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 On Monday, Alibaba signaled it is no longer writing off its smaller
competitor, making a $4.6 billion investment to give it more
traction in two areas JD.com does well in: logistics and
electronics.
Ma's online shopping titan bought into bricks-and-mortar electronics
retailer Suning Commerce Group Co Ltd, surprising investors given it
has traditionally stayed away from physical, offline assets.
Analysts say the main draw for Alibaba is likely to be Suning's
logistics network, which it says covers nine-tenths of China's
counties, helping it compete with JD.com's sophisticated in-house
warehousing and delivery system.
"Instead of building the network itself, it saves more time through
this kind of deal," said Walter Woo, an analyst with Oriental Patron
Finance Group in Hong Kong.
But even for cash-rich Alibaba the investment is a bold one, coming
when its heady growth of the past few years is losing momentum.
The company reports its April-June results on Wednesday, with
revenues predicted to hit $3.39 billion – the slowest rate of annual
growth in at least three years – according to a Thomson Reuters
SmartEstimate poll of 27 analysts.
For a company long praised for its fat margins, fast revenue growth
and lack of physical assets, buying a stake in Suning, which had
margins last year of less than one percent, raised industry
eyebrows.
Suning is now valued at 149 times earnings for the last 12 months,
according to Thomson Reuters data.
GROWING THREAT
In January, Ma apologized for his barbs about JD.com and its
business model, saying he had spoken too openly.
JD.com's recent growth in the total value of goods sold on its
platforms is likely to have given Ma more reasons for reflection.
JD.com's gross merchandise volume went from 21 percent of Tmall's,
the main Alibaba site with which it competes, in the 12 months to
December 2013, to 42 percent in the year ending June, according to
Morgan Stanley Research.
"This likely might have triggered Alibaba and Suning to form a
closer alliance to fight back," said Alicia Yap, a Hong Kong-based
Barclays Internet analyst, in a Monday research note.
With China's increasingly discerning consumers drawn to JD.com's
ability to use its in-house delivery system to avoid the more
fragmented, chaotic one in China that its rivals depend on, Alibaba
will be hoping Suning can give it a quick leg-up.
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This prospect has already made JD.com investors nervous, with its
shares down 12.6 percent since Monday, the biggest two-day drop
since it went public in May last year, though the company is playing
down the threat.
"When we began investing in same-day delivery, people wrote us off
as dead," said a company spokesman in Beijing.
"More than five years later, e-commerce companies in the U.S. and
China see our superior service and realize investing is the only way
they can survive."
Alibaba also wants to hook up its other Internet services with
Suning, including its affiliate online payment system Alipay.
Such moves linking online to offline assets are not always welcomed
by investors, as they pose the risk of slimmer margins than
online-only businesses.
Earlier this month, Baidu said it would spend aggressively in this
area, triggering the shares' worst two-day drop since late 2008.
Some analysts say though that if e-commerce giants want to dominate
all of the retail industry, then more tie-ups like Alibaba and
Suning are on the cards.
"The price they paid is indeed very high," said Orient Patron
Financial's Woo.
But given how complementary the deal could be, "this may be the
reason to justify this high price".
(Reporting by Paul Carsten in BEIJING, Brenda Goh in SHANGHAI and
Donny Kwok in HONG KONG; Editing by Rachel Armstrong)
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