New Road to China E-Commerce Leads Through JD.com
Shopping in China has never been easy for foreign internet companies, as reflected by the messy trail of web carnage left by failed investments over the last 15 years in this complex market. Despite that dismal track record, global giant Google Inc. made headlines last week with its announcement of a $550 million investment in JD.com Inc., providing a new feather in the cap of China’s second-largest e-commerce company.
There are many angles to this deal, but as a longtime China internet watcher the most interesting for me is JD.com’s sudden emergence as the preferred internet dance partner for foreign giants. China web watchers will recall that global retailing leader and e-commerce aspirant Walmart Inc. also threw its lot in with JD.com a couple of years ago, when it made an even larger investment. So this Google tie-up means JD.com now counts two of the world’s largest companies as significant investors.
By comparison, leading e-commerce firm Alibaba’s cupboard is relatively bare, at least in terms of strategic foreign partners. Alibaba Group Holding Ltd.’s 2016 annual report shows that 15% of its shares are held by the company formerly known as Yahoo, the result of an investment from long ago that yielded handsome returns but not much else for the former U.S. internet titan. Alibaba also counts Japan’s SoftBank as an even larger shareholder with about 29% of the company. But as with Yahoo, that case has produced huge returns for SoftBank Group Corp., but little else.
It wasn’t always like that. I remember the huge fanfare that came more than a decade ago when Yahoo made its investment in Alibaba, paying $1 billion for 40% of the young e-commerce company at that time. There was talk of synergies and other tie-ups initially, but that quickly evaporated with the entry of a new Yahoo chief executive who famously clashed with Alibaba founder Jack Ma.
The relationship was more harmonious with SoftBank, largely because that company’s chief, Masayoshi Son, knew better than to tell Jack Ma how to run his business. But even that pair’s one significant tie-up that I can recall was a dud, with Alibaba launching an e-commerce service on SoftBank’s platform in Japan, only to watch the business sputter before its quiet closure in 2012.
I should be fair here and point out that Alibaba isn’t the only company that has proved to be largely a dead-end for foreign internet companies looking for a road into China. Search leader Baidu Inc., the country’s other major internet firm, was also courted from overseas in its early days when it received a major investment from Google. Baidu founder Robin Li later told me that Google went on to make a bid for all of Baidu shortly before the latter’s initial public offering in 2005, but that he declined the offer.
New internet era?
With all that history in mind, the big questions become: Why did the other tie-ups fail? And will JD.com live up to the big expectations that foreigner giants are placing on the company as their strategic road into China?
We should start by pointing out that the China internet of today is far different from a decade ago, which is when most of the big failed investments were made. The landscape of 2018 is a highly competitive one that has yielded two of the world’s 10 most valuable companies in the form of Alibaba and online gaming and social networking giant Tencent Holdings Ltd.
That new generation of internet titans has their own global aspirations, which may be leading them to become more receptive to meaningful partnerships with other major players outside their home market. At the same time, the rise of these homegrown Chinese titans seems to have infused Beijing with more confidence in its online abilities, meaning it’s a bit more receptive to foreign investment in Chinese internet firms, or at least it isn’t interfering as much as it might have in the past.
The foreign companies are also far more aware these days that having a strong local partner is key to success, a factor that undermined many of the earlier tie-ups that saw names like Yahoo, eBay and Amazon make outright acquisitions that ultimately didn’t do very well. Clearly Google and Walmart have learned that lesson, which is why they’re opting for their JD.com tie-ups that have left Walmart holding about 10% of JD’s stock, with Google holding a more modest amount of less than 1%.
As to the question of “Why JD?” — I personally attribute the preference for this company at least partly to the personality of founder and chief Richard Liu, who comes across as reasonably open to new ideas and slightly more humble than his peers due to his company’s status as a clear No. 2 to Alibaba. By comparison, Alibaba’s Ma and Baidu’s Li are quite comfortable calling all their own shots, and don’t seem too interested in taking advice from outsiders, Chinese or foreign.
That said, one of my analyst contacts who closely follows these companies pointed out there are also a number of real strategic reasons why JD.com looks like a good fit for these big foreign partners. He noted that JD.com is mostly focused on its core e-commerce business in China, unlike Alibaba, which has expanded into a wide range of areas like medicine and entertainment, and has ambitious global aspirations. That means conflicts of interest are less likely to occur in a JD.com pairing versus one with a more complex creature like Alibaba.
At the same time, JD.com also offers an interesting inroad to Tencent, which is easily the softest spoken of China’s top internet players and has also tended to eschew investment tie-ups from big foreign partners. While Walmart has a significant stake in JD.com, Tencent is actually JD’s biggest outside stakeholder with 18% of the company. Thus both Walmart and Google are gaining access to Tencent by their common holdings in JD.com, potentially giving them future access to Tencent’s wildly popular WeChat and QQ social networking services, as well as other assets.
At the end of the day, JD.com certainly isn’t the only show in town available to foreign internet companies, even though it is rapidly emerging as a partner of choice in this latest wave of tie-ups. I expect such tie-ups could become the norm of the future for China-minded global internet firms. That means we could see some of China’s larger and more mature names ultimately sell similar strategic stakes to foreign online giants in search of a 21st century road into the world’s largest online market.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
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