Not clicking like it used to

For decades the ‘Four Great Inventions’ of the compass, gunpowder, papermaking and printing have been celebrated as historic examples of ancient China’s innovative spirit. Less well remembered is that this was an imported idea,  first spread by European missionaries who focused on three core inventions among the four.

The fourth, papermaking, was only ‘added’ after 1949. The move was part of a propaganda push to rebuild confidence in a shattered country, one that had suffered a lengthy period of civil war and foreign occupation. It was an attempt to restore pride in the Middle Kingdom’s innovative past by a new regime wishing to redress  China’s ‘century of humiliation’.

More recently Beijing has been pushing for a  “great rejuvenation” to invigorate the Chinese nation by 2049. Not too surprisingly, the messaging around the campaign seems familiar, although it is  ‘Four New Great Inventions’ that have found their way to the forefront of the updated narrative.

The notion started with a video from the People’s Daily and the Beijing Foreign Studies University in 2017, in which students from 20 different countries were asked to list the leading examples of Chinese technology they wanted to bring back to their homelands.

The four most common replies were e-commerce, mobile payments, bike-sharing and high-speed trains.

Strictly speaking none of these are Chinese  in origin – the roots of each invention can be traced to other countries – although there is no denying that China is the largest market in which each new technology has been widely applied.

Hype about the ‘Four New Great Inventions’ was short-lived, however – the ‘quartet’ concept marred  by the collapse of a series of financially overstretched bike-sharing firms such as Ofo.

Of the remaining three ‘new great inventions’ e-commerce is arguably the most important, having produced some of the fastest-growing internet giants in China and contributing significantly to economic growth (and without online sales the mobile payments revolution would have been substantially delayed, of course).

E-commerce’s contribution to the Chinese economy is also coming  back into focus as analysts weigh the fallout from regulatory crackdowns on the leading internet platforms and the impact of the Covid-19 pandemic.

 Both have buffeted the market capitalisation of companies like Alibaba and have the potential to reshape the industry’s long-term future.

How have the ‘Big Three’ fared?

China’s most valuable e-commerce firm Alibaba published its annual report for the financial year ended March last week. Net profit for the period dropped nearly 70% on the year to Rmb47 billion ($7.4 billion) primarily due to decreases in the market price of its equity investments in publicly-traded firms.

Revenues for the January-to-March period rose only 9% to Rmb204 billion, the slowest revenue growth (for the second straight quarter) since it went public in New York in 2014.

Both figures appeared to have exceeded market expectations, however. Alibaba’s shares soared nearly 15% in the trading session following its results announcement.

This is partly explained by the fact that analysts have set the bar very low for the firm and for the broader internet sector in China after recent market selloffs. Trillions of dollars of market value have disappeared in what might be characterised as ‘dot.bloodbath’.

The Chinese government’s crackdown on the major internet platforms came in wave after unpredictable wave, following the failed spin-off of Alibaba’s fintech unit Ant Group in late 2020. Ant’s leadership team antagonised the central government in a way that has since seen formerly high-profile founder Jack Ma drop so far below the radar that it probably requires sonar to track the submerged tycoon’s movements.

Alibaba’s market value now stands at about $260 billion, or nearly 70% below its peak in 2020 before the Ant Group deal was pulled by infuriated officials.

At one point in 2017 – when local media outlets were still discussing  ‘Four New Great Inventions’ eagerly – the combined market value of Alibaba and its archrival Tencent was almost as big as that of Apple.

But as of April this year, the iPhone maker was worth more than 50 of the biggest Chinese internet firms added together, according to financial data provider Jin10.com.

The drop in value is largely a result of Beijing’s pressing scrutiny of market practices in the sector. However, international investors have also been startled by Washington’s threat to delist Chinese firms from American bourses as tensions continue to flare between the world’s two biggest economies.

There is more uncertainty ahead. Two of Alibaba’s closest rivals JD.com and Pinduoduo have both shown slowing growth in recent earnings announcements. Quarterly revenue growth at Pinduoduo has slowed to single digits. JD.com posted the highest income of  the trio but it still swung to a Rmb3 billion net loss during the first quarter of 2022, compared with a net profit of Rmb3.6 billion a year earlier.

All of the ‘Big Three’, Sina Finance noted, reported minimal growth in the number of annual active users (AAU) of just over 10 million,  although that was still enough for Alibaba to exceed a billion active users for the first time.

“I think no one would expect us to maintain breakneck growth after Pinduoduo reached such business scale,” the seven year-old firm’s CEO Chen Lei argued in an earnings call last week. Pinduoduo has grown from scratch into a company with 882 million AAUs, while JD.com ranks third in active user terms with about 580 million.

Are things going to get worse?

During a video conference with nearly 100,000 officials last week, Chinese Premier Li Keqiang warned that the economy has been struggling badly in March and April.

The same slowdown was evident in Alibaba’s latest results, when the company reported a decline in gross merchandise value (GMV) on Taobao, its leading e-commerce platform. It was the first time that’s happened since Taobao was launched in 2003.

With major cities including Beijing and Shanghai in varying states of lockdown, Alibaba’s CEO Zhang Yong told a news conference last week that GMV dropped more than 10% year-on-year in April, although he expects the situation to improve as parcels from undelivered orders held up at jammed warehouses start to find their ways to customers’ homes.

Indeed Alibaba mentioned ‘Covid’ no less than 26 times in its earnings announcement. It even defied standard practice by opting not to give a forecast for the business outlook over the coming year.

