China’s No.1 Central Document refers to the first policy document issued by China’s State Council, which normally indicates the focus of government in the following year. The No.1 Central Document normally stresses the agricultural industry, but this year, it’ll also be relevant for China’s tech industry.
According to Economic Information Daily, a Chinese economic media outlet owned by China’s Xinhua News Agency, in the document to be released this month, e-commerce for agriculture will be the key focus.
Apart from that, Chinese Premier Li Keqiang proposed RMB 140 billion (USD 21.3 billion) in IT infrastructure investment for the Chinese countryside, bringing broadband to 98% of China’s countryside in the next five years.
China’s countryside has been long neglected by Chinese tech companies due to the fact that internet penetration in these areas is especially low. But as the urban market enters a plateau of development, tech companies have begun to switch to the 49% of the Chinese population who live in less digitized areas. Emerging to be a new focus in China’s policy in 2016, agriculture tech, or agtech, and other tech sectors related to agriculture may see great opportunities and massive investment in the coming months.
1. Expansion of agricultural e-commerce
The focus of agricultural e-commerce is on the supply side rather than the demand side. The primary goal for Chinese agricultural e-commerce policies is to increase farmer income and upgrade the agricultural industry. To integrate agriculture with e-commerce is to connect farmers directly to the external market and increase their risk resistance capacity by diversifying their sales channels.
Leading companies also see opportunities in the underdeveloped market. Chinese e-commerce giant Alibaba has been working on developing Taobao countryside stations since 2014. Taobao Nongcun, which means Taobao countryside in Chinese, is a business joint developed by Alibaba. It has built offline service stations in the Chinese countryside to offer assistance to less tech savvy farmers who wish to use e-commerce platforms for both buying and selling.
These stations are a part of Alibaba’s 2014 countryside strategic plan, which seems to have had a significant impact. The number of Taobao Villages — which refers to villages that generate over RMB 10 million (USD 1.5 million) a year and have over 100 active e-commerce stores — increased from 20 in 2013 to 212 by the end of 2014. To continue boosting this number, Alibaba plans to invest RMB 10 billion (USD 1.56 billion) over the next three to five years to build over 100,000 countryside service stations.
Apart from the focus on e-commerce companies, government support will play an even more significant role in the field. E-commerce for agriculture has been included in many local government’s five-year plans. Sichuan Province, a province in southwest China for instance, aims at generating RMB 100 billion (USD 15.4 billion) GMV in agriculture in total through to 2017 with an annual growth rate above 30%.
On the consumption side, China is seeing developing purchasing power from the less developed countryside area. During the Singles Day sales of 2015, Taobao’s countryside branch generated tens of millions of RMB in revenue in just eight minutes, indicating strong consumption potential across the region. Items purchased in one particular village during the sales included a Porsche Macan and hundreds of tons of fertilizer.
Young returning migrant workers are essential to the development of e-commerce in the countryside. In the past few years, as the manufacturing industry in China has begun to relocate to South East Asia area, where labor is cheaper, Chinese migrant workers have presented a home-coming trend. At the same time, local governments are providing supportive policies, including simplified registration processes and public service platforms for small business owners, to attract young migrant workers with expertise. In many less developed regions, these experienced migrant workers are becoming emerging entrepreneurs at home.
“Many young village residents have experience working as migrant workers in the city. They’re used to abundant commodities and different methods of consumption in the city, and they’ve also mastered online shopping,” Guo Xia, a researcher at Peking University’s China Center for Strategic Studies, said to People’s Daily in an interview in 2014. The young generation in the countryside is increasingly familiar with the internet. Their return migration builds up a fundamental user group for the development of e-commerce in the countryside.
According to Xie Yang, an analyst at China’s State Council, the total volume of China’s rural online shopping market will likely surpass RMB 460 billion (USD 70 billion) in 2016. The enormous market in the countryside means plentiful opportunities for Chinese e-commerce mammoths Alibaba and JD.com.
