(1/2) BABA: Back for Business
(1/2) BABA: Back for Business
How Alibaba lost 30% market share & why we are optimistic
This is part one of a multi-part series, in which we explain:
Why Alibaba’s share price has been in the doldrums.
What decisions Alibaba made over a decade ago, which allowed the rise of PDD.
Why PDD was able to take share from Alibaba.
What changes Alibaba has made recently that make us optimistic.
What risks prospective investors may face.
We were fortunate to have experienced much of this firsthand.
Why are current Alibaba share prices so low?
Arguably the face of Chinese ecommerce for many years, Alibaba needs no introduction. Equally well-covered are its woes in recent years, which partially drove the negative sentiments around its share price and Chinese equities in general.
Recent US-China geopolitics and delisting risk of ADRs only exacerbated this malaise.
What is rather less well-known, however, are the core fundamentals, which in fact drove much of the price decline. Below is a chart of the GMV (gross merchandising value) comparisons in a study that we conducted a couple of years ago.
Alibaba’s low share prices are not only because of sentiments, but because market share & growth prospects diminished drastically in recent years.
As can be seen, PDD was taking significant share from Taobao / Tmall during the 2017 to 2021 period. To add insult to injury, its number of active users also exceeded that of Alibaba in 2021. Alibaba losing to its competition is the key underlying reason for why investment professionals in China have also been bearish on the company.
By 2021, PDD generated some CN ¥2.44 trillion (roughly US $0.35 trillion) in GMV – note that China’s GDP for the year was just under CN ¥115 trillion, so PDD was contributing to over 2% of GDP.
PDD subsequently stopped reporting directly comparable figures, but should have reached around US $0.45 trillion in 2022, and flattened out thereafter, leaning on Temu, which is not available in China, to exceed USS $0.5 trillion in GMV in 2023.
The picture looked even more grim for Alibaba in 2022 and 2023, as Douyin (Tiktok overseas) and Kuaishou (Kwai overseas) also joined the fray. Kuaishou exceeded CN ¥1 trillion GMV in 2023, while Douyin topped CN ¥2 trillion, recording an estimated 60-80% growth over the year prior.
What enabled PDD to take so much share?
A full analysis of PDD’s tactics would warrant multiple detailed studies. However, ironically it was actually Alibaba itself that laid the foundations enabling PDD’s rise.
The root causes of Alibaba’s loss of market share can be found in key decisions made over a decade ago.
Having beaten down both eBay-acquired Eachnet (former #1 and dominant over Taobao) and Amazon-acquired Joyo (founded by Lei Jun, who eventually went on to found Xiaomi) in China, Alibaba was ascendent in the world’s largest ecommerce market.
In 2013, Jack Ma felt comfortable enough with the situation to hand over the reins to his first hand-picked successor Lu.
Alibaba reached a peak of 80% market share by GMV in 2014, and floated that year in the biggest IPO ever, at a valuation of US $169.4 billion (even now its market cap is only US $180.9 million).
However, two key players had emerged on the rapidly evolving Chinese tech scene during 2010-2013:
JD. Chinese consumers buying more larger-ticket categories such as consumer electronics online, as well as more trading-up, lead to rapid growth for JD, China’s answer to Amazon.
WeChat. The victory of WeChat over Miliao (another of Lei Jun’s creations), partially driven by Tencent’s decision to drive migration from its QQ users, lead to explosive growth for WeChat, which was to become a critical kingmaker.
The threat from JD as a direct competitor was evident, so Alibaba responded by going head-to-head in a fight for the premium segment.
However, JD had two advantages versus Taobao and Tmall. Fulfillment was faster, and JD’s merchandise was perceived to be higher quality and more trusted by consumers.
This was due to nature of the different business models – Alibaba’s Taobao and Tmall were pure platform plays, while JD was primarily self-operated, with full control over its supply chain and logistics. Both were the result of conscious decisions by Richard Liu, JD’s founder.
In 2010, JD doubled down on its in-house logistics, making the “211” promise: apart from certain promotional periods, consumers in major cities ordering before 11 a.m. should expect delivery before 11 p.m., and those that ordered before 11 p.m. should expect delivery before 11 a.m.
In comparison, Amazon only began to offer one-day shipping for Prime customers 9 years later.
At this time, it often took 3-5 days for Alibaba’s products to arrive in these same cities (where ecommerce first penetrated, and the wealthiest customers to be found). This meant that there was a tangible difference in expected delivery time.
