Alibaba hedges bets as growth engine falters | South China Morning Post
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  • Mar 5, 2015
  • Updated: 3:12pm

Alibaba

Alibaba is the world’s biggest e-commerce group. Founded by Jack Ma, it owns Tmall.com and its consumer-to-consumer business Taobao.com.

Alibaba hedges bets as growth engine falters

PUBLISHED : Monday, 08 September, 2008, 12:00am
UPDATED : Monday, 08 September, 2008, 12:00am

As mainland exports, its biggest income source, are slowing, e-commerce provider Alibaba.com is branching out into other areas but analysts are not convinced the company can rely on them as earnings drivers.

Alibaba is pinning its hopes on initiatives it has developed over the past years, such as a site targeting domestic markets, services helping overseas firms to tap mainland consumers and expansion in other markets.

'We started the domestic market six year ago,' said chairman Jack Ma. 'It is growing very fast.'

Sales at its domestic trade focus Chinese site, which accounts for about 36 per cent of total revenue, surged 87 per cent in the second quarter from a year earlier. Paid members of its 'TrustPass', a service for domestic market, rose 46 per cent and on average they paid 22 per cent more.

Other services such as 'WinPort', a Web-hosting service targeting small and medium-sized enterprises on the mainland, was launched in April. 'TrustPass for Individual', a recently launched paid membership for entrepreneurs who have not formally registered their companies, has already drawn more than 10,000 members.

'Export to China', a service to help small overseas enterprises to sell to the mainland, has more than 1,700 registered members.

Alibaba is also selling more banner ads and keyword rankings on its sites and such initiatives started contributing to revenue in the second quarter, according to Morgan Stanley analyst Richard Ji.

The company has set up overseas offices such as in Taiwan, India and Japan. It is encouraging clients in Taiwan to upgrade their lower-rate international 'TrustPass' membership to the prime 'Global Supplier'. Its partner in India, Infomedia, a yellow pages publisher, will send sales agents to get local small and medium-scale firms to sign up for Alibaba's paid membership.

The moves to diversify are gaining importance in the face of slowing mainland exports which grew only 6.4 per cent in June from a year ago, the weakest in more than six years.

Alibaba generates more than 60 per cent of its sales from mainland exporters whose businesses are under pressure from softening exports, currency appreciation, tightening credit and rising labour, raw materials and energy costs.

Nearly 20 per cent to 25 per cent of small and medium-scale enterprises in Guangdong and Zhejiang provinces, home to more than 50 per cent of the country's small firms, lost money in the first half of this year, according to official statistics.

There were about 6,000 footwear factories owned by Hong Kong businessmen in Dongguan last year. Over the past six months, one-third of them have closed down, said Mr Ji.

Alibaba admitted some of its customers had delayed subscriptions and the renewal rate was lower for its prime export membership, Global Supplier, particularly in the textiles, metalwork, apparel and construction materials sectors.

The company first noticed the weakening in Guangdong in the fourth quarter of last year and by the first quarter of this year, Zhejiang was affected too.

Still, it would be difficult for Alibaba to rely on the new initiatives to compensate for the slowdown in its core service which charges at a much higher premium, analysts said.

To make up for the loss of one 'Gold Supplier' membership, about 50,000 yuan (HK$57,139) per year, Alibaba needs about 18 'TrustPass' members who pay about 2,800 yuan per year each or 50 members for Winport which charges about 980 yuan per year.

'We believe this diversification is unlikely to support revenue growth in the near term, as currently 64 per cent of revenues are still generated from the export-oriented International Marketplace' said Jason Brueschke, head of Asia internet and media research at Citigroup. 'It is challenging for the minor business line to be the growth engine as the main business continues to slow.'

Mr Brueschke also worries about whether Alibaba's domestic market demand can sustain its current high growth if the country's economy slows further in the next 18 months.

However, Alibaba's management remains confident in its long-term earnings prospects. 'Any loss in sales is temporary. The long-term gains from the [new] initiatives will more than offset any short-term losses,' chief executive David Wei said.

Mr Wei said the company hoped to sell more than 800,000 'Winport' memberships on the mainland by year-end and this translates to additional sales of 789 million yuan, 36 per cent of its revenue last year.

Fearing massive lay-offs the mainland government has also started to ease pressure on exporters. Value-added taxes on certain export products have been reduced while banks have been told to provide more credit to small enterprises.

'China remains a major export country,' said Mr Wei. 'There are very few countries that can challenge its status as factory of the world.'

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