As Chinese consumers from the steppes of Inner Mongolia to the upmarket neighbourhoods of Shanghai go online to shop for just about everything, two giant e-commerce companies, Alibaba and JD.com, battle it out to be top dragon.
Updated 9 August 2017
Already a man wealthy beyond most people’s dreams, Richard Liu is not accustomed to settling for second best. Having seen his company JD.com successfully muscle in on China’s online retail market, the 41-year-old billionaire has arch rival Jack Ma’s mammoth Alibaba Group firmly in his sights. With the competition between China’s twin titans of digital commerce intensifying, the stakes are getting ever higher.
China leads the world in selling things online. Worth next to nothing at the turn of the millennium, by 2020 Chinese e-commerce could be worth more than that of the US, the UK, Japan, Germany and France combined. By the end of this year, total Chinese online transactions are predicted to total more than US$2 trillion, says Shanghai-based market research firm iResearch. Other firms predict similar numbers.
Dominating this booming space are Alibaba Group and JD.com.
With its Alibaba (B2B), Taobao (C2C) and Tmall sites (B2C) accounting for 80 per cent of the market, Alibaba Group has long been the top player. With 350 million active users, most of its revenue comes from fees, advertising and sales commissions. Its online business is already worth more than eBay and Amazon combined.
Founded five years after Alibaba in 2004, JD.com is the up-and-coming challenger. Compared to Tmall – a vast agglomeration of individual stores where the vendor drives sales – this Beijing-based rival is more akin to a massive online department store. By buying, storing and reselling goods, and delivering them to the consumer itself, most of the company’s profits come from its mark-up on sales.
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It’s in the fast-growing B2C segment where Tmall (currently with a 50 per cent share) and JD.com (around 2 per cent) do daily battle.
“A corporation versus a platform – JD and Tmall represent two ways of making money from online B2C sales,” says Matthieu David-Experton, CEO of China-based Daxue Consulting. “Right now, the competition between them is the most important dynamic in Chinese e-commerce.”
It’s all in the delivery
Most of China’s first e-consumers were based in big cities along the country’s eastern and southern seaboards. But these have quickly been followed by their counterparts in the hinterland, where options for traditional bricks-and-mortar shopping are far less enticing. Servicing these more remote buyers efficiently is crucial for e-commerce companies looking to boost market share.
“Many Chinese online shoppers place duplicate orders with different suppliers, pay for the one that arrives first, and then return the others,” explains Li Jian, a principal with management consultancy A.T. Kearney in Shanghai. “Delivery speed is therefore critical.”
“In the battle between Alibaba and JD.com I think it’s still too early to say who will win.” Reema Patel, SmithStreet Solutions
JD.com has spent heavily on delivery infrastructure, investing more than US$1.5 billion building and leasing a slew of state-of-the-art warehouses and order-fulfilment centres. “When we decided to launch standard same-day delivery in major cities nationwide, people thought we were nuts,” says Josh Gartner, JD’s senior director of international communications.
“Now everyone in e-commerce is scrambling to copy us.”
Alibaba uses third-party companies for its logistics, making it harder to control this part of its business. In the past one of the big complaints about Alibaba was the relative slowness of its deliveries. That’s a key consideration for consumers when both JD.com and Tmall frequently stock the same product at the same price.
Yet times are changing. Two years ago Alibaba set up a consortium of logistics companies called Cainiao. Backed by US$16 billion in funding, Cainiao’s goal is to facilitate next-day delivery of Alibaba-sourced goods in 50 Chinese cities by the end of this year.
“With its limited number of delivery personnel, JD.com is restricted to the largest Chinese cities,” says Hong Kong-based Alibaba spokeswoman Crystal Liu. “Through our logistics partners we can service the entire market.”
Grabbing groceries online
Weary of safety scandals, Chinese consumers in first-tier cities are increasingly moving online as they seek reliable suppliers of food and other non-durable goods.
Online sales of fast-moving consumer goods (FMCG) in China rose 34 per cent in 2014, according to consumer insight company Kantar Worldpanel. Kantar’s figures show that more than 50 million more households started buying FMCG online last year alone.
While e-commerce is still a small part of the overall Chinese FMCG market, massive promotional campaigns by Alibaba and JD.com will see rapid growth continue.
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“Our fastest-growing product categories include food and cosmetics,” says JD’s Gartner. “Five years ago we were seen as primarily an electronics site, but consumers now come to us for wine, fruit, diapers and even seafood.”
