Chinese Retailers Play Poker in Empty Malls as Shoppers Go Online

by Bloomberg News

Hailong Electronics City

(Bloomberg) -- 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 Ltd. 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,” 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.”

Productivity Boost

The shift online could contribute up to 22 percent of the nation’s productivity growth by 2025 and make up 7 percent to 22 percent 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 ($2.2 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 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.”
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.

China Online

JD.Com’s 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 percent of them able to access the Internet via smartphones.
JD.com’s Liu is now worth an estimated $7.3 billion, according to Bloomberg Billionaires.
“U.S. 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.”

More Servers

Alibaba has created 14 million jobs directly and indirectly, Ma said in an interview with Charlie Rose at the World Economic Forum in Davos, Switzerland, last month. Ma is China’s wealthiest man and the world’s 13th richest person with an estimated $35 billion fortune.
Explaining his company’s sales growth versus traditional retailers, Ma said: “If you want to have 10,000 new customers, you have to build a new warehouse, this and that. For me, two servers.” He’s aiming for 2 billion customers around the world.
The industry has made it easier and cheaper for merchants to reach consumers and has supported the development of logistics infrastructure, a Hong Kong-based Alibaba spokeswoman wrote in an email yesterday.
“With an under-developed and fragmented retail sector, more consumers are going online to find what they need and at the same time stimulating consumption in China’s economy,” she wrote.
Premier Li Keqiang is cheering the new economy. On Jan. 4, he pressed the enter key on a keyboard for WeBank, a private bank funded by Tencent Holdings Ltd., granting a 35,000 yuan loan to a local truck driver.

Online Future

Without the cost of bullet-proof glass, uniformed tellers and branch outlets, services such as WeBank’s “may be the future,” said Cao. Ma’s Alibaba also has approval to set up an online lender.
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.
A primary reason for the economy’s slowdown, weakness in the property market, isn’t helped by the move online.
Property developer Dalian Wanda, owned by China’s second-richest man Wang Jianlin, plans to close 10 malls across the country and redesign another 25 to cut retail space, China Business News reported last month. Zong Qinghou, China’s fifth-richest man with a beverage and chain-store conglomerate, said at a forum in August that online shopping businesses are “affecting China’s economic security” by suffocating stores that have to pay rents.

Stores Close

Li Ning Co., a sports-clothing maker, is expected to post losses for the third consecutive year and has closed more than a thousand retail outlets since 2012. Anta Sports Products Ltd., a maker of shoes, has also been shutting down stores partly due to competition from online shopping.
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.
“Online shops are virtual, and if they kill all the real economy, what business can they do? What products can they sell?” Zong said in comments published on the official People’s Daily’s website in August. He said the government should enhance supervision on virtual shops.

Old Vs New

Alibaba has a “credibility crisis” fueled by a failure to crack down on shady merchants, counterfeit goods, bribery and misleading promotions using its online malls, a Chinese government regulator said last week. It later eased away from confrontation, saying the report didn’t have judicial effect and that Ma had met with regulators promising to step up anti-piracy spending.
“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.”