Alibaba Feels the E-Commerce Pinch 阿里巴巴感受电子商务竞争

By newsdoug on June 13, 2012

Alibaba appears to be feeling the pinch that has hit most of its major rivals over the last year as they engage in a nonstop game of cutthroat competition, with news that China’s e-commerce leader is doing the once unthinkable: offering discounts. At the same time, media are reporting the company has also become the latest entrant to the online book-selling business, again reflecting the overheated competition that has gripped the market as everyone battles with everyone else in just about every major product category. To understand the significance of this latest news, we need to look first at Alibaba’s e-commerce model, which is quite different from that of its major rivals like Jingdong Mall, which also goes by the name of 360Buy, and Dangdang (NYSE: DANG). Whereas nearly all of its major rivals directly sell their merchandise to consumers, Alibaba uses a model that see it acting as middleman for other online retailers by letting them set up shops on its online TMall platform, formerly known as Taobao Mall. That means that Alibaba, as a middleman platform operator, has largely avoided the recent price wars infecting most of its rivals, whose margins have plummeted as they offered steep discounts to maintain their market position. Now it appears that Alibaba is also feeling some of this price-war pain, as the company reportedly prepares to help the merchants on its TMall platform by providing $47 million in rebates for sales of their various electronics, from cellphones to televisions and air conditioners. (English article) That figure doesn’t look all that big for a company of Alibaba’s size, but it probably reflects the fact that many of the merchants who sell things on TMall are feeling the effects of the price wars that have driven nearly all major e-commerce companies deeply into the loss column, including Dangdang, the only publicly traded company in the space. (previous post) Alibaba likes to boast that it is one of the few e-commerce companies that has remained profitable throughout the price wars, but clearly it’s starting to feel some pressure as many of the merchants who sell items on TMall are being forced to do so at a loss and perhaps even closing up shop. I wouldn’t expect TMall to start losing money anytime soon, though it will clearly feel more pain as the overheated e-commerce sector undergoes a much-needed consolidation that could result in the closure or merger of one or more major players. (previous post) Meantime, Alibaba is copying a tendency by most of its rivals to encroach on each others’ product areas with the latest news that it is boosting its online book-selling business, according to media reports. (English article) That move would following another high-profile entry into the online book business by Jingdong Mall, which made headlines earlier this year when it entered a business dominated by Dangdang and Amazon’s (Nasdaq: AMZN) China site. Despite its late entry to the space, Alibaba will probably gain at least some market share in online books simply because of its size. But from a broader perspective, this move just underscores that the rampant competition in China’s e-commerce space is continuing, with consolidation sorely needed to set the sector on a more solid footing for long-term profitability.

Bottom line: Alibaba’s offer of financial support to its online merchants is the latest sign of rampant competition that has pushed most Chinese e-commerce companies into the red.

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