Alibaba hasn’t missed a trick in this space either. Tmall recently ran a US$160 million online grocery promotional campaign targeted at Beijing users, collaborating with Cainiao to offer same-day deliveries. Cainiao is also rolling out an FMCG-focused, three-hour delivery service called ‘Ji Su Da’ in a growing number of major Chinese cities.
With retail operators such as Walmart joining the fray, China’s FMCG e-commerce battle is set to intensify, and the competition is already fierce. At the end of last year, Tmall and Taobao’s combined FMCG sales were nearly seven times those of JD.com, so the Beijing-based company has its work cut out closing the gap.
Access to foreign goods
China’s e-commerce boom goes way beyond the country’s borders. Its international e-commerce sales were worth more than US$13 billion in 2013, up 75 per cent year-on-year, according to Beijing-based business consultancy Eguan. It predicts that by 2018 China’s consumers will spend US$160 billion purchasing overseas products.
“In the international space Chinese e-consumers have graduated from luxury products to milk powder and tampons,” says Reema Patel, a director at Shanghai-based consulting firm SmithStreet Solutions. “To them, foreign brands mean reliable quality.”
Gartner confirms the trend. “We are seeing huge and growing demand for imported goods,” he says. Recently his firm launched JD Worldwide, a cross-border platform designed to bring foreign brands to Chinese e-consumers. It includes an eBay store that allows Chinese shoppers to buy goods directly from US-based eBay sellers, and a “US Mall” channel dedicated to American brands such as Converse and Samsonite.
But JD Worldwide is already playing catch-up. Alibaba’s Tmall Global site, which launched in February last year, is now home to more than 5000 foreign brands, as the company signs partnerships with everyone from Zara to Unilever.
“Cross-border e-commerce is a top priority for us,” says Alibaba’s Crystal Liu.
Shopping malls on the mobile
Today, China’s online shoppers are rapidly migrating from desk and laptops to mobile. With more than 570 million smartphone users in China, most consumers carry a shopping mall in their pocket.
According to iResearch, the first quarter of this year saw the value of Chinese m-commerce soar more than 160 per cent year-on-year, to about US$58 billion. This whirlwind growth means m-commerce will soon replace PC-based e-commerce as the dominant platform for online purchases.
“M-commerce is one of the most influential trends in Chinese e-commerce right now,” says David-Experton. “Easy mobile-payment systems such as Alipay mean that it’s not uncommon for people to eschew cash entirely, even when paying for lunch, so the idea of buying goods and services via mobile becomes second nature.”
Through the smartphone, social media has become a critical customer-engagement channel for China’s e-commerce companies. On Tmall, for example, consumers can rate the accuracy of product descriptions, the speed of delivery and their satisfaction with customer service.
JD.com’s operations have received a shot in the arm from its partnership with Tencent, the tech giant behind China’s massively popular QQ and WeChat messaging apps, which have more than 500 million users monthly. Tencent is pushing the boundaries of messaging-driven m-commerce, expanding its WeChat payment system to all brands, retailers and e-stores on the app. It has also given JD.com a way into the lucrative C2C market through Tencent’s eBay-like marketplace, Paipai.
According to JD, Tencent’s apps contributed about 20 per cent of their new customers in the fourth quarter of 2014, with the company understandably bullish about the new collaboration.
“A corporation versus a platform, JD and Tmall represent two ways of making money from online B2C sales.” Matthieu David-Experton, Daxue Consulting
“For people unfamiliar with China, it’s hard to explain the complete penetration of WeChat into the lives of consumers,” says Gartner. “It is central to the Chinese online experience. Full integration of JD.com into the WeChat and Mobile QQ apps has opened doors and made us the envy of the industry.”
Smartphones are also enabling a booming online-to-offline (O2O) industry, with mobile apps and promotions leading users to purchase a whole range of goods and services in the bricks-and-mortar realm.
“Chinese consumers are using their phones less to compare online and offline prices. Instead they are looking for QR codes to get store coupons and showing their membership cards when buying clothes,” says Patel.
Both JD.com and Alibaba have O2O platforms: Alibaba focuses heavily on food delivery, and JD concentrates more on the retail space.
