• Bien Perez, South China Morning Post

Alibaba CEO: Falling demand from Western countries is pushing Chinese firms to look inward

Alibaba executive chairman Jack Ma Yun sees a shift in the relationship between major brands and their contract manufacturers in mainland China amid the lingering economic slowdown and increased e-commerce adoption worldwide.

It is a situation that "may challenge the business model of some established brands", Ma said in a published media commentary on Thursday.

"Chinese manufacturers face declining exports because demand from Western markets is not what it used to be," he said. "Everyday, I see small businesses in China suffer because orders from their longtime customers are half of what they once were."

With investments made in factories, equipment and workers, these manufacturers have been forced to look for new ways to ring in business, according to Ma.

"Manufacturers in China are increasingly using the internet to tap into the vast domestic market. Many of these firms have developed their own online-only brands with quality products for Chinese consumers," he said.

On the Chinese mainland, which is the world's largest e-commerce market, the efforts of those manufacturers may have helped online retail sales in the lower-tier cities and rural areas to overtake those in the country's largest cities for the first time last year.

A report by global management consulting McKinsey in April estimated the mainland's online retail market last year to have recorded a gross merchandise volume - the total value of goods sold on e-commerce platforms - of US$630 billion, 50.1 per cent of which were transactions made in the country's vast lower-tier cities and rural areas.

Alan Lau, a senior partner at McKinsey in Hong Kong, said that the finding from the firm's latest "iConsumer China" survey represented an especially "huge revelation for foreign brands, which need to rethink their strategy in that segment of the market".

"The lower-tier cities and rural areas are now home to 257 million online shoppers, compared with 183 million in the high-tier cities," Lau said.

According to Ma, the changing environment presents an opportunity for Alibaba to work with brands to get ahead of these new trends.

"At Alibaba, we have built the world's largest platform that enables more than 10 million merchants and brands to directly engage with hundreds of millions of consumers," Ma said.

He added that "the internet has enabled consumers to assert their preferences more than ever, and thus businesses must innovate".

In his commentary, Ma reiterated Alibaba's stand against counterfeits. "Alibaba is only interested in supporting those manufacturers who innovate and invest in their own brands. We have zero tolerance for those who rip off other people's intellectual property," Ma said.

Mainland China last year surpassed the United States to become world's largest e-commerce market, despite the country's economic growth falling below 7 per cent for the first time since 2009.

Data from Forrester Research showed that China's online retail market will reach US$1.1 trillion by 2020. That would be nine times larger than Japan's US$122 billion market and 17 times greater than South Korea's US$65 billion market in the same period.