Talking Point

Frenemy at the gates

The biggest corporate rivals in China are increasingly Alibaba and Wanda

ma and wang

The battle between Jack Ma and Wang Jianlin has more at stake than a Rmb100 million bet

Richard Neville is known to English historians as the Kingmaker. That’s because in the middle part of the fifteenth century he not only became the second richest man in England, he also held the fate of the crown in his hands.

A key player in the Wars of the Roses, Neville earned his nickname when he helped topple the Lancastrian king Henry VI, and replace him with Edward IV. When he subsequently fell out with the Yorkist monarch, his kingmaking tendency resurfaced once more as he restored Henry to the throne. In a measure of his power, he held both Henry and Edward captive in his imposing fortress Warwick Castle.

Fast forward to present day China and a Kingmaker looks to have emerged in the shape of Zhang Jindong. He’s the founder and boss of Suning, an electronics retailer with a vast footprint across China. In the past few weeks he has done deals with both Alibaba and Wanda, two rivals that are seeking to grab a dominant chunk of the country’s consumer spending.

Will it be down to Zhang ‘the Kingmaker’ to decide whether Jack Ma or Wang Jianlin (both have been ranked as China’s richest man in wealth surveys) prevails as the tycoons battle for dominance?

Two titans make a big public bet…

In December 2012 Ma and Wang appeared together on CCTV’s live show Economic Figures of the Year. Ma was in provocative mood, telling China’s biggest commercial property developer that shops and malls were a thing of the past.

“The bad news is that e-commerce will essentially replace bricks-and-mortar,” Ma jokily told Wang. The hard-charging Sichuanese was unimpressed by Ma’s forecast and made a bet that if online consumption had surpassed 50% of China’s total retail volume by 2022, he’d give Ma Rmb100 million ($15.7 million). However, if e-commerce fell short of that ratio he expected Ma to pay him the same amount.

Who is likely to win the wager?

Three years on and it’s clear to Wang that the rapid increases in online spending are hurting sales at physical stores. China Business Herald reports that in the first half of this year the country’s major retailers shut 121 large outlets (such as supermarkets) and 25 department stores. Indeed Wanda has closed 10 of its own underperforming departments stores, with Winshang.com predicting another 45 could also be shut.

Last month Wanda announced it was closing the nation’s largest karaoke chain, Superstar, too. “China’s consumer behaviour is undergoing significant changes, inevitably hurting some large-scale retailers,” Qu Dejun, president of Wanda Commercial, said in a statement.

Over the past decade Wanda’s department stores were important anchor tenants for its Wanda Plaza shopping malls. They helped to encourage footfall (in 2012 around 1.1 billion shoppers entered Wanda’s malls).

However, Wanda’s Hong Kong listed unit can no longer offer the Wanda department stores – held in a separate non-listed vehicle – a cross-subsidy (in the form of below-market rents). This, combined with falling sales – as consumers shop more online – has made the giant stores an increasingly poor business proposition.

Of course, overall the pie is getting bigger, with China’s consumer spending continuing to rise. Data just released for July shows that retail sales grew year-on-year by 10.5%. But the more striking number was that online sales soared 37% in the first seven months of 2015.

The Financial Times this week reported that Alibaba is responsible for “about 70% of China’s retail e-commerce – and accounts for around 8% of total retail sales in the country”. When the two tycoons made their bet e-commerce only comprised 3% of total retail spending.

Then again, it’s not all been going well for Ma either. Alibaba’s New York-listed stock has plunged 50% below its IPO price and this week traded at a new low. To make matters worse the US business magazine Barron’s published an unexpectedly negative article on Alibaba, stating that the stock could fall another 50% because it was reporting numbers that “strain credulity”.

Alibaba released a detailed rebuttal saying the Barron’s article contained factual inaccuracies, selective information and “misleading conclusions”. Still, for a company to be forced onto the defensive about its financials is never positive.

Meanwhile there are also signs that both Ma and Wang have altered their thinking since they shook hands on their mega-bet. Both seem to have come to the realisation that the winning approach won’t be purely bricks-and-mortar nor purely digital but a mixture of both. The new buzz-phrase is online-to-offline (O2O) and both men are looking to rapidly expand their offering in this area. And that is why both have recently courted Zhang Jindong and inked high-profile deals with his firm Suning Commerce.

