Nov. 7 (Bloomberg) -- Liu Yuguo opened his first online store six years ago, laden with debt after several failed attempts at bricks-and-mortar businesses in China’s big cities.
From his home in rural Qinghe county, it took just two years for the 35-year-old to rake in more than 10 million yuan ($1.6 million) selling woolen yarn -- buying a Mercedez-Benz with the proceeds. Now, others in his village have joined the e-commerce rush.
Liu’s is one of 16 Chinese villages that generated at least 5 billion yuan in combined online sales last year, creating 40,000 jobs and helping slow the flow of residents moving to cities in search of work. Making it happen is Alibaba Group Holding Ltd., which is considering an initial public offering that may value the nation’s biggest e-commerce operator at as much as $190 billion.
“The next source of growth for e-commerce will mainly be rural areas as growth in cities reaches saturation,” said Chen Liang, a senior researcher at Alibaba Group’s research division. “Most of the people who left the village in Qinghe for work have returned, and this will help the local economy.”
More than 22 percent of the 7 million stores on Alibaba’s two main platforms, Taobao Marketplace and Tmall.com, originated from Internet Protocol addresses in villages and towns, according to the company.
Rural regions accounted for more than 54 percent of China’s 26 million new Internet users in the first half of this year, according to the China Internet Network Information Center. The nation has 591 million Web users, more than the entire population of any other country except India.
Liu now works out of a four-story office he bought at a prime location in the development zone of Qinghe county, 370 kilometers (230 miles) from Beijing. His car is different too, though still German: a BMW X6 SUV with a personalized license plate that cost him an extra 200,000 yuan.
The former farmer, who failed at everything from setting up a CD store to chauffeuring an electric tricycle before he made it on Alibaba’s Taobao, wears an Hermes belt and hands out gilded business cards that cost him 10 yuan each.
When his uncle suggested he open a shop on Taobao in 2007, the first question he asked was whether it was legal.
“Look, I’m a farmer, I only made it to the seventh grade,” Liu said in an interview at his village, which had a tradition of buying wool from Inner Mongolia and reprocessing it for sale. “Something that didn’t require money but also made money and wasn’t illegal, just sounded surreal to me.”
Out of curiosity, Liu listed 10 wool products on Taobao. He sold out within an hour.
As one of just a few selling yarn online, Liu’s business took off along with Taobao as more Chinese people began shopping on the Internet.
Throughout 2008, he would stay up until 4 a.m. learning how to develop and promote his Taobao store via free online courses provided by Alibaba. By the end of that year, he made more than 200,000 yuan.
“Because I had never seen so much money, I withdrew all of it from the bank,” said Liu. “I just counted it and looked at it.”
Other villagers, who had doubted the source of Liu’s money, started asking about his secret to success. Before long, he was giving lectures on how to sell on Taobao.
Driving into his village, Liu points out brick houses adorned with bright-orange Taobao advertisements, many of them for online stores run by his relatives.
Liu himself owns one shop on Taobao and four on Tmall.com, another Alibaba platform that links retailers such as Nike Inc. with individual buyers. Employing as many as 200 people during peak season, his online shops attract as many as 180,000 visitors a day, he said.
Liu’s success reflects the evolution of Alibaba, which offers everything from Alaskan salmon to Diamond Aircraft jets.
Jack Ma, Alibaba’s current chairman, and 17 others founded the company in 1999 in Hangzhou, a city of 8.8 million about 100 miles southwest of Shanghai. The main platform then was Alibaba.com, which provides an online service for wholesale buyers and sellers.
In 2003, Alibaba set up Taobao Marketplace, the website that links retail buyers and sellers, to counter EBay Inc.’s expansion in China. The following year, the company developed Alipay, a Paypal-like third party payment system, to ensure the safety of transactions on Taobao and help it grow.
Alibaba now gets the bulk of its sales and most of its growth selling to individuals across China, from customers in villages without many -- if any -- shops to consumers in Beijing and Shanghai seeking to avoid traffic and pollution. The company is considering a U.S. listing that may value it at more than Facebook’s $104 billion market debut.
Taobao and Tmall.com, with a combined 500 million registered accounts, now contribute the majority of Alibaba’s revenue, according to the company. The two sites sold more than $3 billion of goods during a single day’s sales promotion last year.
Alibaba has said the transaction volume on its own platforms could reach 3 trillion yuan the next three to five years, surpassing Wal-Mart Stores Inc.’s sales. The volume on the Chinese retailer’s main platforms was equivalent to almost 2 percent of the nation’s gross domestic product last year.
The company’s growth is aiding China’s drive to boost domestic consumption, which Premier Li Keqiang is counting on to sustain economic growth at a bottom line of 7 percent a year.
China could have more than 850 million Internet users by 2015, according to the Ministry of Industry and Information Technology. E-commerce transaction volume could reach 18 trillion yuan, and online could account for more than 9 percent of total retail consumption, the ministry said.
“Taobao and Tmall look very big already, but actually they still have a long way to go,” Alibaba Vice President Brian Li said in an interview. “Among the many markets that are waiting to be excavated include the rural market.”
By creating jobs in rural areas, online retailers may also ease the burden of China’s rapid urbanization. Last year, 163 million villagers left their hometowns in pursuit of work in the cities, earning an average of 2,290 yuan a month and often leaving the elderly and young behind.
China must spend at least 41.6 trillion yuan over two decades to integrate rural workers living in cities and towns so that the country realizes the benefits of urbanization, a United Nations report said in August. China’s hukou residence-registration system excludes migrant workers from taking advantage of schools and pension benefits in cities.
While Liu got an early start on Taobao, intensified competition has made it harder for newcomers to earn money, according to Cao Lei, a director at the Hangzhou-based China e-Business Research Center.
“For any product you can think of, there will be tens of thousands of people out there selling the same thing,” Cao said in an interview. “With even university students having a hard time mastering sales, what about farmers?”
Song Fuqiang, 29, who is from the same village as Liu and also sells yarn, said he feels a lot of pressure this year as he needs to spend about 680,000 yuan to advertise on Alibaba, about one-third of his annual costs.
Liu also said his margins have been squeezed as he has to contend with 9,000 other sellers of similar products. His business still enabled him to buy another BMW this year for his wife.
“My wife and I always just aimed for a life that would provide us enough food and to have 50,000 yuan in cash,” Liu said. “Taobao changed my life.”
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