By Adam Jourdan
SHANGHAI (Reuters) - In a small research lab in Palo Alto, California, flanked by Hewlett-Packard Co and Stanford University, China's largest electronics retailer is learning how to compete online.
Shenzhen-based Suning Commerce Group Co Ltd is looking to tap Silicon Valley nous to help it with a formidable challenge: succeeding in China's booming e-commerce market in the face of the behemoth that is Alibaba.
"If you're going to enter the online market and are thinking about competing with our Tmall and Taobao, that's already a mistake," Alibaba's Chairman Jack Ma recently said at the firm's Hangzhou headquarters.
"Instead you should be trying to fill in the gaps that Alibaba hasn't done so well."
Set up by charismatic entrepreneur Ma, Alibaba accounts for half of online retail sales through its Tmall online market while its eBay-like Taobao also controls around 80 percent of consumer-to-consumer online sales, according to data from consultancy Euromonitor. Alibaba is also poised to raise an initial public offering that could value the firm at more than $100 billion.
By comparison, China's second-largest e-commerce firm Jingdong, or JD.com, has a nearly 13 percent market share. Suning, which specializes in electronics, accounts for just over 3 percent of the online retail market.
But even with an omnipresent Alibaba, the huge potential of China's online market is impossible to ignore, luring retailers like Suning, Jingdong as well as Wal-Mart Stores Inc's Yihaodian and Amazon.com.
China's estimated 1.7 trillion yuan ($286 billion) online retail, or e-tail, market will overtake the United States to become the world's biggest this year, said Bain & Co. The consultancy predicts Chinese e-tail growth of 32 percent each year to 2015, a pace over twice as fast as the United States.
Analysts also estimate online retail will account for over 9 percent China's 31.5 trillion yuan ($5.17 trillion) wider retail market by 2015. By 2028, this share will be a quarter.
"We don't believe the market can be dominated by one company in e-commerce in China - namely Alibaba. The Chinese market is very wide and deep, with a huge population," Zhang Jindong, CEO and chairman of Suning, told Reuters in an interview at the firm's new Palo Alto base.
WINNERS AND LOSERS
The battle for a share of China's e-commerce bounty has already resulted in some high-profile casualties and intense competition means more bloodshed is on the cards.
Amazon's Joyo.com, since rebranded as Z.cn, has seen its market share fall to 1.7 percent in 2012 from 7.3 percent five years earlier, according to data from Euromonitor.
There was no immediate comment from Amazon on its China operations. Last year, the U.S. web retailer told Reuters it believed the China market would eventually be "huge" and that it was aiming to be one of China's top three e-commerce firms.
Suning rival Gome Electrical Appliances Holding Ltd, backed by Bain Capital, has also seen its market share cut to 0.4 percent from 2.5 percent last year.
And a long list of names including Dangdang, computer maker Dell, Newegg, Redbaby and MecoxLane International have also seen their stake slowly disappear.
Meanwhile, Alibaba's Tmall has been hoovering up market share, rising to 50.6 percent last year from 35 percent in 2010. By comparison, Amazon's share in the United States, its biggest market, is closer to one-fifth.
"If you look at the landscape, there aren't that many players left anymore," said Shen Haoyu, chief operating officer of China's second largest online player Jingdong, part-owned by Saudi investment firm Kingdom Holding Co.
"But the truth is in two or three years time there will be even fewer firms standing. That's the level of competition."
PLAY YOUR STRENGTHS
China's government has lent its support to the online retail sector, issuing directives last week aimed at encouraging consumers to shop online.
But with few firms able to compete head-on with Alibaba, retailers are scrambling to find a niche market, or leverage existing strengths, such as offline networks or social media.
Specialists include Jumei in cosmetics, Yesmywine.com in alcoholic drinks, and VIPshop in discount retail. VIPshop swung into profit in the last quarter of 2012.
Yixun, also known as 51Buy, makes use of WeChat, the popular social messaging app of its parent Tencent Holdings Ltd, to lure shoppers online.
WeChat has close to 300 million users globally and has overtaken Sina Corp's Weibo microblogging service as China's most popular social messaging app. Alibaba holds an 18 percent stake in Sina Weibo.
"If you specialize you can do better than mega sites that try and do everything for everybody," said Jeff Walters, China-based partner with Boston Consulting Group.
Wal-Mart's majority-owned Yihaodian, meanwhile, is leveraging the global reach of its parent to provide Chinese consumers with often coveted imported products, Doug McMillon, Wal-Mart's president and CEO, told an analysts call this month.
Yihaodian helped increase Wal-Mart's global e-commerce sales close to 40 percent in the third quarter, even as traffic to its 401 China stores fell 8 percent.
Jingdong, formerly called 360Buy, is the most similar to Alibaba in terms of scale and range. It focuses on using its own brand for direct sales, an advantage because shoppers feel more confident buying from a single, all-inclusive seller.
Its broad scope, however, puts it in close competition with Tmall and risks the firm being dragged into profit-sapping price wars with a larger, deep-pocketed rival.
"China's online market will likely see consolidation as one or two big online stores emerge alongside smaller specialists. I think those in between will probably die," said Jason Yu, managing director at retail consultants Kantar Worldpanel.
Going online is also key for the survival of traditional bricks-and-mortar chains like Suning.
The chain has closed almost 100 stores this year and cut its store footprint for the first time in at least six years. It is implementing a barcode scanning system to help shoppers in store make online purchases on-the-go, investing in tech-savvy staff and regional distribution centers to overcome the logistics bottleneck for online sales.
As for the Palo Alto lab, CEO Zhang hopes it will help sharpen Suning's online edge so it can better compete with digital players like Alibaba and Jingdong.
"There are many things we have to learn in technology to evolve," said Zhang. "This is a brand new concept for us. We are learning, the market is learning, the country is learning." ($1 = 6.0932 Chinese yuan)
(Additional reporting by Malathi Nayak in PALO ALTO, Jane Lee in HANGZHOU, Paul Carsten in BEIJING and Shanghai newsroom; Editing by Emily Kaiser and Miral Fahmy)