How Inclusive Businesses Can Tackle Poverty in China

I grew up in a middle-class family in the heart of Beijing. I had my fair share of McDonald’s burgers, piano lessons, sports camps, and family vacations to tropical beaches—an experience familiar to many who grew up in the United States. I never had to worry about the basics: I lived in a modern apartment with running water, heating, and air conditioning. I took a newly renovated subway to school, a public school on par with the average public school in the United States.

China’s economic boom over the past three decades has spurred the rapid rise of its middle class, with youth whose lives are very similar to mine growing up. Over the past couple years, you may have seen stories of China’s sky-high GDP growth, topped only by its towering new skyscrapers. This may give the impression that China is free of serious poverty issues.

However, the reality is shockingly different. While China has seen amazing economic development, there is also ever-increasing income inequality. Much of the bottom of the pyramid (BOP) population has been left behind. In rural areas, farmers still use primitive farming techniques (think rake-and-hoe type painstaking labor) on increasingly eroded soil in small farmlands, barely making ends meet. Migrant workers congregate on the outskirts of cities, living in run-down complexes with no insurance coverage and no consistent sources of employment.

Different sectors have already made various efforts to alleviate the poverty of China’s BOP population. The Chinese government has launched a number of targeted campaigns, such as the Precise Poverty Alleviation Campaign, rolled out in 2013 with the intent of customizing poverty alleviation programs for regional environments and local population needs. In provinces with ample sunlight, for example, the local government provides low-interest loans for local farmers to install solar panels, both to generate electricity for personal use and to sell it to the national grid. Meanwhile, the Heifer Foundation, a nonprofit dedicated to bringing sustainable agriculture and commerce to areas with a long history of poverty, has been supplying subsidized cows to rural Chinese farmers and training them in husbandry techniques.

In addition to the public and nonprofit efforts, for-profit companies known as inclusive businesses are playing increasingly significant roles in poverty alleviation in China. To be considered an inclusive business by international development organizations such as the International Finance Corporation (IFC) and the Asian Development Bank (ADB), a company must be profitable and scalable, and its core business must increase income or create adequately paying jobs for the BOP population.

But how can a company can do good and make money at the same time? This is the question that our firm, Venture Avenue, has sought to answer through a first-of-its-kind landscaping study on inclusive businesses in China. We have found that the most successful inclusive businesses tackle poverty from multiple angles, employing a range of creative technical solutions across the supply and demand sides of specific industries.

For example, Minf Potato, an inclusive business in Inner Mongolia, provides farmers there with germ-free potato seeds, which have significantly increased production yields and tripled the average annual income of the local farmers. Minf Potato also has rented land from local farmers to build a company-owned standardized potato production base to grow potatoes using the latest germ-free seeds and technologies and is hiring farmers to work there. This base provides 1000 additional jobs during harvest season and 200 additional jobs during non-harvest season, and a stable cash flow from rent and salaries for farmers. Additionally, Minf Potato purchases potatoes from farmers to manufacture potato-based products at its processing plant, creating a stable source of demand for farmer’s yields. Having to worry less about selling them, farmers are able to focus on increasing their potato production and enjoy further income increase. As this example suggests, poverty alleviation efforts need to be multi-faceted: Introducing advanced potato production materials and techniques alone, without creating additional demand, would create a new challenge for farmers to sell their extra yields and wouldn’t encourage lasting income increase. The sale of higher-margin high-quality potatoes and potato products contributed to a year-on-year 15 percent increase in the company’s profit margin between 2013 and 2015.