What were the deals?

Alibaba swooped first. Last month it surprised many analysts when it purchased a 19.99% stake in Suning for $4.6 billion. In return Suning also bought 1.1% of Alibaba for $2.28 billion.

Prior to the transaction Alibaba had just announced that its revenue for the three months ending in June rose 28% to $3.27 billion, its slowest growth rate in more than three years.

Local media in China commented that the Alibaba-Suning tie-up looked like the sort of tactical alliance seen during the country’s Warring States period. (Comparison is often drawn between this era of seven battling kingdoms – eventually won by the state of Qin in 221 BC – and the modern day business struggles being fought on smartphone screens, between firms like Tencent, Baidu, Alibaba, Xiaomi, JD.com, Suning and Wanda.)

The strategic rationale for Alibaba was Suning’s logistics and retail distribution network. Techcrunch pointed out that Suning has 1,600 stores in 289 cities, but equally important is the logistics operation it has built to deliver the items ordered in those shops and online. This is said to cover 90% of China via eight national distribution centres, 57 regional centres and over 1,700 last-mile delivery stations.

This can be combined with Alibaba’s own (less developed) logistics unit Cainiao, with Walter Woo, an analyst with Oriental Patron telling Reuters, “Instead of building the [distribution] network itself, it saves more time through this kind of deal.”

Ma said of the deal: “Over the past two decades, e-commerce has become an inextricable part of the lives of Chinese consumers, and this new alliance brings forth a new commerce model that fully integrates online and offline.”

It marks the end of Alibaba’s asset-light strategy, but Ma thinks the O2O opportunity merits the change of direction. Access to Suning’s physical stores will enable greater after-sales support, and allow customers to pick up purchases. The New York Times reports there is even talk of Alibaba channelling online grocery sales through Suning’s distribution network; as well as Alipay becoming the favoured option for making purchases within Suning stores.

This deal was perhaps less about Wanda from Ma’s perspective than about e-commerce rival JD.com. Like Amazon the latter has invested in a sophisticated in-house warehousing and delivery system. Its efficiency and customer satisfaction levels have even started to eat into Alibaba’s market share in e-commerce. To some extent, the investment in Suning was a defensive strategy to nullify JD.com’s perceived speed advantage in delivering online purchases.

But Wanda was soon back on Ma’s radar, as just weeks after his own deal, Wanda became a strategic partner of Suning too.

“It’s a win-win for both sides,” Wang said at the signing ceremony on September 7. This time the main focus was on the news that Suning would open 40 stores in Wanda Plazas by the end of the year (there will be 135 Wanda malls nationwide by December).

(Also heavily rumoured: that Suning might buy control of Wanda’s department store arm.)

However, the agreement will likely irk Ma because Suning and Wanda are also talking about “deepening their cooperation in the development of e-commerce and getting greater traction from combining their online and offline capabilities”. Indeed, in a sign that kingmaker Zhang might be hedging his bets, he said the pact with Wanda will “allow for the two sides to leverage shared resources”.

Nor can Wanda’s e-commerce ambitions be written off by Alibaba. Last year it banded together with Tencent and Baidu – two of Ma’s most formidable internet rivals – to set up a Rmb5 billion e-commerce joint venture (see WiC251).

Ma too is building alliances, of course, primarily with large retailers he’s luring to his Tmall sales platform. In July it was announced that the popular Japanese clothing chain Uniqlo would sell online in China exclusively through a Tmall store. This month Germany’s biggest retailer Metro also signed an exclusive strategic cooperation with Tmall. Also opening joining Tmall is J Sainsbury. The British supermarket group will sell (long-life) groceries.

Where else are Alibaba and Wanda competing?

Well, both want to be movie moguls.

The Chinese box office is booming, with some forecasting that revenues will rise 50% this year to yet another record level (Rmb45 billion, or $7 billion). Wang was much earlier into the film business. He has the largest cinema chain in China and bought the AMC movie theatres in the US. He’s also building an $8 billion studio complex in Qingdao, which he hopes will prove to be an ‘eastern’ Hollywood (see WiC211).