In response, Alibaba founded Cainiao, its logistics arm, to improve fulfillment in May 2013. However, the original Cainiao primarily functioned only as a coordinator and tracker, aggregating data from 3rd party logistics services and contacting customers. So the main difference initially was that customers would increasingly receive SMS from Cainiao rather than various 3P logistics providers.
This was in stark contrast to JD, which operated its own distribution network and veritable army of delivery people – by 2015, when JD hit over 100,000 employees, over 90% of worked in the logistics division – to ensure fast and reliable delivery.
Consequently, Cainiao did not offer an immediately discernible improvement over 3P logistics services, and JD was still ahead where it counted – speed of delivery.
Over time, however, this advantage was eroded as 3P logistics providers improved their own services. Delivery times were whittled down to typically 2-3 days in the most developed regions; JD was still faster, but this no longer mattered as much to most consumers.
When not in a hurry, most consumers were content to wait 2 more days for a lower price tag.
Merchandise quality was actually the bigger headache. Alibaba had battled long and hard against vendors peddling counterfeits, but it proved to be a tough nut to crack. Indeed, both Alibaba’s CEO and COO resigned due to vendor fraud in 2011.
The principal reason was because the bulk of Taobao’s vendor base comprised small businesses that often had minimal oversight, with some not above making a quick buck – even if that meant selling counterfeit merchandise.
Even if those products were delisted or the accounts banned, it was relatively easy to open a new account and repeat the process.
This was in fact why Alibaba chose to split Tmall from Taobao in 2011, to provide a more premium and higher quality assortment for Taobao users. Now Alibaba redoubled efforts to stamp out vendor fraud and premiumize, pulling multiple levers:
Price increases. To ensure the typical Tmall vendor is well-established with more skin in the game (in addition to increasing profitability), Alibaba increased the costs of opening online Tmall stores repeatedly and began charging additional fees. Vendors raised an outcry when Alibaba increased annual fees from CN ¥6,000 to two tiers of ¥30,000 and ¥60,000 respectively in 2011.
Preferential placement. Tmall listings were always ranked ahead of Taobao listings in search results – though this policy was reversed some years later, the damage had already been done. Large, well-established vendors were also listed ahead of smaller vendors.
One way traffic. Many Taobao links would take you to Tmall, but Tmall links would stay on Tmall. Very few customers would notice this seamless transition, yet the impact was of course enormous for vendors.
The latter two policies meant that many small vendors on the lower-priced Taobao suffered decreases in customer traffic of well over 50%, so having a Tmall store became table-stakes.
Yet the first policy meant that vendors wanting to be admitted to the Tmall club, already finding themselves having to pay increasingly high advertising fees to the platform, found it even more difficult to break even.
Small and newly start-up vendors were hit the hardest, due to the much higher startup capital required.
This precipitated in a mass migration of smaller vendors (especially those selling non-branded merchandise) away from Alibaba, in search of cheap, monetizable traffic.
They converged on WeChat, which was growing explosively – reaching 100 million MAUs (monthly active users) in 14 months, 200 million in 20 months, and 300 million in just another 4 months.
Although it started by imitating Miliao (and both in turn imitating Kik), by 2013, WeChat was delivering homegrown micro-innovations at a stunning pace, a few of which proved to be pivotal in the Chinese ecommerce landscape in the years to come:
Official account – rolled out in Jan 2012.
Moments – rolled out in Aug 2012.
Groups – rolled out in June 2013.
Wallet – rolled out in Jan 2014.
These collectively contributed to the rise of social commerce in China – a continuation of the conversational commerce trend that would take SE Asia by storm 5-6 years later – and also spawned PDD.
In another twist of fate, Alibaba was the foremost pioneer in conversational ecommerce, which it leveraged to beat Ebay and Amazon in China, when it was still in startup mode.
Recognizing the specific needs of the market, and taking advantage of cheaper labor, Alibaba created Aliwangwang, an instant messaging platform, back in 2004.
This was integrated with Taobao, allowing prospective customers to message and even haggle with vendors, as well as seek aftersales support.
Aliwangwang also conditioned Chinese ecommerce customers to default to instant messaging when communicating with vendors, but WeChat’s much richer feature suite opened a whole new set of possibilities:
Official accounts. The earliest official accounts offered mostly static content, could only be used to push articles to subscribers once a day, and were often used as text-based informercials, e.g., to introduce new products. As WeChat enriched their functionality, these became more interactive – with pictures and links being key to ecommerce – yet these only came a few years later.
