characteristics, migration experience, educational background, and health status.

Taobao Villages have quickly become an exciting model for governments in other developing nations. Visitors from Rwanda, Mexico, Malaysia and other countries join the annual Taobao Village Summit, where rural entrepreneurs and scholars in China share best practices for rural ecommerce businesses.

Economists have uncovered certain key ingredients that go into building a Taobao Village. One essential factor is infrastructure and capabilities furnished by the Chinese government – good Internet connectivity, logistics networks, and capital and talent. For example, Dongfeng Village of Shajia County in Jiangsu Province and Junpu Village of Xiyang County in Guangdong Province reportedly became Taobao Villages thanks to the national government’s support of basic infrastructure, ecommerce industrial parks and service centers, low-interests loans, tax concessions, connections to talent in universities, and urban planning that was geared to enabling ecommerce. The national government’s support is part of its broader rural development strategy: China’s 2018-22 rural development strategy pledges to improve rural incomes and living standards, as well as of other government initiatives such as subsidized rural manufacturing and rural drone development. The Chinese Communist Party has actively promoted ecommerce as a means to end poverty, and pushed local governments to cultivate Taobao shops.

Alibaba’s role has been very important as well, as a provider of ecommerce training, IT hardware, and broader services to rural villages – which the company has made as an investment in capturing the bulk of the rural ecommerce market. For example, in 2014, Taobao announced it would establish 1,000 county-level and 100,000 village-level service centers that provide connectivity, logistics, and business services to both buy and sell online, along with educational, medical, travel, ecommerce training, and social services.

At the same time, there are hundreds of thousands of villages in rural China – yet only a small set of them have become Taobao Villages. What has made this subset of villages succeed?

Econometric work by Jiaqi Qi across over 1,600 counties in two major provinces suggest that education levels – specifically the share of high school graduates in a county and availability of computer, communication and other skills in the county – are associated with the rise of Taobao Villages. In addition, counties that have more firms and factories are likelier to have more Taobao shops, as are counties that have a certain ecosystem of services that online sellers need such as advertising, shipping, and website development. Tax base also seems to play a role: in counties with a strong local tax base, the government is able to invest in transportation infrastructure. Meanwhile, government support for industries and businesses that are not engaged in ecommerce, such as state-owned enterprises, reduces the odds of Taobao shop formation.

Taobao shops also share common features. For one, they tend to be led by relatively young entrepreneurs with above-average education levels. Many are migrants returning from larger cities where they firsthand witnessed China’s online shopping boom. Taobao shop owners are savvy about ecommerce and leverage the Taobao platform frequented by millions of consumers as a marketing and market research tool. For example, some Taobao shop owners have gained a great deal of traction livestreaming to urban audiences “programs” about fresh and high-quality local food products. One village excelling in apple production used celebrities to streamline their apples to 300,000 viewers and as a result sold 35,000 kilograms of apples produced by 700 poor households. Taobao sellers are also using Taobao to access insights about shoppers’ interests. For example, small firms in Chaoyang Nanshi Village that produce Tang dynasty-style tricolor pottery learned via Taobao that shoppers are looking for rear-mirror pottery charms for their cars.

Granted, Taobao shops also face many challenges, much like any aspiring ecommerce seller around the world. Their main constraints include high costs of online advertisement; stiff competition, including from shops in the same village; and lack of skills to use digital channels. They also do not have many funding sources: most shops were founded with funds borrowed from family, friends, and relatives.

Household incomes in Taobao Villages are almost three times higher than incomes of average rural households in China, and approximate average incomes in urban areas. While Taobao Villages are probably wealthier to begin with, econometric evidence also shows that Taobao Villages have had similar impacts as fiscal expenditures by local governments: they raise rural incomes and help close the rural-urban income gap.

There is still much more potential in the rural areas of the Western part of China, both in online consumption and sales. While the rural areas of the country make up over 40 percent of citizens, they make up fewer than 30 percent of internet users in China. These areas tend to be populated by an older demographic than in the cities; Alibaba has recently introduced a Taobao shopping app specifically to those over 50. Another ecommerce giant JD announced plans to build drone airports across the country, to serve rural areas.

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