Forget about Alibaba and Tencent. The most dominant internet combo of recent times is Google and Facebook. Combined, the two firms account for more than 80% of global digital advertising spend and their market value is almost as big as the Russian economy.
Who do investors think could disrupt this duopoly? Judging by its share price Amazon is one of the primary candidates. It has spent many years building a vast audience of online shoppers, but more recently has also started to get market watchers excited about other areas of its business, including digital ad spend, cloud computing and even internet search – Google’s bread-and-butter.
In fact, Amazon’s market value vaulted past Google’s parent Alphabet for the first time in March. The search giant has responded by stepping up its investments in its Google Shopping platform, as well as its collaboration with conventional retailers such as Walmart.
And in its most recent move to fend off Amazon’s challenge, Google also turned to China’s second biggest e-commerce brand JD.com this month.
Often referred to as ‘China’s Amazon’, JD.com is the main competitor to Alibaba. Rivalry between the two is already intense and the announcement about the investment from Google was timed for the same day that New York-listed JD.com held its 618 (i.e. June 18) retail festival, an annual sale of online bargains that draws comparison with Alibaba’s (bigger) Singles’ Day, which is held on November 11 each year.
No doubt Alibaba’s Jack Ma will be watching the Google-JD.com tie-up closely. Indeed, the new alliance raises a number of intriguing questions for the e-commerce business in China and beyond.
What are the terms of the deal?
Google is investing $550 million for less than 1% of JD.com. That makes it a relatively small stake in the Chinese e-commerce platform, which has seen its market value double to $57 billion since going public in 2014.
JD.com has been keen to portray the combination as significant in strategic terms, however. At the heart of the plan, the Chinese firm plans to make a selection of its “high-quality products” (branded Jingzao, or ‘finely made’) available for sale through Google Shopping’s e-commerce platform in key markets around the world.
More broadly, it says it will jointly develop “retail solutions” in regions around the world including Southeast Asia, the US and Europe by combining its logistics expertise with Google’s technology strengths.
“This partnership with Google opens up a broad range of possibilities to offer a superior retail experience to consumers throughout the world. This marks an important step in the process of modernising global retail as we celebrate our June 18 anniversary sale,” JD.comsaid in a statement.
What’s in it for Google?
Google retreated from the search engine business in China in 2010, when it refused to censor search results. Access to Gmail, YouTube and Google Play (its app store) is also restricted in the world’s largest smartphone market.
But Google hasn’t disappeared from China completely. It runs a research centre in Beijing dedicated to artificial intelligence and it has signed an agreement with Tencent that allows the two businesses to work together on patents.
Taking a stake in JD.com adds another influential partner in what should be one of its key markets.
The investment from Google is also an attempt to counter the wider commercial threat from Amazon. Jeff Bezos’ firm has emerged as a significant challenger to its search business, eating into its revenues from product advertising. Retailers are starting to see Amazon as a more effective way to promote their goods because people visit the site already intending to buy something, while browsers on Google are more often looking for information.
The threat is already very real: Kent Walker, a senior vice-president at Google, told Australian radio last week that there is now more commercial search activity on Amazon than on his own firm’s platforms.
Google wants to fight back by striking at the heart of Amazon’s core business of online sales. Google Shopping is effectively a search engine for products provided by non-Amazon merchants and the search giant is rolling out Google Express, a shopping hub where consumers can buy goods from major retailers like Walmart and Carrefour.
In fact, by making JD.com its commercial ally, Google will tighten its relationship with Walmart, the bricks-and-mortar retailer that is engaged in its own bitter struggle with Amazon.
The once dominant Walmart needs allies against Bezos and his rapidly expanding online empire. Amazon took 18 years to overtake Walmart’s market value in 2015 – but it only needed another three years to triple the gap. In one of the moves to meet Amazon’s challenge, Walmart teamed up with JD.com in 2016 by swapping its Chinese e-commerce operation for a minority stake in the latter (see WiC333).
Having seen its own market cap overtaken by Amazon this year, Google has also turned to JD.com as an ally. And even though this month’s investment looks like a small one, it could lead to a deeper collaboration. “The road to China’s one billion customers, and much of the broader Asian market, runs through Chinese partnerships. Google’s deal is a penny ante for future access to the Chinese market,” financial correspondent Dylan Byers suggested on CNN.
Is JD.com ‘China’s Amazon’?
Amazon’s shares now trade at a valuation of more than 250 times net profit. But its founder’s determined focus on sales over profitability has meant that being in the black wasn’t the prime concern for the Seattle-based firm. It has repeatedly doubled down on its investments to build its brand and grab market share across the fuller shopping experience (starting out with books and moving into more categories of goods, including groceries in its recent purchase of Whole Foods).
Between 1994 (when it was founded) and 2013, Amazon’s entire cumulative profit was less than ExxonMobil’s earnings every 2.5 weeks, according to Investopedia. As a result it built a money-losing reputation with the investment community before finally starting to convert its market strength into significant profits (it reported net income of $1.86 billion in the fourth quarter of 2017).
JD.com bears a strong resemblance to the American firm – particularly when it comes to bleeding red ink during its early years.
It reported a 40% rise in revenues to Rmb36 billion ($5.4 billion) last year but its net loss more than doubled to Rmb5 billion. According to news portal Huxiu, JD.com’s annual losses have added up to Rmb19 billion from 2009 through 2017.
