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bidnessetcnews 11:17 AM Jun 27, 2016 at 11:17 AM

Can Alibaba E-Commerce Prowess Come In The Way Of Amazon Ambitions?

Alibaba may well be the dominant force in China’s e-commerce space, but the company would need to cover all the bases if it is to compete with Amazon.com

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China is the world’s most populous country, with over 1.357 billion people. Such a large population base allows for an extensively untapped market(s) for most goods and services. The Chinese market carries potential to reach a valuation of over billions of dollars; however, the region is ridden with regulations as China struggles to heal from the failures of communism.

Multiple estimates suggest that the country’s e-commerce market could be worth over $1.1 trillion by 2020, if it continues its current growth rate. Presently, China’s e-commerce space is predominantly occupied by Alibaba Group Holding Ltd. (BABA), which controls about 37.8% of the market. Recently, founder Jack Ma has been known to be making quite a lot of effort in changing the Chinese counterfeit culture, in order to both add value to the country’s resources and more importantly, save the platform’s image from drowning deeper than the Titanic.

The company recently underwent a thorough probe by the SEC regarding its consolidating practices, operation of Cainiao, and the platform’s popular “Singles Day” event. Alibaba made roughly $14.3 billion worth of sales on last year’s Singles Day – China’s one-day digital shopping holiday. Explaining the importance of Cainiao’s logistics capabilities to Alibaba’s long-term vision, the top management has said that the synergy will result in a worldwide eco-system that could reach the most remote locations.

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Interestingly enough, mobile is fast becoming a major driver of online retail sales, as the number of smartphone users in the country continues to increase. While in the past mobile might not have contributed significantly to overall online retail sales, the trend is changing dramatically. According to Forrester Research, mobile contributed 38% to gross merchandise volume (GMV) on Taobao and Tmall platforms in 2015, compared to a mere 7% in 2013.

Barriers To Entry

The regulations imposed by the Chinese government on foreign businesses operating in the region make the Great Wall look like a mere fence. In recent times, we have seen foreign businesses face increasing levels of difficulty in China and some of the biggest names in technology and retail such as Amazon, Wal-Mart, and e-Bay struggle to woo the Chinese authorities. While trying to feel welcome in any country, it helps quite a bit to have a local friend. That is exactly what many foreign companies that have set foot in China are doing.

A popular exchange that has been identified is one where the foreign company takes cover under a Chinese giant’s shadow to remain in the running for a piece of the pie. However, a worrying trend has emerged in this seemingly innocent transaction. The troves sold to Chinese giants appear to be making less noise, and some have even shut down. Recently, Wal-Mart joined forces with JD.com to support the latter company’s ambition to climb up the ranks and, at some point, challenge Alibaba at its own game. The rising e-commerce beast operates over 5,370 delivery and pick-up stations across China, and runs roughly 210 warehouses in 50 cities in different districts across the country.

In what seems to be an ongoing struggle for superiority in the e-commerce market, there is one foreign player that refuses to give in to the pressure: Amazon.com, Inc.’s (AMZN) subsidiary Amazon China. The subsidiary’s total transactions during Black Friday increased by about six times in 2015, compared to the year before that.

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So How Do They Stack Up?

Ever since its IPO in September 2014, Alibaba has, on many occasions, been compared to its US rival Amazon.com. To begin to compare the two, however, one must understand that the two companies operate and monetize quite differently from each other. Alibaba makes most of its revenue from ad monetization and vendor services, whereas Amazon makes revenue from selling cloud computing services through its Amazon Web Services platform and takes a portion of the revenue generated from goods sold on its e-commerce platform.

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While Alibaba’s revenue might not even be close to Amazon’s, the Chinese e-commerce juggernaut has registered a constant growth in revenue since it went public and has demonstrated only healthy irregularities so far. However, since then Alibaba’s stock price has failed to hit its IPO point. Moreover, the diversity of Alibaba’s revenue stream helps protect it from swings in consumer sentiment and macro-economic conditions. But the picture isn’t as rosy as it appears at the moment; talks about China’s slowdown have started to reach all quarters of the world. Retail, whether traditional or online, could quite obviously take a hit and give way to an aftermath many companies in the space might not be fully prepared for.

In such a scenario, Alibaba’s direct exposure to the Chinese people – who have been at the root of its success so far — could become its biggest threat. In the past financial quarters, the contribution of retail sales to Alibaba’s overall revenue has gone up, which has in turn only increased the company’s reliance on the segment. Meanwhile, Amazon.com has been quick to set up a user-base for its Amazon Web Services that is big enough to offset any future declines in retail. Alibaba’s management apparently recognized this threat late last year, after the company started to invest in companies such as Youku Tudou, which is often seen as China’s version of YouTube.

For more information on Alibaba financial performance and history, refer to our Alibaba Data Analysis section.

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