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Alibaba vs JD.com: China’s Online Titans Battle for Asia

From acquisitions and investments to the deployment of drones and encrypted messaging apps, China’s e-commerce giants are gearing up for war in Southeast Asia’s $52 billion fashion market.
Collage by Tamison O'Connor for BoF
By
  • Melissa Twigg
BoF PROFESSIONAL

SINGAPORE — The dynamic between Alibaba and JD.com has been characterised as everything from a cat-and-dog fight to a "Game of Thrones"-style war for allegiance. Together, the two Chinese e-commerce giants have been credited with transforming the landscape of online sales in China and during their intense two decades-long battle, they have driven explosive domestic growth. Now looking to expand beyond their home market, the e-commerce giants are sparring over a vast new battlefield: Southeast Asia.

It's not only Alibaba's Jack Ma and JD.com's Richard Liu who have the region in their sights. Everyone from Marc Woo, Google's head of e-commerce, to Jeff Bezos of Amazon agrees that Southeast Asia will be the next major boom market for online sales. Joint research by Temasek Holdings and Google estimates that the Southeast Asian e-commerce market was worth just $7 billion in 2016 but predicts it will reach $22 billion in 2020 then $88 billion in 2025, tripling in size in a single decade.

Both Alibaba, which owns the B2C marketplace Tmall and its C2C sister site Taobao, and JD.com have recently released second quarter reports revealing just what is at stake, with both online giants increasing their revenues by a significant percentage year-on-year. Alibaba earned $7.4 billion in the quarter ending June 30 2017, an increase of 56 percent since 2016. JD.com, meanwhile, made $13.7 billion in the same period, an increase of 43.6 percent.

“The discrepancy in revenues comes down to the contrasting business models of Alibaba and JD.com,” says BMI Research consumer analyst Josh Holmes, highlighting the fact that unlike Alibaba, JD.com manages its own product inventory and ships directly to customers. “Alibaba generates revenue primarily from commissions, advertising payments and other service-based fees, as its e-commerce platform in China relies solely on third-party sales. The company therefore raises less revenue than JD.com for every transaction on its websites.

“However, revenues do not tell the whole story. In addition to its core commerce business, Alibaba also operates its own online payment platform, Alipay, and cloud computing business, Aliyum, as well as logistics firm Cainiao. This means Alibaba is considerably ahead of JD.com in terms of both profitability and gross merchandise value.”

But while Alibaba still has the largest market share (57 percent by the end of 2016 versus 25 percent for JD.com), Hitha Herzog, chief research officer at H Squared Research, believes JD.com could overtake its rival.

JD.com certainly has the potential to take a larger market share in China over Alibaba.

“JD.com has sold its financial business for around $2 billion to invest that money into fulfilment expenses,” she says. “It launched a drone delivery programme and created almost 250 warehouses in China in anticipation of a surge in customer demand, so I would say JD.com certainly has the potential to take a larger market share in China over Alibaba.”

From JD.com’s $397 million investment in luxury e-commerce unicorn Farfetch to the announcement of Alibaba’s new Luxury Pavilion platform and rumours of a deal between Alibaba and Yoox Net-A-Porter (YNAP), designer fashion is one of their major battlegrounds. Much like the Chinese giants, the two luxury platforms have entirely different business models and their future success will be partly dependent on the in-roads made by JD.com and Alibaba into international markets like Southeast Asia.

At a time when brands such as Louis Vuitton are choosing to bypass online platforms in China to sell directly to their clients, Alibaba and JD.com have been working hard to woo big brands in a struggle for allegiance. In order to improve brand perception abroad, Alibaba has joined forces with Kering and Swarovski to try and stamp out counterfeited goods in China.

However, last month saw a major coup for JD.com when it announced an upcoming partnership with Saint Laurent in China. Meanwhile, Alibaba is set to launch its own dedicated high-end platform, dubbed Luxury Pavilion, on Tmall featuring brands such Burberry, Guerlain, Hugo Boss and La Mer.

“This will create stiffer competition between JD.com and Alibaba, as both are fighting for the same share of the luxury market in China,” says BMI Research consumer analyst Nainika Singh. “The point of differentiation between both will come down to the quality and speed of their delivery services, for example JD.com’s ‘white glove’ service [which delivers goods in one hour in certain Chinese hubs].”

Investing big in Southeast Asia

This war over high-end brands will be integral to Alibaba and JD.com’s success in Southeast Asia. Outside of Singapore, regional consumers have relatively limited access to luxury goods online, and Alibaba and JD.com are both aiming to change that.

So far, however, the giants are taking a different approach to conquering the region. Of the ten Southeast Asian nations that make up the ASEAN block (Association of South East Asian Nations), JD.com is currently only fully operating in Indonesia, with rumoured plans to move into Thailand later this year.