“Considering the risks and uncertainties arising from Covid-19, which we are not able to control and are difficult for us to predict, we believe it is prudent at this time not to give financial guidance,” the company said.

JD.com is likely to have an ugly second quarter as well. Equipped with one of the most extensive logistics networks of China’s e-commerce platforms, it undertook a difficult mission to get daily supplies to residents of many Shanghai districts during the recent lockdown. The efforts required by delivery staff in these nightmarish conditions likely made this a lossmaking enterprise, although the company’s contribution might earn kudos from the government.

More broadly, sentiment seems weak across the sector. Dai Shan, one of Alibaba’s founders, has been visiting different merchants on Taobao and Tmall since she took charge of the popular shopping platforms last month. According to China Entrepreneur, a magazine, Dai spoke to representatives of more than 300 consumer brands in May. Many expressed anxiety over their prospects for the remainder of this year.

In the past the e-commerce platforms prospered by luring new shoppers, Dai told China Entrepreneur. But in future Alibaba will focus more on retaining existing customers and maximising their spending.

Even the ‘618’ shopping festival, an event started by JD.com, which was founded on June 18 (in 1998), and which has gone on to become the second most important online sales fiesta behind Alibaba’s Singles’ Day on November 11, has been struggling.

“Traffic has been quiet. The KOLs [i.e. the online influencers and e-commerce livestreamers] have been quiet. And the level of consumer demand has been quiet in general,” Sina Finance noted, predicting that there could be a drop in GMV in this year’s 618 sales campaign.

Are there any growth stories?

For the e-commerce heavyweights, there is further bad news: up-and-coming sales platforms have been joining the sector.

Some of the newcomers are taking market share at a rapid rate. Step forward Bytedance and its Chinese sister version of TikTok:  Douyin (China’s most popular video streaming app). During the Douyin E-commerce Ecological Conference on Tuesday, it was annnounced that Douyin’s GMV surged 320% for the fiscal year ending in April, with more than 10 billion products changing hands on its platform.

Much of that growth has been built on Douyin’s core strengths in video content. Thanks to their algorithm-based recommendations, AI-powered platforms such as Douyin are well equipped to link content with commercial offers for their viewers.

This business model has been described by Douyin as ‘interest e-commerce’. When the platform realises that video clips or footage from KOLs are exceptionally popular, it directs e-commerce ads and other sales efforts automatically to these points of interest.

For instance, after Taiwanese singer and fitness coach Liu Genghong’s home workout livestream caught fire on social media, Douyin scored a windfall from related e-commerce sales. In April alone, when platforms such as Taobao were suffering from Shanghai’s lockdown, Douyin sold more than 229,00 yoga mats, 110,000 dumbbells and 752,000 skipping ropes as part of their home fitness sales effort.

Other video platforms such as Kuaishou and Bilibili have been trying to monetise their traffic better with e-commerce applications too. Even ‘content providers’ such as Zhihu, China’s leading question-and-answer app, ventured into e-commerce last year.

The result is an increasingly fragmented market. For years Alibaba and some of the most popular KOLs on platforms like Taobao Live had a lucrative time staging streaming shows to grow sales. Now the battle is being waged to beef up content that pinpoints audience demographics more specifically, drawing on areas of interest in a more detailed way (see here for more on the rapid growth of the frisbee community, for instance).

Is there a ‘Digital Silk Road’ for growth?

One of the fundamental changes brought about by the pandemic is an accelerated transition towards the digital economy. E-commerce is also set to thrive, despite the short-term disruptions to sales and distribution during the pandemic.

As such, more of China’s internet giants are investing more resources in tapping overseas markets too.

Alibaba’s international business was a bright spot in its otherwise lacklustre report for 2021, for instance. Orders on its Southeast Asia-focused unit Lazada grew 60% on the year, while those on Trendyol rose nearly 70%. The latter operates in Turkey, where online sales have  surged (Alibaba has also been making inroads overseas with its cloud business; see page 13).

Other Chinese firms have been targeting a greater share of sales away from their domestic markets too. GMV at TikTok this year is projected to reach $12 billion by some analysts, which would be more revenue than Twitter and Snap combined.

But the likes of Alibaba and Bytedance are also feeling the competitive threat  in overseas markets from a company that doesn’t even look like an e-commerce platform at first glance or even seem to be a Chinese firm. The valuation of the Chinese fast-fashion app SheIn is now said to have exceeded $100 billion (for our first article on this low-key  unicorn, see WiC542). The company’s app was downloaded nearly 190 million times last year, up 70% from 2020, which makes SheIn the world’s most popular shopping app (as opposed to website) ahead of Amazon, according to data aggregator Apptopia.

The original ‘Four Great Inventions’ that were pioneered in ancient China spread to other parts of the world through the Silk Road. T0day a Digital Silk Road is a less discussed objective in Beijing’s Belt and Road Initiative, which is more typically associated with the construction of roads, railways, ports and power stations. But in the original BRI blueprint the Chinese government also called on Chinese firms to narrow the digital divide between nations, including lowering the  barriers to cross-border e-commerce.

While China’s e-commerce giants will struggle to repeat their previous growth spurts at home, more of them will look overseas for ways of increasing their sales with newer customers. Whether by circumstance or design, much of that plan will focus on online shoppers in countries in Africa and Asia. The leading players in the sector should also be well-positioned for success after road-testing their strategies for much of the last decade. After fine-tuning the marketing messages and honing the algorithms in pursuit of these shoppers, the comparative advantages of China’s e-commerce firms should bring new profits from sales to consumers in the world’s emerging markets.

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