Another promising example of Chinese inclusive business comes from e-commerce. The country’s leading company in the field, Alibaba, has adopted the “Double Cores + Multiple Services” strategy to address poverty by connecting rural residents to online markets through several means. The first “core” of the strategy is the development of what Alibaba terms “Taobao villages,” typically rural villages that lack resources to develop traditional farming industries but have developed a large number of online stores through Alibaba’s Taobao shopping platform. Alibaba sends experts to these villages to develop the e-commerce business model, and consequently a large number of additional grassroots e-commerce businesses emerge on Taobao, usually selling processed agricultural products or home supplies to cities. The second “core” of the strategy is the rural Taobao program, which builds out Alibaba’s own rural e-commerce operation centers in low-income rural areas to collect products to sell, bring in outside products, and provide e-commerce training services. While the Taobao villages are organized by villagers themselves, the rural Taobao program is operated by Alibaba the company, as the program’s locations often lack the means for individuals to start grassroots e-commerce businesses on their own. Alibaba also provides various additional services to grassroots e-commerce businesses throughout the supply chain. For example, an online rural vegetable shop on Taobao can use Alibaba to buy fertilizers online, transport its vegetable products with Alibaba’s Cainiao logistics arm, and use Alibaba’s Alipay platform to receive online payment.

Low-income households run online Taobao stores via the Alibaba rural e-commerce program. (Photo courtesy of Alibaba)

With this strategy, Alibaba has been able to create positive social impact in several areas. First and foremost, low-income rural families have experienced direct increases in income. Via Alibaba’s e-commerce platform, rural households can buy high-quality products at much cheaper prices, and farmers can expand their agricultural products’ sales channels. Alibaba’s strategy also creates new rural e-commerce ecosystems on a local level, through its online shops and their respective payment and logistics infrastructures. Especially in areas lacking the resources to develop traditional agriculture and factories, the rise of the rural e-commerce ecosystem is an alternative catalyst for long-term income increase and job creation. For example, in 2015 the Taobao villages directly created 280,000 jobs as a result of local villagers starting their own Taobao online shops, producing products to be sold on Taobao shops, or providing post-sales services. Meanwhile, the rural Taobao program now covers nearly 200 impoverished counties, bringing benefits to 1.2 million people. Finally, the model indirectly encourages urbanization. As e-commerce develops locally, we have observed that other infrastructures, such as transportation and healthcare, also develop, benefiting a larger portion of the rural population than those who participate in rural e-commerce directly. Launching this rural e-commerce strategy has also benefitted Alibaba as a company, allowing it to become one of the earliest major e-commerce players to take over a large rural market share at a fairly low cost.

Inclusive businesses are still in their early stage of development in China. Most private sector Chinese companies involve the BOP population as labor and suppliers in some way. However, a large number of these private sector companies currently do not see improving the BOP population’s wellbeing as a business opportunity. It is therefore crucial that the government and other intermediary organizations create the right incentives for companies to adopt inclusive business models. They might do this in a number of ways:

1. Private sector research institutes could work with the government to advocate for existing exemplary inclusive business practices, so that other private sector companies are exposed to available social and business approaches that benefit BOP populations.
2. The government could incorporate inclusive business practices into its existing policies on poverty alleviation. Under the Precise Poverty Alleviation Campaign, the government has already emphasized the importance of the private sector by encouraging specific leading companies to pair up with impoverished villages and help them through corporate social responsibility activities. It can apply more tangible and favorable policies toward inclusive businesses through, for example government-guaranteed low interest loans.
3. Inclusive business models often need to go hand-in-hand with basic infrastructure development, such as irrigation systems and roads. The government should play a critical role in delivering such costly infrastructure projects, allowing companies to more effectively implement their inclusive business models as well.
4. Many Chinese companies have the potential to become impactful inclusive businesses but currently lack expertise. Experienced international development organizations, such as the IFC and ADB, can offer capacity-building services, connecting domestic Chinese firms with the experts needed to expand their businesses and serve the BOP population’s needs at the same time.

Inclusive businesses have significant potential to tackle poverty in China, and there are a couple outstanding cases of companies already doing so. It will take a multilateral effort to further develop our understanding of what makes an effective inclusive business model, and how to implement that model. The government and research institutes should lay the foundations, and private companies should work hand-in-hand with them to discover, test, and improve sustainable inclusive business approaches.

Read more stories by Mandy Zhang.