Online Wars Hit Suning, No Relief in Sight 电子商务价格战拖累苏宁业绩
Here’s a word of caution to anyone who might have thought that China’s bloody e-commerce wars may start to ease in the second half of the year as companies start to run out of cash: Don’t get your hopes too high. That’s my main conclusion after looking at newly released first-half results for Suning (Shenzhen: 0020204), one of China’s top electronics retailers that seems determined to sacrifice short-term profits in its aggressive drive to build up its fast-growing online business. The big problem in China’s e-commerce wars, which began more than a year and a half ago, has been that most players have access to huge reserves of cash from outside sources and all have indicated they will continue to use that money to fund operations no matter how much their loses mount.
In Suning’s case, the company is using its successful chain of real-world electronics stores to subsidize its online shop, suning.com, now one of China’s top 5 e-commerce sites. That strategy caused Suning’s profit to tumble 30 percent in the first half of the year to 1.74 billion yuan, or about $270 million, marking the biggest such decline for the company in recent years. (Chinese article) Suning’s overall revenue rose nearly 7 percent, although revenue for its online store more than doubled to more than 5 billion yuan.
The big profit decline doesn’t come as a huge surprise since Suning had previously warned that its first-half net income would fall 20-30 percent. (previous post) Still, the fact that the final figure came in at the lower end of its guidance shows that Suning intends to continue aggressively subsidizing its e-commerce site for at least the next year.
Perhaps more worrisome, media reports indicate that Suning’s e-commerce goal for 2012 remains at 20 billion yuan in sales, meaning the company will have to nearly triple its online sales in the second half of the year for it to meet that goal. That kind of aggressive target looks more like a fantasy than a goal that Suning will ever be able to really attain; but it also underscores the fact that Suning intends to remain quite aggressive in the e-commerce space and that it’s quite willing to keep sacrificing its profits and margins as it attempts to catch up to industry leaders Alibaba Group, Jingdong Mall and Amazon China (Nasdaq: AMZN).
Most people believe that all of China’s major e-commerce players, with the exception of industry leader Alibaba, are losing big money as they fight for market share. The big problem is that most top players still have access to cash to continue their wars for as much as the next year or longer. Like Suning, Alibaba can draw on its profits to maintain its market position; meantime, Amazon China and Suning both can draw on profits from their parent companies’ core businesses.
Jingdong Mall, which also goes by the name 360Buy, and Dangdang (NYSE: DANG) are 2 players without access to major sources of outside cash; still, the former has embarked on a new round of fund-raising that could see it raise another $1 billion, while the latter has relatively large cash reserves of about $200 million. With all that excess cash floating around in China’s e-commerce cyberspace, look for the price wars to continue for at least the next 12 months and perhaps even longer as everyone fights for market share and no one cares about margins or profits.
Bottom line: Suning’s latest results indicate it has no intention of yielding in China’s bloody e-commerce wars, which now look set to last at least another year.
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