Buying products like books overseas just became easier

Alibaba system lets mainlanders surf-and-shop without credit cards

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HONG KONG--Start stocking up on inventory. China’s largest e-commerce company just launched an online payment service that makes it possible, even easy, for tens of millions of middle class Chinese to shop online anywhere in the world for the first time.

Alipay was developed by Alibaba Corp. three years ago for its business-to-business flagship site Later, Alipay was used for Alibaba's business-to-consumer site, Alipay is similar to global online payment services such as eBay's Paypal, but until now has only handled transactions in RMB, the currency of the People’s Republic of China.

Through a partnership with Bank of China and Industrial & Commercial Bank of China, it now facilitates transactions in 12 foreign currencies, including U.S. dollars, Japanese yen and euros.

This development has turned Alipay into “the biggest retail story in China in the last decade. This will revolutionize the way retailing is done in China,” predicts Shaun Rein, managing director of China Market Research Group in Shanghai.

Alibaba executives doubt Alipay’s foreign currency service will be attractive to major global brands like Nike or the luxury goods giant LVMH Group, which have established brick-and-mortar outlets and online distribution channels in the mainland.

But it could transform China into a vast new market for global businesses lacking the scale and manpower to set up widespread retail operations on the ground in China. That could include e-commerce giants like Amazon as well as niche marketers such as Dutch baby furniture manufacturer Stokke and tennis shoe maker Puma.

“The opportunity is for companies that are not in China already. Now is the time for big online retailers who aren’t already here to jump into China,” said Porter Erisman, Alibaba’s Hong Kong-based VP, corporate affairs.

Alipay also makes it easier for medium-sized retailers in the mainland’s most developed markets, Beijing, Shanghai and Guangzhou, to expand into China’s second- and third-tier cities, where it becomes significantly more challenging to set up a presence in the mom-and-pop retail sites that dominate those towns.

Foreign companies often have trouble obtaining licenses to sell online in China. “That’s why they’re partnering with companies like Chinese portals like Sohu and Sina. With Alipay, foreigners don’t need to worry about licensing, they can piggyback on Alibaba’s license,” said Mr. Rein.

What’s really bringing together foreign retailers and Chinese shoppers, however, is the currency transaction service, particularly in categories like cosmetics and apparel. There are tens of millions of middle class Chinese who have money, style and a hunger for new products--but no plastic for shopping.

Since relatively few Chinese possess credit cards, they lack a secure payment method to shop online. That's why cash-on-delivery has become popular for e-commerce sites in China, a method “that’s hard for the big foreign retailers to manage,” said Mr. Rein.

Alibaba’s chairman, Jack Ma, didn’t set out to be a payment broker between online buyers and sellers. When he founded, he quickly realized the need for Alipay due to the lack of credit cards or any trusted alternative in China. To reassure both shoppers and sellers, Alibaba agreed to hold on to payments for products until goods were delivered to buyers.

The situation has improved since he started the company in his Hangzhou apartment in 1999. The number of credit cards issued in China has more than doubled over the past year to over 40 million, according to McKinsey. But it’s a scant figure in a country with a population well over one billion and in the absence of Visa and Mastercard, Alipay took off.

According to independent research institute Analysys, it is the largest online payment service provider in China with a market share of over 50%. It has more than 47 million users in China, growing at a rate of more than 80,000 new registered users each day. Daily transaction volume exceeds $20 million, with an average of 780,000 transactions each day.

“Now that Alipay is China’s most popular online payment system, it’s a natural step for us to expand the service globally,” said Mr. Ma in a company statement. “China’s consumers can now shop around the world without leaving their homes. To buy the latest products from Paris, London, New York and Hong Kong, all a China consumer needs is an internet connection and an Alipay account.”

And an Alipay partner. So far, “few companies outside China have realized Alipay is a very big deal. The world hasn’t woken up to the fact that Chinese can now buy many foreign products online for the first time,” said Mr. Erisman.

An Eddie Bauer spokesman, for instance, said the U.S. retailer has no plans to work with Alipay and that most of the company's business is from the U.S. and Canada, with only a "miniscule" number of orders coming from China.

Unsurprisingly, Alibaba’s first international partners sell the kinds of products--cosmetics, apparel and electronics--that Chinese are now buying in droves when they travel overseas. The list includes Sa Sa International Holdings, a leading Asian cosmetics retailing and beauty services group; StrawberryNET, a big international provider of discounted designer skin care, make-up, cosmetics, and fragrances; and J Shoppers, a subsidiary of Japan mail order company Nissen Online that focuses on mail order sales outside Japan.

Although the foreign currency service has launched with little fanfare, Alibaba predicts the international service will reach monthly transaction volumes greater than $100 million by the end of 2007.

Contributing: Ad Age reporter Emily Bryson York in Chicago
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