Monday, June 10, 2019

Promise of e-commerce in enabling access to markets for rural entrepreneurs

While the mainstream discussion on e-commerce had centred around the consumption side, its real development impact may lie on the production side. In particular, I am intrigued by the possibility of e-commerce platforms being a critical market access linkage provider for entrepreneurs and producers in the rural areas. 

In terms of the scale of rural penetration of e-commerce, there is no comparison to what is happening in China,
The number of Taobao Villages, defined by AliResearch as administrative village with e-tailers clustering and total annual e-commerce transaction volume of more than RMB 10 million (about US$1.5 million), as well as at least 10 percent of village households actively engaging in e-commerce or at least 100 active online shops operated by villagers, primarily with the use of and marketplace – increased from 212 in 2014 to 2,118 in 2017 and to 3,202 in 2018. Most Taobao Villages are in coastal areas and show significant trends of clustering... Development of Taobao Villages shows a trend of clustering, and new Taobao Villages tend to emerge next to existing Taobao Villages... According to Ali Research, the clustering trend results from a developed industrial base in old Taobao Villages, attractiveness from e-commerce success in existing nearby Taobao Villages, and the rapid development of an e-commerce service ecosystem. The number of active online shops in Taobao Villages increased from 70,000 in 2014 to 660,000 in 2018. Clothing, furniture, and shoes were the top three purchased products from Taobao Villages. Luggage and leather goods, auto accessories, toys, and bedding products are also very popular.
Its impact on the development side,
A fast-growing body of case studies on e-commerce in rural China focuses on Taobao Villages. Numerous cases show the prosperity of Taobao Villages and that people gain wealth and have better lives through participating in e-commerce. Case studies, such as Shaji in Jiangsu province and Caoxian in Shandong province, show many young and talented people, including women, have returned to their hometown in rural areas, earning income similar to or higher than they were as migrant workers in the cities and at the same time enjoying family life with their elderly and children. Many have become leaders of e-commerce in their home villages and are role models for their fellow villagers. Case studies in Mengjin in Henan province show people are enriched by access to new markets through online platforms for traditional cultural products such as peony painting and Tang tri-color ceramics. Case studies in Xifeng in Guizhou province show households received higher farmgate price for kiwis and therefore have an incentive to increase the production through online sales to domestic as well as European markets. Many cases, including poverty-stricken counties in remote and mountainous areas, show that access to an online market allows people in rural areas to enjoy the convenience, variety, and similarly low prices that are enjoyed by people in big cities... 
The Chinese Taobao Village development report (Nanjing University and AliResearch 2018) examines the patterns of formation of the Taobao Villages and their evolution, drawing from extensive fieldwork. The report shows that, while most Taobao Villages on the coast developed spontaneously, often led by a couple of first-mover return migrants and followed by fellow villages, government support, often through subsidized service provision by experienced e-commerce service firms, has become a major force for the incubation of inland Taobao Villages.
There is a stark contrast in the entrepreneurship and successes of the Chinese e-commerce providers with that of their Indian counterparts. Even government initiated large flagship initiatives like the agriculture national market place (e-NAM) have had limited success. In fact, I am not aware of even one Indian manufacturer of any kind who has become reasonably big by growing from their rural base, whereas such Township and Village Enterprises (TVEs) were the stars of China's growth.  

This is surprising since efforts to enable wider market access to local farm and non-farm produce has been a major part of rural development programs of the central and state governments for decades. It was then thought that there was a large urban market for, say, indigenous crafts and organic produce, and the major constraint was a means to connect rural sellers and urban buyers, or matching frictions. Now that the e-commerce marketplaces have solved that matching problem, one would have thought that the market ought to have taken off. So clearly there are other binding constraints on the flourishing of rural e-commerce. I am not aware of any research exploring these in the Indian context. 

One can understand the challenges associated with agriculture produce given the concerns of quality and standards, reliability of delivery, transportation times, settlement of payments etc. While the same applies just as well to non-farm production, they are perhaps less daunting. For example, unlike agriculture produce, perishability is not a problem, and even quality and standards can be defined reasonably well in case of many products.

There are also issues of broadband connectivity, use of smartphones, transportation logistics etc which are critical. We may also need to question whether there is availability of large enough concentrated demand pockets so as to leverage economies of scale with production, marketing, and logistics. Maybe there is a need for some form of receivables credit provision. Or maybe Indian consumers, socialised by distrust, prefer to buy such products through physical retail. 

I am not sure what public policy can do to promote this market. One may be to work with the industry and define clear and simple standards for the main manufacturing products in rural areas, facilitate access to standards accreditation, enable receivables credit financing, and encourage e-commerce players to venture into rural areas with targeted incentives in this regard. There may be a role for the National e-Government market, GEM, place to play some role in catalysing this - perhaps even promoting strategic public procurements from rural areas etc.

A more promising and perhaps effective and quicker approach would be the emergence of some  deep-pocketed and visionary market participant like Alibaba. It would need to make the large upfront fixed investments, including hiring local marketing personnel and enlisting rural partners, required to dramatically expand the market and capture it. None of the incumbents in India like Flipkart or Amazon are likely to take a leaf out of Alibaba's book play this game. Jio?

If a private provider like Jio is interested in pursuing this approach, I don't think it is a bad idea to support that player, even at at the cost of contributing to massive private benefits at tax payer expense. It is just that the total long-term social value creation and externalities would far-exceed the private benefits. 

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