This is not something that seems to have troubled JD.com’s founder and boss Richard Liu. In fact, he has taken pride in his company’s dubious honour as “the king of lossmakers” among major Chinese firms (according to Fortune China, a unit of TIME magazine, JD.com was the largest lossmaker from China on its Global 500 list).
In 2012 when JD.com was mired in a price war with retailing rivals GOME and Suning, Liu boldly announced that his internet firm wouldn’t make a gross margin on any of the electronic goods sold on its site for three years.
The 44 year-old even threatened to sack sales staff discovered to be making a margin on sales of the goods concerned.
JD.com’s main target is Alibaba?
“It is hard enough trying to be the Amazon of China without also having to live in the shadow of Goliath,” The Economist concluded in an article in 2014, just months ahead of JD.com’s listing in the US.
The ‘Goliath’ here, of course, is Alibaba, the only e-commerce platform that is bigger than JD.com in China.
In a way, JD.com’s Amazon-esque “expansion over profitability” strategy has been everything that Alibaba is not. JD.com’s business model has been “asset-heavy”. It operates its own logistics network and holds hefty inventories of goods.
That allows it to offer standards of same-day or next-day delivery in areas covering more than 1 billion (mostly Chinese) consumers.
In comparison, Alibaba holds no stock of its own (other merchants sell via its marketplace platforms) and relies more on independent couriers such as ZTO or YTO to make sure packages bought via its Taobao and Tmall sites reach homes and offices quickly.
Putting this different approach into another perspective, JD.com employed about 160,000 people at the end of last year, including delivery staff. That was nearly triple the size of Alibaba’s workforce worldwide.
It has also put a heavy emphasis on the quality of goods sold and delivered via its platform (it takes a ‘zero-tolerance’ approach to counterfeits). Sales of fake goods have been an Achilles heel for Alibaba, however, and one of the shortcomings that has hampered its ambitions to expand in the American market (see WiC327).
JD.com’s approach eats into its short-term profits but the hope is that the investments in infrastructure, akin to the early days of Amazon, will allow it to build a stronger market position over the long run.
“Give us enough time and we will one day surpass Alibaba,” Liu predicted in an interview with state broadcaster CCTV in 2016.
Others want to target Alibaba too?
JD.com’s experience in building out its own fulfilment network is another of the core reasons for Google’s investment this month. The plan is to bring the same skills into international markets – most likely starting with Southeast Asia. Combining this expertise with the “data traffic” (of consumers and consumer brands) on Google’s search engines could give JD.com an edge over Alibaba, Caijing magazine predicted.
Alibaba’s other main competitors in China have been eager to help JD.com challenge its larger rival. For instance, Tencent invested more than $2 billion in JD.com prior to its Nasdaq listing and it has since raised its stake to about 18%. Walmart has also beefed up its shareholding in JD.com to about 10% after pulling out of e-commerce sales in China two years ago.
Both Tencent and Walmart have been using JD.com as a “proxy” to compete with Alibaba’s core business, Hong Kong Economic Journal reports. In fact, the newspaper says the deal with Google means that JD.com is now being backed by “the most glittering list of strategic investors” and that each of them is resolved to take on Alibaba in China and other markets.
In another sign of Walmart picking sides, the American retailer has dropped Alipay in favour of Tencent’s payment tool WeChat Pay in its stores in western China, including provinces like Sichuan, Yunnan and Gansu (see WiC403).
And Liu, the JD.com boss, has been keen to hype how his firm is set to combine with the heavyweight trio in confronting his bigger rival.
“In the future, our strategic investors including Tencent, Walmart and Google will together forge a ‘borderless retailing’ alliance, provide services to global consumers and consumer brands, and bring quality Chinese brands to the global market,” he wrote in a memo to employees last week.
Alibaba is sounding unfazed?
Alibaba has always played down the threat from its smaller peer. “JD is really not a competitor. We’re about six or seven times bigger,” Joseph Tsai, its executive chairman, told American news portal The Information in a nonchalant interview back in 2016. “They keep making inconsistent promises to the market that they cannot deliver. We don’t really pay too much attention to them.”
It’s true that JD.com has a lot of catching up to do. Its 618 Shopping Festival, which ran from June 1 to June 18, saw Rmb159 billion of goods sold on its e-commerce platform during the period, or a 37% increase from a year earlier.
By comparison it took just 24 hours for Alibaba’s Singles’ Day to rake in a similar sales figure last November.
Trading at a market value of $57 billion, JD.com also has some way to go before it comes close to Alibaba’s market worth of about $480 billion.
Perhaps stung by JD.com’s claim to leadership in logistics, Alibaba has been beefing up its control of its delivery affiliate Cainiao and it says it will turn five cities into “global hubs” for its sales platform: Dubai, Kuala Lumpur, Liège in Belgium, Moscow and its home city of Hangzhou.
Nonetheless, it would be foolish to underestimate its smaller rival amid signs that the battle for online sales is going to feature three main contenders.
Two of them – Amazon and Alibaba – seem intent on largely going it alone, trusting in their own commercial ecosystems.
Against both of them a looser alliance of Google, Tencent, Walmart and JD.com is taking shape. Their bet: that a mix of search and advertising power, online payment know-how, as well as a mastery of social media, traditional retailing skills, and excellence in online sales and delivery will prove more potent.
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