Alibaba Group Holding Ltd (NYSE:BABA) has been investing aggressively in its Chinese backyard, and it has the right reasons for doing so despite economic slowdown in the Asian nation.
Alibaba is Optimistic
The e-commerce giant’s research division, AliResearch, has co-authored a report titled ‘The New China Playbook’ with the Boston Consulting Group (BCG) that provides an insight of the Chinese consumer economy.
Alibaba is optimistic that China’s consumer economy will continue registering growth, mostly powered by mobile e-commerce.
The report reveals that even if economic growth rate slows down to 5.5 percent, a full point less than the official 6.5 percent target, the world’s second largest economy will register at least 50 percent growth in consumption to $6.5tn in 2020, up from $4.2tn last year.
Growth is expected to be driven mostly by e-commerce as China transforms its economy from an export-driven one to one powered by domestic consumption. This transition will be speeded up by the use of mobile devices for shopping online.
In terms of proportion, e-commerce is expected to contribute 42 percent of the growth in consumption in the five years to 2020.
“One of the most revolutionary changes in the Chinese consumer economy has been the astounding growth of e-commerce,” notes BCG in the report.
Whilst in 2010, e-commerce accounted for 3 percent of total household consumption in China, this figure has shot up to 15 percent. It is expected to grow to 24 percent over the next five years.
This is remarkable considering that e-commerce accounts for 7.5 percent of U.S. private consumption.
Alibaba and BCG have pinpointed three key “megatrends” that are expected to drive up consumption despite slowdown in economic growth. The first one is growth in disposable income, which is expected to fuel further spending, especially in new areas that previously registered zero or minimal sales.
The population of Chinese upper middle class, which lumps individuals with annual disposable income range of $24,000 to $46,000, is expected to surge to 100 million households in 2020. Consumption of this demographic segment has been ballooning at 17 percent annually, much faster than 5 percent for the emerging middle-class and middle-class segment.
Growing Youth Demographic
The second aspect is the growing influence of China’s youth demographic, which demands more sophisticated goods. This group is composed of individuals aged less than 35 years. It is mainly attractive due to the fact that they tend to outspend their older counterparts and tend to form emotional attachment with brands.
Finally, there is an industry-wide shift from brick-and-mortar store model to e-commerce that will see online retail contribute more to the Chinese economy.
If you want to invest in Alibaba for the long-term, this is no doubt good news. Moreover, the report shows that the $2.3tn increment in Chinese annual private spending over the next five years is almost akin to injecting a consumer market the size of Japan’s into the world’s economy.