China’s urban e-commerce market is nearing saturation after years of explosive growth, a trend leading China’s online retailers to address the untapped markets in rural areas.

Nearly 50% of the country’s 1.36 billion population lives in rural areas; however, less than 30% of rural residents are online and only 10% have bought things online, according to iResearch. AliResearch, the research arm of Alibaba, has estimated that China’s rural e-commerce market will reach RMB180 billion (around US$29 billion) by 2014 and exceed RMB460 billion by 2016.

After its landmark IPO this year, Alibaba has rural e-commerce in its sights, with cross-border online shopping and data analysis the other two of its three strategic focuses. Over the next three to five years, Alibaba expects to invest RMB10 billion (around US$1.6 billion) in constructing infrastructure and logistics systems in rural China. The plan targets the building of 1,000 county-level operation centers, which will provide services for 100,000 villages countrywide.

The number of “Taobao Villages” — clusters of rural online entrepreneurs with shops on Alibaba’s Taobao marketplace — soared from 20 to 211 in 2014, according to AliResearch. The report added that some 70,000 Taobao Village merchants are selling products on the marketplace.

Taobao-JDOutdoor Ads of Taobao and JD in Rural Areas (image credit: CB.COM.CN)

JD, China’s second largest e-commerce retailer by sales, has also targeted this untouched market by creating new services tailored to rural e-commerce and establishing county branches, amongst other actions, to gain more extensive coverage in lower-tier cities and even villages.

Through JDbang (not official name), JD’s e-commerce program integrating outsourcing services for third-party retailers on its site, the company has set up its first county-level franchise store in Hebei province in November last year. These bricks-and-mortars stores are expected to number around 1,000 within the next three years. Cooperation with local merchants is expected to solve the last-mile logistical problem for JD and improve its after-sales service in smaller cities.

JD has also initiated its first pilot program for rural e-commerce in Renshou, Sichuan province. The company aims to provide the same services in rural areas as in cities, by establishing local service centers and improving delivery systems in cooperation with both JDbang partners and traditional commercial enterprises.

JD’s launch of a shopping channel on Mobile QQ is likely to attract more customers, Mobile QQ having a high penetration rate in lower-tier cities.

To promote its services, the company has advertised on more than 8,000 billboards in more than 100 townships across the country since the fourth quarter of last year.

Other Chinese e-commerce giants like Dangdang, Yihaodian and Suning also have their own plans to explore the sector through setting up offline service centers, cooperation with local partners, and more.

The huge market presents new growth opportunities for Chinese e-commerce companies facing increasingly intense competition. But there are still several obstacles to overcome before they can turn a profit from this sector.

Despite the huge population, a majority of the rural residents has never shopped online, and most don’t even have access to the internet. Since young people from rural areas tend to work in cities as migrant workers, current residents in lower-tier cities are mostly elderly or children, who are very difficult to be convert into active online shoppers.

In rural China, most middle-aged villagers with purchasing power use mobile phones instead of computers to get online. Rising smartphone penetration in rural regions is hence a boost for rural e-commerce and m-commerce. On the other hand, these middle-aged users are less avid users of internet and social networking than younger generations, who are accustomed to sharing and finding everything online. In urban markets, expanding from PC to mobile may just need a simple duplication of what’s on the website to smartphones, but it requires far greater customization in rural areas due to the difference in users’ browsing habits.

 

Editing by Mike Cormack (@bucketoftongues)