A Chinese e-commerce warning to Washington - a trade war will hurt you more than us

As a escalating trade war between the US and China is talked up by the Trump administration, Chinese e-commerce giant Alibaba has warned the White House that there are plenty of markets in which to thrive, as rumors grow of a new push into India.

The firm’s Vice-Chairman Joseph Tsai issued a blunt warning to Washington that if tariffs make it too expensive to source US products, then Alibaba will shift its purchasing power elsewhere:

If US goods become too expensive due to tariffs, Chinese consumers can shift to domestic producers or imports from other parts of the world. In terms of our international expansion, the world is a big place. We have made substantial progress in emerging markets like Southeast Asia and South Asia as these markets are ripe for us to add more consumers into our ecosystem.

It’s a line of argument picked up by CEO Danial Zhang:

Globalization is our long-term strategy. That's why we make very big investments in Southeast Asia. And that's why we newly acquired a business in Southern Asia, Daraz, and our investment in Trendyol, a Turkey leading e-commerce company. So we have a very big picture in terms of globalization. So far, actually we do see a very big progress on in terms of customer acquisition and user growth and the category expansions in the new markets.

One advantage we are taking is that we have a lot of brand partners with us for many years. Today we are working with not only [partners] in China anymore, but also in the new markets. China is famous for its manufacturing base, and we have a lot of good supplies with very good prices, and which are very popular in Southeast Asia and the Southern Asia markets. So we will continue to do that to do this, to leverage what we supply from China, and what we are partner with this brand to build a unique advantage in these new markets.

One market that’s inevitably of interest is that of India. Recently Walmart completed its majority takeover of indigenous e-commerce player Flipkart, part of the ongoing battle with Amazon which is also keen to expand in India. For its part, speculation has grown about Alibaba’s intent here, with rumors that the firm is set to take a 50% stake in India’s Reliance Retail at a cost of around $5 billion. Tsai denies the speculation for now:

Reliance is a very good company, strong company in India. We've a lot of respect for them. But what you read in the news is just untrue. I think taking a step back, I've talked about investing in the emerging markets both Southeast Asia and South Asia. We have put a lot of resources into Lazada, which operates in six Southeast Asian countries. We've also recently invested in the largest e-commerce business in Pakistan and Bangladesh. These are sort of off the beaten track markets, it seems to [analysts], but just remember that Pakistan has a population of 200 million people. It's about the same size in terms of population as Indonesia. So these are some of the areas that really excite us...Although they're growing from very low base, we think they have very good long-term potential.

Pain point

With all this talk of international alternatives and expansion, the underlying message is clear - increased tensions will hurt the US more than Alibaba. Tsai says:

Alibaba’s business is focused on capturing the Chinese domestic consumption opportunity and less reliant on Chinese exports. We believe that Chinese Government policy will continue to support imports into China to satisfy the rising demand of Chinese consumers. This coming November, China will hold the world's largest import exhibition in Shanghai that will showcase products from all over the world.

When you look at Alibaba’s presence in the United States, our focus is on helping American farmers and small businesses to sell their products to Chinese consumers. In addition, as demonstrated by our partnership with Starbucks, we are working constructively with American brands to better serve Chinese consumers.

That partnership involves Alibaba engaging with Starbucks China for digital transformation. Given the coffee giant’s already-impressive track record in the domestic US market on that front, it’s a good example of strategic partnering by a US brand to facilitate footprint expansion in China. But all that could be damaged by an escalating trade war. Tsai warns:

It is clear that nobody wins in a trade war. Over the years, China has become less reliant on exports so that the Chinese economy can withstand the in-position of tariffs on Chinese products. The most important point, however is that the strength of the China’s domestic demand is critical to the stability of the Chinese economy and market confidence.

Strength

For its part, Alibaba is in sound financial strength. While its most recent profits fell short of estimates, due to a one-off cost, revenues soared 60% year-on-year. Cloud computing revenue for the most recent quarter grew 93% year-on-year to $710 million.

Tsai is confident that the company has made the necessary early investments in technology, supply-chain and logistics to be able to ride the rising tide of retail spend among what he calls “the Chinese middle class”. This protects against home-grown or external competition, he suggests:

Alibaba's three-pronged consumer offerings in retail, entertainment and local services will be the long-term drivers of value creation, as the Chinese middle class expands, and more of these consumers demand a higher quality lifestyle. The good thing is our historical strength in e-commerce is giving us a distinct advantage, because we have already acquired our customers.

These consumers have made purchases on our platform, not just once or twice a year, but on a regular frequent basis. The average annual active consumer places 90 orders across 16 different product categories per year on our China retail marketplace platforms. And they trust Alibaba as the Company that will offer goods and services, where they can spend and get quality and value for their money.

Because of the loyalty of our consumer customers, we have the confidence to aggressively invest in new products and service offerings as well as innovations and necessary infrastructure to provide them with a better experience. Whether it is daily supply of fresh food, catching the latest fashion trends, access to luxury brands, the most popular videos, the most exciting sporting events, or a quick late night snack delivery, Alibaba is busy at work to satisfy our customers.

My take

There are some harsh realities lost behind the trade war rhetoric coming from certain Twitter accounts. In 2017, China’s consumer e-commerce market was worth $1.11 trillion , up 35% year-on-year. More significantly, it’s twice the size of its US counterpart. A trade war that inhibits US brands getting their goods onto that platform is a self-inflicted blow, even it plays well with the base.

What happens with India will be something to watch closely. The recent moves by Walmart and the reaction from Amazon make clear how important that market is becoming for global retail brands. What Alibaba does next here will undoubtedly have significant impact on the shape of the competitive landscape.