2. Next comes supply chain finance
With an established e-commerce business, the next step for tech giants in the countryside will be to focus on supply chain finance.
The average success rate for family loan application at banks in China’s countryside is only 27.6%, far below the average level of 40.5% for the entire country, according to Farmer’s Daily. The low debt-paying ability of farmers and lack of qualified collateral, make it too much of a risk for banks to issue a loan.
E-commerce platforms step in to fill the gap. Based on the data collected via farmers’ previous purchase orders, e-commerce giants build up personal credit profiles to allow farmers to apply for loans to purchase agricultural materials, and issue loans with time spans as long as a full production period.
As China’s biggest e-commerce platform, Alibaba is acting as a pioneer in the field. According to Ant Financial’s CEO Peng Lei at the Wuzhen Summit, the financial company’s farmer-only loaning product has already covered about 1,000 villages in China. Ant Financial’s investment in the Postal Savings Bank of China — a Chinese bank with expertise in service for lower income rural area residents — last December also shows its ambition for further development in the field.
JD.com, another Chinese e-commerce giant, is also paving the way to fast track supply chain finance. The Finance to Country initiative is a part of JD.com’s countryside development strategy, and serves to offer effective financial services to countryside residents. As part of this plan, JD has began to issue loans and products to farmers and holds crowdfunding events that actually serve as pre-orders for farmers — e-commerce platforms are performing as lending platforms and sales channels at the same time.
“Factory to Country and Farm to Table creates a full circle for countryside e-commerce, and finance will accelerate the development of this circle,” said Li Xueni, leader of JD’s countryside e-commerce team.
Apart from the leading e-commerce sites, some peer-to-peer loan platforms are attempting to collect interest in the form of agricultural products.
Shenma Jinrong, or Shenma Finance, is a financial platform dedicated to providing services to low and medium income groups. The company offers installment loans to farmers to purchase production materials such as electric vehicles.
E-bikes are the primary cargo transportation tool for farmers in China. Shenma Jinrong collaborates with local EV retailers to issue loans to farmers to increase their production efficiency. Because of relatively low family migration mobility and the intimate social network in Chinese traditional villages, the credit risk for supply chain finance like Shenma’s business is controlled within a monitorable range.
Because of long production times in agriculture, most of the attempts made in the latter half of 2015 will have to wait to see returns in early 2016. Without a doubt, some of the experiments may fail, but as the countryside becomes increasingly important to China’s economic development plan, the successful ones will have a greater chance at becoming celebrated approaches in the field.
3. Any interest from outside of tech?
Though it seems that e-commerce companies will be the key players in the country market for 2016, many other possible players may latch onto the field as well.
According to a report by China Internet Network Information Center in May 2015, China already has 178 million netizens from the countryside, among which 146 million connect to the internet via mobile phones. Additionally, as of December 2014, online video viewers from the countryside have increased 12% year-on-year to 109 million while the number of gamers leaped 16.8% to 96.3 million.
All of this indicates that Chinese countryside netizens are consuming more cultural products as IT infrastructure develops in the region. Companies with a stronger emphasis in cultural products may also grasp at the opportunity during this time. Some sensitive investors have already begun to hunt.
Lei Jun the CEO of Chinese smartphone manufacturer Xiaomi is one of the strongest advocates in the field. He said he saw the opportunity in the field three years ago, began to invest in the sector two years ago, and plans to invest in 100 companies [in internet related fields in the countryside] in the future.
“In the future, there’ll be tech companies valued at tens of billions of US dollars appearing in the countryside. The country will skip all the stages of urbanization and get connected to the development of the urban internet. The change is happening this minute,” Lei said at a media summit in December.
A billion-dollar startup like Lei said may not appear in a year but 2016 will definitely be a year of landmark development for internet related industries in the countryside.
(Top image from Baidu Images.)