The problem of knock-offs
China’s growing middle class shuns cheap knock-offs, preferring to spend more on high-quality, genuine products. In a recent survey by Shanghai-based RedTech Advisors, 91 per cent of Chinese consumers said authenticity was the most important factor when choosing what and where to buy.
One of the drawbacks of Alibaba’s business model is its susceptibility to selling counterfeit products. It was little surprise when a survey conducted earlier this year by China’s State Administration for Industry and Commerce found that more than 60 per cent of merchandise sampled from Taobao vendors was fake.
"M-commerce is one of the most influential trends in Chinese e-commerce right now.” Matthieu David-Experton, Daxue Consulting
Alibaba has since vowed to redouble its efforts to weed out counterfeiters, revamping its process for reporting and removing vendors from both Taobao and Tmall. With more than eight million local merchants selling products across its sites, this task may prove futile – nevertheless, regaining consumer confidence is crucial.
“The scandal regarding fake goods on Alibaba’s e-commerce platforms may be one of the reasons why JD.com, which has a better reputation as a B2C platform, is gaining so much market share right now,” says David-Experton.
With operations becoming increasingly complex, JD.com and Alibaba’s business models are gradually converging. Growth for JD.com looks healthy if it can continue to diversify its business, acquire loyal users and leverage its Tencent connection. As the delivery volumes rise, its in-house logistics operation may need to be rethought.
Alibaba’s growth is also promising, although it may be at risk of over-diversification. As it looks to facilitate e-commerce between China
and the West, the company will need to demonstrate zero tolerance toward counterfeiting.
While its revenues are on the rise, the high cost of JD.com’s business model means its figures are likely to remain in the red for the foreseeable future. The company insists profitability will come with burgeoning market share – the same plan that has worked for the unprofitable but highly valued Amazon.com. Investors, however, may want to see a return sooner rather than later.
The current financial position of Alibaba, which has a significantly higher profit margin than JD.com, is far brighter. With Tmall’s revenue growth outstripping Taobao’s, last year Alibaba’s group profits were up 26 per cent to a staggering US$5.64 billion. The company is focusing heavily on mobile advertising and is set to double its revenues to US$4.75 billion this year, overtaking those of Baidu, the China region’s equivalent of Google.
Like the two giants that serve them, China’s online consumers are a heterogeneous group. In less developed areas, successful e-commerce is still about product availability and price. But in the nation’s first- and second-tier cities, considerations such as quality and authenticity are increasingly paramount.
“Within the world of Chinese e-commerce, buying behaviour is nuanced and capricious,” says Patel.
“Successful engagement with China’s online consumers requires insight, innovation and a bold business model. In the battle between Alibaba and JD.com, I think it’s still too early to say who will win.”
Jack Ma — Alibaba
Alibaba executive chairman Jack Ma was a thirtysomething university lecturer in English and international trade when he discovered the internet. It led to him becoming the richest man in China. In 1999, Ma and a group of friends founded e-commerce site Alibaba, which when it floated on the New York Stock Exchange 15 years later, raised US$25 billion and broke the initial public offer record.
Alibaba now ranks fourth in the world by market capitalisation, nipping at the heels of Apple, Google and Microsoft.
Despite now holding only 8 per cent of Alibaba stock, Ma retains the right to nominate more than half of the board members. However, his most controversial move was into financial services. As well as using Alibaba’s payments app, Alipay, to buy goods, people can also use it to invest in Ma’s money-market fund, Yu’e Bao – which has US$87 billion in assets.
Ma is also a philanthropist, renowned for giving to causes such as nature conservation and disaster relief.
“Many Chinese online shoppers place duplicate orders with different suppliers, pay for the one that arrives first, and then return the others.” Li Jian, A.T. Kearney
Richard Liu — JD.com
JD.com founder and chairman Richard Liu intended to have a career in politics before he decided that business held better prospects. He learned computer programming in his spare time and in 1998, after a couple of business failures, he established a specialised electronics goods retailer called Jingdong, which is now JD.com.
The company had modest growth and by 2003 Liu had opened 12 stores across China. That was the year when he was forced to rethink his business model, as staff and customers were staying away in the wake of the SARS outbreak.
What followed was Liu’s first retail website in 2004. JD.com was founded later that year. Then in 2005, Liu closed all his physical stores and became an exclusively e-commerce businessman.
In 2014 telecommunications and media giant Tencent bought 15 per cent of Liu’s company and JD.com emerged as a serious challenger to Alibaba.
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