- Alibaba gains the benefit of favorable Chinese regulations and has huge international growth opportunity.
- Alibaba remains dominant in C2C, B2C, and B2B segments putting it in the prime position to benefit from a growing Chinese middle class.
- Organic growth in the form of higher spend per consumer, paired with monthly active user growth will continue over a long period of time (at least the next 20 years).
- Further growth opportunity in other segments like Alipay, local deliveries, and etc. will also drive significant growth in future.
Alibaba (BABA) may have shut out Amazon from ever becoming a major competitor in China, while it can easily waltz its way into the United States. Chinese regulations, paired with the overall mechanics of importation and exportation heavily favor the Chinese e-commerce giant. Not to mention, Alibaba’s market share in key markets puts it in a position in which the vast majority of e-commerce volume goes through Alibaba’s portfolio of mobile apps/websites.
So when confronted with the question of who will become the biggest global e-commerce platform, the odds are definitely in favor of Alibaba. Unlike Alibaba, Amazon doesn't have one of the biggest base of emerging consumers behind it. Furthermore, Amazon has to compete with various online commerce websites, both big and small. While regulation doesn't limit Amazon from competing in the Chinese mainland when it comes to strictly e-commerce, various difficulties with censorship paired with certain industry restrictions makes it difficult for Amazon to market some of its other services.
The regulatory environment isn't friendly for Amazon in China
The below table shows the sectors in which foreign companies can actively invest into, and while e-commerce is not a restricted/prohibited sector the rules are subject to change.
Source: Latham and Watkins
Amazon has to plan ahead for regulation, which is why they launched their international trade hub in a trade free zone.
According to Reuters:
Amazon.com will set up shop in China's Shanghai free trade zone, the company said on Wednesday, aiming to take advantage of less stringent trade regulations to sell a wider range of products in the country. The U.S. online retailer's move shows an intent not only to remain in China but to beef up its presence in an e-commerce market dominated by Alibaba Group Holding and Beijing-based JD.com, the second-biggest player.
Because Alibaba does remain dominant as both a wholesaler, and also in B2C retail, it’s unlikely that Amazon’s global growth rate in commerce will match that of Alibaba’s. Again, China is still a major export market, so for Amazon to gain a foothold it would have to compete with Alibaba, which is already a well-established B2B company, through Alibaba.com.
Quoted from Wall Street Journal:
According to figures released by the General Administration of Customs on Friday, exports expanded 14.5% year-over-year, nearly double the 8% growth forecast by 15 economists in a Wall Street Journal survey and a sharp increase from the 7.2% year-over-year increase recorded in June.
Alibaba’s wholesale business was established over a decade ago, and while growth rates have matured, it accounted for 9.2% of total transaction volume in Alibaba’s most recent fiscal year. Alibaba will be a direct beneficiary from a growing Chinese export market for many more years to come.
Alibaba has huge market share in all operating segments
Source: Observer Intelligence
Currently, Alibaba is the most dominant B2C company in China at 50.6% market share. Having such a significant share of an open market is unheard of, and pair that with the following findings from the Economist, and it becomes easier to understand the relatively high market capitalization of Alibaba over Amazon.
Source: The Economist
As you can tell, based on 2011 figures, Taobao is the most dominant consumer to consumer platform (Taobao is the eBay of China). It currently has 90% market share, dwarfing whatever commerce volume competing platform Paipai has. Having high market share in a web based business has a reinforcing impact on the business, as added scale presents a barrier of entry to competitors.
Source: McKinsey Global Institute
The more interesting point about Alibaba is here: C2C share of online e-tail was estimated to be greater than 70% of total sales online in China. In the figure before this, Taobao had 90% market share in this segment. The conclusion is that Alibaba is dominant in C2C segment which accounts for the vast majority of transaction volume in China. In addition, unlike other developed markets, China has a much more fractured ecosystem of retailers, which makes C2C a growth category, with a well-established moat.
However, beyond the overwhelming dominance that Alibaba has in B2C, C2C, and B2B e-tail, Alibaba's payments service AliPay is one of the biggest in China. Based on the earlier diagram by Latham & Watkins, banking is a restricted sector for foreign equity ownership, which is why Alibaba had to set up a complex string of financial arrangement to gain equity interest in Alipay, which was gone over in further detail in an earlier post on Amigobulls.
According to Alibaba’s most recent F-1 filing
In the twelve months ended June 30, 2014, 78.1% of GMV on our China retail marketplaces was settled through Alipay’s escrow and payment processing services. On Tmall and Juhuasuan, we earn commissions only on transactions that are settled through Alipay.
The Alipay interest, paired with the combined ownership of China’s B2C, B2B, and C2C marketplaces puts Alibaba in a position to grow sales at a much higher pace than Amazon. This is why analysts are anticipating Alibaba to IPO at approximately a $200 + billion market cap, which is significantly higher than Amazon’s market cap of $156 billion.
Alibaba enjoys favorable economic tailwinds
China is at the sweet spot where GPD per capita figures will allow for a massive drive in consumption growth.
According to Ernst & Young:
China’s higher average level of per capita income is also likely to contribute to earlier growth of the middle class — and not only because people are closer to the necessary US$10 income threshold. In 2008, average per capita income in China reached the equivalent of US$6,000 per year. History has shown that this level of income tends to trigger acceleration in domestic private consumption; the Chinese have experienced this in the last few years. India is not expected to reach this growth “sweet spot” until 2017 — hence the projection of rapid middle-class expansion in the 2020s.
Quoted from Ernst & Young:
Even more interesting is that the GDP per capita is expected to increase to $45,000 by 2030, which is impressive when taking into consideration the sheer size of the Chinese population. Furthermore, the GDP per capita figure for 2008 was $6,000 per year in China, so the growth tailwinds from a rapidly emerging middle class, paired with high market share of C2C and B2C ecommerce puts Alibaba in a position to grow revenue and earnings for the foreseeable 20 years. Beyond organic growth, future business developments through delivery services and other business categories that have yet to emerge can accelerate growth in the future.
Alibaba is expected to IPO at a significantly higher valuation than Amazon. This is driven by the favorable attention domestic Chinese companies get over foreign companies that want to compete in China. The censorship issue makes it difficult to launch global retail platforms inclusive of China. Paired with the restriction on selling digital media into China (digital books, movies, music, and etc. cannot be sold via Amazon’s China website) Amazon Prime Video also can’t expand into China. The restriction puts Amazon in a position in which it can’t leverage some of the synergy between its various business segments.
Furthermore, Amazon has a near non-existent presence in China through its Amazon.cn website, whereas Alibaba continues to absorb the benefit of a rapidly emerging Chinese middle class. By dominating the C2C market with 90% market share, Alibaba effectively controls a huge percentage of Chinese commerce. However, when you combine C2C with the 50% market share in B2C, it’s likely that over 80% of e-commerce transactions in China happen via Alibaba’s expansive portfolio of e-tail properties. On top of that Alibaba also earns added fees from financial transaction volume through Alipay, which will also be owned in some shape or form through Alibaba holdings.
Therefore, the combination of regulation, scale, organic growth, and business expansion into other categories will put Alibaba well ahead of Amazon in terms of both revenue and profit for the foreseeable future. The rumored valuation of Alibaba can be justified in comparison to other major e-commerce properties, and with the IPO scheduled in the beginning of September, and trading to happen mid-September, the investment does have its merits.