“It is still early on, we’re making strong inroads and working off a strong base,” says Josh Gartner, the vice-president for international corporate affairs at JD.com. “For us, it was essential that we found the right local partners in Indonesia. We don’t want to rush into a market just because it looks good. And growth has been good, as has consumer loyalty and appreciation. And as Indonesian consumers become wealthier, our reputation has helped a lot.”

The point of differentiation between JD.com and Alibaba will come down to the quality and speed of their delivery services.

Farfetch, however, is already operating throughout the ASEAN bloc, making JD.com’s recent investment in the London-based firm a strategic asset. “We are selling into all countries across the region,” says Andrew Robb, the chief operating officer at Farfetch. “We get incredible feedback from customers in the region that tells us there is huge demand for luxury fashion e-commerce.”

Alibaba, meanwhile, has gone in with a more comprehensive and aggressive approach, partnering with the Malaysian government to build the world's first ever digital, free-trade zone outside of China in Kuala Lumpur. Alibaba already has one such set-up in its home base of Hangzhou, and the aim is for the two hubs to eventually be linked together.

“The eWTP promotes three main goals,” says an Alibaba spokesperson. “To advocate public-private dialogue to improve the business environment; to cooperate with international organisations such as the WTO to prioritise eTrade development needs; and to facilitate cross-border e-trade and the digital economy through development of e-trade infrastructure.”

In addition to this, Alibaba has also invested close to $2 billion in Southeast Asian e-commerce site Lazada, increasing its stake in the company from 51 percent to about 83 percent as of June this year.

The results have been immediate. Lazada has experienced impressive growth since Alibaba’s first investment last April, with its base of merchants now numbering 100,000, collectively selling 115 million unique products. Alibaba has also tripled its sales of the Taobao Collection, an in-house fashion brand, by partnering with Lazada to make the goods available in Singapore and Malaysia.

“We are doubling down in this region and on this company by increasing our stake in Lazada,” says the spokesperson for Alibaba. The move demonstrates Alibaba’s confidence in the growth potential of the Southeast Asian markets and its commitment to the region as part of the giant’s expanding global footprint.

“[The investment in Lazada] provides us with unrivalled access to consumers in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. Southeast Asia is a region where only 3 percent of total retail sales are conducted online, so we expect it to offer tremendous growth potential,” the spokesperson adds.

There are two reasons for this expected soar in regional sales. The rapidly growing middle class population is arguably the biggest factor — the number of adults in Southeast Asia with between $16 and $100 to spend a day is expected to reach 400 million by 2020, up from 190 million in 2012, according to Nielsen.

The second consideration is internet access. The recent Temasek Holdings and Google report revealed that an estimated 130 million people in the region now have smartphones — many of whom have never previously owned a PC, making mobile their first foray into internet shopping. Altogether, 600 million people in Southeast Asia will have some form of internet access by 2025. To put this number into perspective, it’s nearly twice the size of the entire US population.

Southeast Asians are also among the most prolific device users. Filipinos send more texts than any other nation on earth and Jakarta, Indonesia has been named the world’s most active city on Twitter. And as report by Bain & Company indicates, this is fast translating into online sales, with 24 percent of all clothing and footwear in Southeast Asia already purchased online.

Opportunities beckon beyond Singapore

However, within this hugely diverse region, certain countries are inherently more attractive for the likes of Alibaba and JD.com than others.

According to data provided by BMI Research, spending on clothing and footwear this year in eight of the ten biggest Southeast Asian markets totalled more than $52 billion this year and will surpass $68 billion in just five years. Myanmar has huge long-term potential but remains far too underdeveloped to be a significant market and Brunei is far too small.

The firm’s analysts believe Singapore has the strongest immediate potential for online fashion retailers due to its affluence and high internet penetration, although growth is restricted by the small size of the population.

“In terms of long term potential we highlight Malaysia,” says Singh. “This is thanks to its large youth demographic and relatively developed logistics and transport network offering substantial growth opportunities for online retailers. We forecast Malaysia’s e-commerce sales to reach $7 billion by 2020.”

Hana Ben-Shabat, a partner at US consulting firm A.T. Kearney, believes Indonesia and Vietnam will have the fastest growing fashion e-commerce markets in the region.

“While consumer profiles are different in these two countries, they have much in common,” she says. “[Both have] a growing demand for apparel — between 2014 and 2016 Indonesia has seen 9-11 percent growth in apparel sales every year and Vietnam 11-12 percent. [This is combined with a] young population — 40 percent of the population is below the age of 24 in both countries — and highly connected consumers. And rapid urbanisation [leads to] faster retail development and exposure to brands.”

There is no such thing as a homogeneous Southeast Asian consumer. It is Lazada as a platform that provides the common access point to e-commerce. That's the only size that fits all.

