Online Shopping In China Is Getting Big

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Companies from around the world want to get in on the growth of the consumer population in China. Putting stores on the ground and products on shelves has been the dominant avenue for that. However, as the economy develops, it looks increasingly likely that Chinese consumers are going to leapfrog to the Internet, making web-based retail increasingly important. There are a few U.S. based firms that have more than just a toe in those waters.

Chinese Developments

The story in China isn't really about a big population. While the country certainly is large, lots of poor people don't make a great nation. Thus, the story in China is about industrialization. Having lots of poor people that are swiftly moving toward the middle class, now that's something to sink your teeth into.

So far, the nation has moved aggressively from a largely agrarian economy to a factory driven one. With the money being spent by the government on education, pegged at $250 billion a year by the New York Times, the country's leaders are clearly making a concerted effort to move toward intellectual dominance, as well.

A funny thing is happening along the way. China is leapfrogging years of development because of technological advances. For example, China didn't need to develop its own world wide web, it had one of those handed to it. There are risks associated with the technology for a government as controlling as China's, however there are massive benefits, too. One area that is looking particularly bright is online retailing.

Leapfrog

The Untied States was a clear leader in the online space. That has allowed companies in other nations to simply copycat U.S. companies. The model was proven out, at great risk to those who built it, so the risk for the second in line is materially reduced. For example, Alibaba is more like a clone of U.S. ideas than anything original.

Want an auction site like eBay? Alibaba does that. Want a service like PayPal? Alibaba. Want an online book store like Amazon (NASDAQ: AMZN)... yeah, Alibaba does that, too. Thus, this still private company is a massive online competitor in China, but it has also been a transformational force because it has imported so many ideas from the West.

Although Alibaba is still private, there are a few ways for U.S. investors to get into the Chinese online retail market without having to go overseas.

Amazon (AMZN)

The United State's largest online retailer bought its way into China in the mid-2000s with the purchase of Joyo.com. It later changed the name, in two steps, to Amazon China. The company's name holds material weight in China, though it doesn't have nearly as dominant a position in the market as it does in its home market. However, with Internet sales still in their infancy in the country, there's still time to stake out important ground.

The big push that everyone is expecting is the launch of the Kindle in China. The company already offers over 20,000 Chinese language books through a Kindle application. Moreover, citizens have gone overseas to bring the device into China. So, there's building demand for the company's tablet-like device. That said, others in the nation have already starting selling e-readers, so Amazon won't enjoy the same first-mover advantage it did at home.

Still, Amazon China should be a fierce competitor in a growing market. Look for it to pick up market share and use its industry leading practices to, hopefully, outpace copycat competitors.

Wal-Mart (NYSE: WMT)

Although a good portion of the online market in China is still consumer to consumer selling, business to consumer selling is growing fast. Never one to sit by the sidelines, Wal-Mart inked a deal to purchase a majority stake in Yihaodian. That company is a notable competitor in the online space.

Wal-Mart is already on the ground in China in a pretty big way, with nearly 400 stores. It isn't new to the market either, having first entered in 1996. So the Wal-Mart name is well known, with a controlling position in an online portal, bringing the company's name to the web should be fairly easy to accomplish.

The brick and mortar/website combination will be more expensive to operate than Amazon's online only model, but it should bring with it notable benefits. Being top of mind is one of them. One of the biggest benefits for Wal-Mart, however, is that it won't be late to the Internet in China the way it came late to the game in the United States. This should allow it to pick up market share as the market grows instead of playing catch up.

Yahoo! (NASDAQ: YHOO)

Yahoo! is a back door play on Alibaba. In the United States, Yahoo! has struggled to remain relevant. It doesn't do much better around the world. However, one of the things it has done right was to buy a 40% stake in Alibaba for $1 billion in 2005. The relationship has been contentious at times, but Yahoo! just sold half of that stake for $7.6 billion.

That's a huge return on investment, but investors should remember that Yahoo! still owns another 20% of an industry leader in the online space in China. Moreover, Alibaba is looking to go public sometime in the next few years, which means Yahoo! is inline for yet another massive windfall. It wouldn't be too much of a stretch to suggest that the other half is worth at least $7.6 billion, with many speculating the 20% of Alibaba that Yahoo! still owns is worth much more.

Yahoo! itself isn't likely to do much within China, since it is having a hard enough time with the U.S. market. However, investors looking for a way to invest in Alibaba might wish to take a look.

China Online

Market researchers suggest that the Chinese online market is about the same size as in the United States, as a percentage of total retail sales. With the ability to jump right onto the Internet without having to go through the development of physical stores or the technology behind the Internet, the online market in China should grow quickly. Amazon and Wal-Mart are staking out their online turf, while Yahoo! is tagging along for the ride. Investors interested in China's online retail sector should take a look at all three.

Yours,
Reuben Gregg Brewer


Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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