Beware the e-commerce bright spot in Chinese economy

Countries around the world are now trying to ensure that their economies continue to function amid the coronavirus, with governments zooming in on e-businesses and the internet economy. At the moment, e-commerce is recovering well, but governments have to watch out for e-commerce's long-term impact on the socioeconomic structure of society.

China's first-quarter GDP performance was announced this month, and the only bright spot was the information industry. Out of 12 industry categories, only the financial and information industries grew by 6% and 13.2% respectively, with e-commerce the standout performer for the information industry.

Zhejiang province, where e-commerce giant Alibaba is located, surprised many by earning 56.9 billion RMB in February and overtaking Guangdong, Jiangsu, and Shanghai to be the top-earning province in China. Notably, Zhejiang was ranked fourth in 2019, taking in only 56% of Guangdong's figure.

The tax breakdown for Zhejiang in February shows that value-added tax and personal income tax went down by 7.6% and 2.9%, while corporate tax grew by 13.6%, mostly from information transmission software and information technology services, which grew by 311.3% and contributed 113.2% of tax growth for the sector. This huge growth in corporate tax was contributed by Alibaba and related e-businesses.

Figures show that after the coronavirus outbreak, online orders on Alibaba's online-offline supermarket concept Hema Fresh jumped 220% year-on-year.

Taobao Live, the livestreaming arm of Alibaba, has also been an economic phenomenon, with a 719% month-on-month increase in new merchants making use of the platform to promote their products in February. The successful sale of a Wuhan-made space rocket on Taobao Live was the talk of the town. Many brick-and-mortar businesses are now staying alive through Taobao online stores alone. At one point, Bestore Co, a snack products manufacturing company headquartered in Wuhan, had about 80% online orders - this proportion was just 15% in previous years.

Many companies that were comparatively conservative in expanding into e-commerce before the outbreak have now gone all in, making long strides in this wave of e-commerce.

The difference between the traditional economy and digital economy is that the former has spillover effects from physical space and limits on client load, and the latter does not.

In terms of physical sales, if a mall is popular, people will come, and nearby stores will also benefit from the crowd. If some products in a mall are popular, similar products on sale around it will also get attention. But in a digital economy, people have specific preferences on which livestreamers to follow, and will disregard the others.

The traditional economy is also limited by physical space - there is a limit to an operator's service area. For instance, a traditional mall can only accommodate 10,000 people and the staff can only handle a few hundred people, while a livestreamer can tell tens of thousands of people about their product.

Given the factors above, a top sales team could leverage online technology to gain unlimited domination of the market. The Matthew effect - where the rich get richer and the poor get poorer - is a clear reality in the current e-commerce sector.

Take popular livestreamers for instance, while there are about 800,000 people trying to make a living out of online sales, Taobao Live saw just over 400 livestreamers with monthly sales of at least one million RMB.

Sales on Taobao Live hit 100 billion RMB in 2018, with two of the most prominent livestreamers Li Jiaqi and Wei Ya attaining sales of 1.3 billion RMB on Singles Day alone, accounting for 1.3% of total annual industry sales.

Furthermore, with improving technology, leading livestreamers such as Wei Ya and Li Jiaqi are getting an increasing market share, because as technology expands the service capabilities of top teams, many middle- and tail-end operators find themselves depleted of market value.

As the retail industry recovers from the coronavirus, governments cannot just look at whether sales figures are recovering. They should also look at whether, as sales figures gradually recover, there is also a general recovery among industry players. If only a handful of top teams are storming forward, social crises such as unemployment will not be eased even as industry figures recover.

Going back to the fundamentals of retail, each technological advancement improves efficiency, which in turn means that some operators will be squeezed out of the industry and into new industries. When industry efficiency improves at the same rate at which some industry players move into new industries, there will be sustainable, long-term social prosperity. If the two speeds do not balance, social crises such as unemployment and a growing rich-poor gap are unavoidable.

Even without the coronavirus, the rise in efficiency due to e-commerce was showing signs of moving too fast. Now, the coronavirus has greatly accelerated its spread. Governments have to keep an eye on such unbalanced recovery, even as they fight the coronavirus.

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