However, while the e-commerce opportunity in certain Southeast Asian countries look bountiful, successful execution is fraught with difficulty. The region is fragmented, with each country having entirely separate linguistic, social, and infrastructural business needs.

Singapore has an established online payments system, but other populations still prefer to pay in cash, meaning e-commerce sites have to rely on the inefficient, fraud-fraught system of an agent who collects money on delivery.

“Southeast Asia is a vast and diversified market, where distinct cultures and spending habits exist within and across countries [so] there is no such thing as a homogeneous Southeast Asian consumer,” says Will Ross, the cross-border CEO of Lazada, the e-commerce site in which Alibaba owns a majority stake.

“It is Lazada as a platform that provides the common access point to e-commerce. That’s the only size that fits all — beyond that we need the breadth and depth of assortment to enable customers to meet their unique needs. Our on-the-ground presence with local teams keeping their ears to the ground facilitates quick response and turnaround based on understanding of local nuances and insights.”

Growing influence of social commerce

Southeast Asian consumers are highly affected by digital content — according to Bain, just over a third of people making an online purchase in the Philippines were influenced by social media content. Therefore, JD.com and Alibaba urgently need to better harness platforms such as Facebook and messaging apps like LINE and WeChat.

“JD.com is extremely well placed for this, as evidenced by the fact that orders placed through smartphones more than doubled to 81 percent,” says Gartner. “We go to where the customers are and we have a unique knowledge of the social media space, and an unusually strong record of tapping into social media and converting it into sales. And not just in China. Even in the US, we’re proving that we’re leaders in that department.”

However, social media needs vary significantly across the region. “In Vietnam shoppers will buy phones that are only half the price of those purchased in Malaysia,” says Ross, suggesting that Vietnamese customers could therefore have restricted or poor access to e-commerce sites.

“There are also differences in the way shoppers make their decisions,” he continues. “Malaysian customers, for example, are more transactional and focused on the best deal, whereas Indonesian customers are more social and read product reviews on social media. We have a big follower base on our social media channels in our markets though. For example, in Thailand, we have an official LINE account with 23 million followers while we have 19 million Facebook fans across the region.”

Another problem both JD.com and Alibaba are fighting to find a resolution to is regional delivery times. Infrastructural issues continue to plague e-commerce sites operating in Southeast Asia and they include complex border-crossing rules and a lack of good roads outside the biggest cities.

Alibaba’s takeover has allowed Lazada to invest in a fleet of motorbikes to replace unwieldy trucks and upgrade all their warehouse management systems. “With our cross-border business, we’re working to reduce the time needed for cross-border orders from China,” says Ross.

JD.com, meanwhile, is offering its own creative solution to the problem. Having recently invested in drone technology to allow deliveries to inaccessible parts of China, the company is hoping this method will be transferable to island-heavy Southeast Asia.

“I can’t speak specifically to conditions in Southeast Asia,” says Gartner. “But we are already delivering in the countryside, and once we have that technology, applying it to different markets is very appealing to us. In Indonesia we do our own deliveries, and it is done in a very efficient way.”

It is worth remembering that the two platforms are not alone on the battlefield. American giant Amazon last month set up its first Prime Now service in Southeast Asia, housed in a 100,000 square-foot facility in Singapore.

While Amazon has not made strong enough in-roads in China to take on Alibaba or JD.com on home soil, in Southeast Asia, where none of the online platforms have a strong foothold, competition will be fierce. And local e-commerce players like, Zalora, the Rocket Internet-backed online fashion store, has a gained a good share of the online fashion marketplace in the Philippines and Singapore, but appears to be retreating from Vietnam and Thailand by selling off its local ventures.

Ezbuy and Akulaku, meanwhile, are making inroads in Singapore and the Philippines respectively, while Blibli has made some gains on Indonesia’s dominant player MatahariMall. Lazada, however, still dominates nearly every ASEAN country it operates in, giving Alibaba a major advantage over its Chinese rival.

“At BMI, we think that Alibaba will remain stronger in Southeast Asia [than JD.com] as by partnering with Lazada, it has tapped into the local expertise of the company, which will allow it to better cater its products for the Southeast Asian consumer in different markets,” says Singh.

However, Herzog believes the opposite. “The business model of JD.com is changing to focus more directly on the consumer,” she says, referring to the fact that unlike Alibaba, it acts as a merchant offering direct sales. “If they are able to do this, meaning sell to consumers while also driving down price of goods, the company will able to take market share away from Alibaba in Southeast Asia.”

At A.T. Kearney, however, Ben-Shabat believes it is too early to speculate. “I think that the companies that will win these markets are those that are able to knock down barriers for e-commerce adoption — namely, payment solutions [and] last-mile delivery,” she says.

“More importantly [it will be up to the platforms to] bring brands with a good understanding of the consumers and their culture.”

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