Moments. Early social commerce on WeChat was a rather informal affair. Sellers would connect with clients offline, or even just use existing contacts, advertising products on their WeChat moments, before making the sales offline. Startup sellers would often pick up the products themselves – driving the rise of cross-border ecommerce (parallel imports), or Daigou.
Groups. Used by sellers to notify existing customers of new products or promotions, and gather batches of orders simultaneously – perfect for pre-orders and bulk purchases (eventually leading to PDD’s much misunderstood C2B model).
Wallet. A clearly necessary component of any ecommerce platform, this too was to play a major role in the rise of PDD, in more ways than one. It is important to note here that early customers did not place orders directly on WeChat.
The more common practice was for vendors to redirect WeChat traffic to their own Taobao stores.
Taobao charged no commissions, and unlike Tmall, charged no annual fees; its primary source of income was providing exposure to stores by way of display ads & search ads.
This meant that when vendors pointed customers from WeChat directly to their product detail page (PDP) on Taobao, Alibaba received no income.
Now we enter one of the most commonly misunderstood and murky developments in Chinese tech (even those working within the field in China often misidentify the instigator of the WeChat and Taobao decoupling).
To prevent sellers from circumventing its normal traffic flow and monetization model, Alibaba decided to bar vendors from sharing Taobao links on WeChat.
To be fair to Alibaba, there were alleged instances of Taobao vendors defrauding or verbally abusing customers via WeChat.
At the time, the BAT (Baidu-Alibaba-Tencent) rivalry was also in full swing, with each being extremely wary of others encroaching on their home turf – search, ecommerce, and social media respectively – yet harboring ambitions of doing exactly that themselves.
Tencent has long tried and failed to vie with Alibaba for a decent slice of the ecommerce market.
Any possibility of creating an over-the-top ecommerce model has been shattered, and Tencent retaliated by eventually boycotting all links from Tencent to the Alibaba ecosystem.
In hindsight, Alibaba underestimated the longer impact of its blocking of WeChat traffic - at the time, mobile purchases accounted for around 1/7 of GMV, since most bigger ticket purchases were still made on PC, and WeChat was mobile-only.
However, the decoupling proved to be devastating for Alibaba in the long run, especially as WeChat already had 900 million MAUs to Alibaba’s 500 million – creating a whitespace of 400 million unserved users.
Deciding that it could not defeat Alibaba at ecommerce, Tencent decided to invest in JD instead, closing the first deal in early 2014 for 15% of JD’s equity.
In addition to cash, Tencent also sold off its Paipai platform to JD, and in the process began to create the anti-Alibaba coalition in China, which eventually grew to include the likes of Tencent, JD, PDD, Meituan and Vipshop (formerly the #3 ecommerce player in China).
Naturally, these did not generally allow their traffic to be directed to the Alibaba ecosystem or accept Alipay. Instead, they defaulted to Tencent’s WeChat Pay.
After JD’s 2014 IPO, Tencent made another investment, becoming its biggest shareholder, and deepened the strategic collaboration a year later, but that’s another story for another day.
In 2015, Lu himself was succeeded by Daniel Zhang.
It should be mentioned that Alibaba was not altogether unsuccessful in its effort to contain the threat from JD, especially with the premiumization strategy.
However, the real threat came from elsewhere.
In 2016, Tencent made another momentous investment that was to disrupt the Chinese ecommerce landscape – the #1 vendor that grew from its WeChat platform – PDD.
The conditions were perfect for the rise of PDD as a two-sided ecommerce platform. Thanks to Alibaba’s initiatives against JD, PDD had access to:
Supply. Thousands of vendors displaced from Alibaba’s Tmall / Taobao.
Demand. 400 million customers unserved by ecommerce, yet entirely reachable via WeChat.
We seem to have reached the length limit for articles sent via email – to be continued in the next installment.
Full disclosure: We hold a long position in Alibaba and PDD - this is not a solicitation to buy or sell. We have no current business relationships with the companies mentioned in this note, and are not paid to write this piece (other than paying fellow exponents of the research).
Disclaimer: This should not be construed as investment advice. Please do your own research or consult an independent financial advisor. Alpha Exponent is not a licensed investment advisor; any assertions in these articles are the opinions of the contributors.