Commerce Ministry Weighs in on Price Wars 商务部或对电商领域价格战有所行动

By newsdoug on May 30, 2012

You know things are bad when even your national regulator isn’t optimistic, which appears to be the situation based on comments by a top Commerce Ministry official discussing rampant competition plaguing China’s e-commerce sector. Of course, it doesn’t take a genius to know that China’s vibrant e-commerce industry is in the midst of a series of cutthroat price wars, with new promotions being announced almost daily by the likes of Jingdong Mall, also known as 360Buy, Dangdang (NYSE: DANG), Yihaodian and Suning (Shenzhen: 002024). What’s more interesting here is the fact that the regulator is commenting on the situation, which hints that perhaps it may soon make an attempt to ease the situation — a step that would be consistent with China’s past behavior but also one I would strongly advise against. According to media reports, a top Commerce Ministry official for e-commerce, speaking at an event in Beijing this week, noted that the online retailing space has huge growth potential, with total sales set to pass 3 trillion yuan in the country’s current 5 year plan. But he also noted that companies are using the future to subsidize the present, which has led most major players to sink deeply into the red. (Chinese article) That trend has been all too obvious on company financial statements lately, with Dangdang, the biggest publicly traded player, and newly listed discount retailer Vipshop (NYSE: VIPS) both recently reporting big quarterly losses. (previous post) None of this is really news, as these price wars have been going on for nearly a year now. But what’s potentially cause for concern is that the Commerce Ministry is speaking so publicly about its own concern for the sector, since regulators are traditionally supposed to remain low-key and impartial to market developments as long as conditions remain orderly. These comments indicate the ministry may be considering taking steps to cool the competition, perhaps by bringing the major parties together to try and tone down their price wars. Indeed, the very same Commerce Ministry made a similar move last year, when it tried to mediate a patent dispute between telecoms equipment leaders Huawei and ZTE (HKEx: 763; Shenzhen: 000063). (previous post) That attempt looked clumsy and inappropriate and I doubt it yielded any results, and a similar attempt to end the rampant competition in e-commerce would most likely product a similar outcome. It’s somewhat understandable that Beijing regulators might want to prevent this kind of destructive situation from getting out of control, which is clearly the case with e-commerce. But experience in the West has shown that government intervention in these situations usually just makes the situation worse, and instead natural market forces are the best antidotes for these kinds of problems.

Bottom line: The Commerce Ministry needs to remain impartial in ongoing e-commerce price wars and let market forces resolve the situation.

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