Ma too wants a piece of the film action. This month the tycoon was pictured with Tom Cruise at the China premiere of the new Mission Impossible film, of which Ali Pictures was one of the producers. In fact CBN reports that when the Ali Pictures logo was shown after Paramount’s at the beginning of the film, the cinema burst into patriotic applause.

CBN says that Ma sees synergies between his existing platforms and blockbuster film production. His Taobao film ticketing service is one of his successful O2O businesses, while his stake in Sina Weibo allows this social media platform to publicise film releases. Then, of course, Tmall can be used to sell merchandise linked to the film.

In June Ali Pictures opened an office in Los Angeles to look for further film opportunities.

Beijing Business Today points out that Alibaba’s recent purchase of Yueke Software for Rmb830 million has also stretched the firm’s tentacles into cinemas – i.e. Wanda’s domain. Yueke operates the ticketing system most commonly used by China’s 1,700 movie theatres.

Anywhere else?

The sports industry is another field where the two tycoons are going head-to-head. And again, Ma is the relative latecomer.

Wang has been associated with sport since the 1990s when he purchased a football team in Dalian, that went on to become the country’s most successful. Earlier this year he bought a 20% stake in Spanish club Atletico Madrid, and acquired the sports marketing company Infront Sports and Media (which holds the World Cup broadcast rights in Asia). Last month Wanda also purchased World Triathlon Corp (the global organiser of Ironman events).

According to PWC the global sports market is currently worth $145 billion, and as WiC has reported, a number of favourable policies in China have recently designated sports as a priority industry. That’s generated a lot of new interest from the business community.

This month Ma established Ali Sports, with the division designed to look after the company’s investments in this sector. The first was the stake bought in China’s top football team Guangzhou Evergrande last year, while the second foray came in May when it was announced that Alibaba would participate in an Rmb800 million equity fundraising for online broadcaster LeTV Sports. Ali Sports took a 7.8% stake.

Also investing: Wanda. It bought 11.5% of LeTV Sports.

Now as their empires morph and embrace a whole variety of online and offline services, their original bet – due to be decided in 2022 – may be quietly forgotten by both men.

So are Wang and Ma ‘frenemies’?

When Wang decided to give a speech this year on his investments in the film industry, he chose to do so in Hangzhou, in a spot not far from Alibaba’s headquarters in Xixi Park.

The choice of venue led one member of the audience to ask whether he’d selected it because of Ma. As Zhejiang Daily reports, Wang then tried to rebuff what he called was a “widespread misunderstanding” that he had a “hostile relationship” with the Alibaba founder. “We are good buddies privately,” he claimed.

Despite their business rivalry, observers see ample room for the two tycoons to cooperate. For example: by wooing Hollywood. “Although Ali Pictures and Wanda Cinemas have a competitive relationship, there are many opportunities for cooperation between the two sides. Both are in a stage that allows the coexistence of cooperation and competition,” deputy dean of Peking University Cultural Industry Research Institute, Chen Shaofeng, told Beijing Business Today.

Jiang Jiongwen, a professor at the business school CEIBS, also notes that some of the most influential private-sector tycoons have been working closely together in recent years despite their obvious commercial rivalries.  He cites the afore-mentioned Wanda, Tencent, and Baidu e-commerce joint venture Wanhu. “Various partnerships like this have caused smaller retailers and SMEs to feel a serious sense of threat,” Jiang wrote in a piece for Sina Finance. He added that while competition law in the West tends to prevent alliances between online giants such as Facebook, Twitter and Amazon, the Chinese government has been quite free-handed in this regard. “Important [consumer] data is firmly controlled by a small group of businessmen,” Jiang wrote. “The growing monopolisation of data in China is a very serious issue.”

If anything, the coalitions that Suning has forged with both Alibaba and Wanda suggest that this trend is accelerating. Perhaps Zhang Jindong is calculating that by allying himself to this ‘big data’ revolution he will be able to reach his stated target of growing Suning’s annual sales to Rmb300 billion by 2020. It will be interesting to watch how this would-be kingmaker plays his very own ‘game of thrones’ with Ma and Wang…


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