Alibaba – Trip down the Amazon.

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Alibaba is evolving to become the Amazon of China.

• With its 20% investment in Suning, Alibaba is starting look more and more like Amazon.
• Alibaba is investing $4.63bn for a 19.99% stake in Suning which is one of the largest consumer electronics retail chains in China.
• At the same time, Suning is investing $2.28bn in Alibaba for a 1.1% stake.
• The co-investments mark the beginning of an in depth collaboration aimed at advancing Alibaba’s position in the O2O (Online to Offline) segment of the Internet industry.
• O2O is now one of the most important areas of growth in China as the overall revenue opportunity is much greater than just sticking with Internet services.
• Given that this area is poorly developed, all of the Internet brands in China are looking at ways of jumping on this growth opportunity.
• Suning will set up a flagship store on Alibaba’s business to consumer platform Tmall.com and will also enter into a partnership with Cainiao.
• Cainiao is Alibaba’s affiliate that deals with the logistics of ensuring that products reach buyers successfully.
• Together Suning and Cainao cover 2,800 counties in China with 1,700 last mile delivery stations.
• This represents a departure for Alibaba which historically has mostly matched buyers and sellers but it is clear that its ambitions are much greater.
• The fact that Amazon has a market capitalisation of $246bn compared to eBay at $34bn will not be lost on Alibaba.
• Initially this will represent a foray mostly into electronics but it is pretty clear what the long term ambitions are.
• Just as Amazon started with books, I suspect that Alibaba will aim to leverage this relationship and end up selling pretty much anything and using its logistics partners for fulfilment.
• A critical element of this will be mobile as China is shaping up to be a market that is driven much more by mobile than fixed.
• This is why Alibaba is also engaged in the development of its own ecosystem on mobile devices.
• That way it can ensure that its own Digital Life services including e-commerce and O2O are front and centre of its user experience.
• If it can also ensure that users choose to live their Digital Lives with Alibaba, there will be a greater likelihood that users will transact on its platforms.
• Furthermore, it will also be in a position to monetise its Digital Life services using any one of the three established methods (see here).
• Consequently, I expect to see Alibaba continue to aggressively push both aspects of its Internet business and to be a formidable competitor going forward.
• The one that has to worry is Xiaomi which has got great first mover advantage when it comes to the mobile ecosystem but I think lacks the resources to really compete against BAT and China Mobile in its home market.
• I continue to believe that a valuation for Xiaomi at $45bn is already assuming much too much success.