China syndrome - Trump tariffs aren't a problem for a changing economy, argues Alibaba

As noted yesterday, Macy’s CEO has voiced concern about the impact of Donald Trump’s trade war with China on the future of his own business. Despite the President’s naked enthusiasm for tariffs as a way to Make America Great Again, Jeff Gannette is more worried about the negative impact that they might have on his own great American company.

As I said yesterday, Gannette’s comments are unlikely to the last we hear from US firms on this topic and to prove the point Walmart CFO Brett Biggs yesterday warned that US consumers will pay the price of a trade war:

Our goal is to be the low-price leader. We want to manage margins with customers and shareholders in mind. We have mitigation strategies that have been in place for months. But increased tariffs will increase prices for customers.

But what about the view from the other side of the Great Wall? Are Chinese retailers quaking at the thought of a new raft of tariffs heading their way? Some no doubt will be worried; others less so.

Last August, before the escalation of Trump’s rhetoric and the breakdown of negotiations with China, Joseph Tsai, Executive Vice-Chairman of Chinese e-commerce giant Alibaba, warned on the eve of battle that tariffs would hurt US providers more than the likes of his own company, arguing:

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.

Nine months on and with relations between China and the US heading to a new low, Tsai’s stance has, if anything, hardened as he declares:

The trade talks put Alibaba on the right side of all the issues on the table.

Evolving

Tsai’s prediction is that China is transitioning to become a net importing economy and as such there’s a lot of opportunity for those countries that want to trade with it and use Alibaba to do so:

Consumers in China will benefit from the availability of quality imported products from all over the world, including from American farmers, brands, and small businesses. Alibaba is set up to benefit from this secular trend of growing imports into China. We are the platform of choice for global producers, products, and brands selling into China because we have the reach and deep insights on over 650 million active Chinese consumers on our platform.

The scale and effectiveness of our access to Chinese consumers is simply unrivalled. In cross-border commerce, our Tmall Global platform is China’s number one platform for overseas brands and merchants to sell to Chinese consumers directly without physical operations in China. Well-established global retailers and brands that have built an online presence on Tmall Global include nutritional supplement vendors Chemist Warehouse and Blackmores, baby products brand Pampers, and apparels brand Emporio Armani.

If he’s correct in his thesis, the shift also reduces exposure to US tariffs as the country moves from an export-driven economy to a consumption-driven one . Tsai argues that the changing nature of Chinese society essentially makes this a less-than-opportune time for the White House to pick a fight:

We’re not concerned about slowing China exports affecting GDP growth because the Chinese economy is shifting from an export economy to a domestic consumption economy. Job expansion is continuing in China. Over the last five years, while China lost 14 million manufacturing jobs, the economy added 70 million service jobs that drove real disposable income growth and consumption.

The middle class in China has reached critical mass of over 300 million, almost as large as the entire US population. The middle class will double in the next 10 years, especially from the lesser developed Chinese cities. While total Chinese domestic consumption is $5.5 trillion today, consumption from these third, fourth and fifth-tier cities, with a combined population of 500 million people, will triple from $2.3 trillion to nearly $7 trillion in the next 10 years.

Smell the coffee

The private sector is on the rise in China, he adds, complementing - a crucial choice of word - the old model of what he terms “state-dominated influence in traditional industries”. What’s emerging is a new commerce infrastructure for a digital economy, says Tsai, citing Alibaba’s partnership with US retail icon Starbucks as a case in point:

Starbucks in China has established a prominent brand presence and customer engagement platform within our mobile-ready China retail marketplaces. This has already resulted in Starbucks acquiring millions of new loyalty members online. We are also enabling Starbucks to expand their offering from store-based operations to on-demand delivery to customers. Through these initiatives, Starbucks has added an online dimension to its customer acquisition and engagement, as well as fulfilling customer demand outside of its stores. This would not have been possible without the support of Alibaba’s business operating system, data technology, and on-demand logistics infrastructure.

Starbucks is indeed a good exemplar to roll out. It’s got a goal of having 6000 stores in China by 2022. The firm has actually had a presence there for over two decades, but there’s a lot riding on this escalated push into Tsai’s changing consumption-based market. Starbucks CEO Kevin Johnson says:

We're building on that brand strength and have successfully rolled out Starbucks Delivers in partnership with Alibaba to more than 2,100 stores across 35 cities throughout China. Our team in China accomplished this in only four months, again demonstrating our operational agility. While still in the launch phase, performance to date is meeting our expectations with average delivery time under 20 minutes, higher average ticket and strong trial from existing Starbucks Rewards members. This gives us confidence that we are building a meaningful and sustainable delivery channel to complement our existing in-store experience as we plan to expand Starbucks Delivers to 3,000 stores across 50 cities in China, by the end of fiscal 2019.

He adds: 

We are very pleased with our continued success in China. The strength and relevance of the brand, expansion and performance of our new stores, accelerating comp growth in existing stores, positive progress on Starbucks Delivers, and a phenomenal customer reception to the Starbucks Rewards program are all signs that we are well-positioned for long-term growth in China.

It is indeed a great example of a US brand expanding, exporting and taking up the new economic opportunities cited by Tsai, an American success story.

What could possibly go wrong?

My take

At the end of the day, Tsai expects that “the vexing issues in the trade negotiations will resolve themselves”, but if the Oval Office is hoping that business behemoths like Alibaba will be putting pressure on the Chinese government to bend to US demands, that’s not panning out. The concern is coming from American counterparts so far.

In contrast, the Alibaba exec sees the firm as well-positioned:

As we look at the evolution of the Chinese economy, Alibaba is on the right side of all of [the] issues. I cannot think of another company that is better equipped to drive these secular changes and participate in the ensuing long-term benefits.

We’ve referred to the shift toward a domestic consumption economy. That’s a big macro trend that’ll last for many years, as well as in the future, China importing a lot more. With a government commitment as well as reaction to the trade negotiations, China will make commitments to import more. If you’re looking at our business as swimming…in the direction of the tide as opposed to going upstream against the tide, all those long-term secular macro factors are actually providing the tailwind to push our business forward.

If tariffs are supposed to bring China to its knees, that’s not the message that’s coming out of Alibaba.