TaoBao

For years, Indian villages have been ignored by the government. If only a way can be found to add
value to the village produce and to sell the goods, many jobs can be created for rural folk and
transform villages. What is needed is infrastructure, marketing and financial linkages to enable rural
entrepreneurs to start small-scale industries. This in turn helps them become consumers and afford
goods that they otherwise wouldn’t. This case study describes the transformative power of ICT
and how it can help in bringing remote villagers into the marketing mainstream.
A lesson could be learnt from China, where e-commerce is helping rural businesses to flourish
through Taobao villages. Pioneered by e-commerce giant, Alibaba, Taobao has created 280,000
rural jobs in 2014. The Chinese government has stepped in, by giving grants to 55 poor counties
to develop local industries. A Taobao village is defined as a cluster of rural entrepreneurs where at
least 10 per cent of village households engage in e-commerce or at least 100 online shops have
been opened by villagers, with total annual e-commerce transaction volume of at least RMB 10
million, about US$1.5 million.
The number of Taobao villages has been increasing: from 20 at the end of 2013 to 211 villages
at the end of 2014. This shows that e-commerce can indeed improve rural participation. According
to a report from AliResearch, the research arm of the Alibaba Group, there are now 780 Taobao
villages, located in 17 different provinces. Most of them are situated in Zhejiang, Guangdong and
Jiangsu and the majority of the villages are along the coast, with 176 of them in impoverished
regions. These villages leverage cheap rural labour and local knowledge to produce goods, but the
major challenge is distribution and logistics. This is overcome by clustering rural units, which
creates incentives for transporters to provide services to villages.
Taobao villages have reversed the fortunes of many rural people, enabling many to become
producers. It encourages villagers to organize themselves into groups and start selling their
produce, such as handicrafts, clothes, weaves, value added agricultural products and gift items
online. If the cluster is located next to factories, the village is able to supply manufactured goods
as well.
One village in Guangdong has also opened a ‘Taobao university’ which teaches the concepts
of e-commerce. Local governments are supporting villages with free wireless Internet, tax credits
and even free storage space. A professional school to teach Taobao selling has also started,
teaching computer skills to master customer service. The villages have helped empower the local
people, reversing the trend of migration to cities and aiding in rural development. The government
has helped. Party leaders have realized that e-commerce is one of the pillars of the local economy
and must be encouraged under Beijing’s initiative to modernize the economy. The local authorities
have decided to exempt online businesses from paying rent and have provided them with a shared
warehouse and a canteen.
The formation of an e-commerce cluster is shown. The first column shows the steps of cluster
formation. Initially, the marketing portal provides an easy way to sell village products. Some
entrepreneurs are attracted, who start small scale industries and become pioneers. Since initial
orders may be slow in coming, the entrepreneurs have to show persistence, improving their quality
as they go along. Soon, other families in the village get attracted and start making similar products.
They must invest in product differentiation otherwise prices will be forced down. As more families
enter, the cluster attracts the interest of raw material suppliers, technical support services and so
on.
 Formation of an e-commerce village cluster.

The Taobao site

Source: https://world.taobao.com/

The cluster formation requires government support. Instead of the usual rent seeking mentality
of governments, they must develop a helping mentality and pitch in to provide common
infrastructure and ensure access to Internet. This is given in the second column. Related industries
soon establish their offices in the villages once they see volumes picking up.
The Taobao concept has helped the economic development of rural areas in addition to
increase the income of the village people. The success of online sales has boosted other businesses
such as delivery, logistics and service companies. Not only can the villagers sell their products but
they also have access to goods that they can buy from outside. Further, Taobao plays an important
role in sourcing products that can be exported across the world through Alibaba.
The initiative shows the transformative power of e-commerce: it can connect people in the
remotest regions and turn them into entrepreneurs. For instance, one village, Dongfeng, has
become a centre for low-cost furniture production consisting of a cluster of some 1,000
households. Using cheap local timber and labour, they were able to develop their capabilities. Now,
the Dongfeng region has 40 logistics companies providing transport. CNBC describes another
village, Beishan, which once just produced bread, but now has a company with annual sales of
US$8 million worth of camping gear and sleeping bags.
Can India learn from the Taobao success? India’s villages also represent populations that are
cut off from the rest of the country. The people in these villages are unemployed or
underemployed. However, the Indian IT revolution has been limited to urban areas. Though e-
commerce sites are penetrating rural areas and small towns, it has not been able to induce the kind
of transformation that is being seen in China. There are no doubt initiatives such as Fabindia and
Jaipur Rugs, which use local knowledge and skills and help market locally produced goods in India
and abroad, but the large scale transformation of villages into producer clusters is missing. The
government promotes rural industries through its KVIC, which runs a network of Khadi
Bhandar shops. However, it has not helped large scale rural transformation despite subsidies and
reservation of various products for small scale industries. The trouble with most government-run
rural marketing ventures is that they are run by bureaucrats and politicians, who have milked these
organizations for personal perks and benefits.
Taobao villages show that e-commerce has the potential of turning a large section of neglected
population into producers, solving problems of underemployment at the same time. However, the
role of government and municipal corporations also becomes important: they have to give up their
rent seeking mentality and build enabling infrastructure, helping villages to develop products.
Some services have to be given free so that entrepreneurs are not loaded with costs at the inception
stage. Can our government rise up to the challenge?

Questions for discussion:

1. Can IT interventions result in large scale change in India? What are infrastructure and
government policy required to encourage such use of technology in India?
2. Imagine you work for an FMCG firm that also has a clothing/textile/fabrics arm and
sources inputs from villages. How can this firm adopt a similar model as in the case
above, while eradicating the local challenges?