The “Marriage” Between Alibaba & Suning And Other Tales



· 2015.08.24

How could yesterday’s rivals go hand in hand and enter into a strategic alliance? What are Jack Ma and Zhang Jindong up to?

(Chinese Version)

Half a century ago, John Keynes predicted that in the next century human beings, would no longer struggle with their life since both agriculture and industry would be fully developed at that time. Half a century later, human society seems to be already fully developed, while many keen innovators are looking for opportunities to transform human society via the Internet.

On August 10th, China’s e-commerce behemoth Alibaba and home appliance retailer Suning Commerce Group Limited announced that they had entered into strategic alliance. According to their joint statement, Alibaba will invest approximately 28 billion RMB (US$4.38 billion) for a 19.99% stake in Suning, which is going to make Alibaba the second largest shareholder in Suning, while Suning will in turn invest 14 billion RMB (US$2.19 billion) to acquire 1.1 percent of Alibaba’s newly issued shares. In the near future, the two sides will also cooperate on online shopping, logistics, e-payment, etc.

How could yesterday’s rivals go hand in hand and enter into a strategic alliance? What are Jack Ma, founder and chairman of Alibaba as well as a leading innovator in Internet industry, and Zhang Jindong, chairman of a traditional offline retailer but reluctant to transform its own industry via the Internet, up to?

The “marriage”

At a press conference, Zhang Jindong suggested that their cooperation came naturally: he met Jack Ma for only two times within two months but agreed instantly to cooperate with Alibaba. Jack Ma added that he assigned a special team to work on the specifics soon after his meeting with Mr. Zhang.

According to the joint statement, the two sides will cooperate closely in at least the following five aspects:

1. E-commerce: The two sides will cooperating in sectors such as fast moving consumer goods and especially 3C (Computer, Communication, Consumer Electronic).
2. Logistics: Suning’s more than 5,000 offline service stations will be integrated to Alibaba's Cainiao Network, a network of major logistics service providers.
3. E-payment: Suning users get to pay via Alipay during their online purchase.
4. Cloud computing: The two sides will work together on unleashing the potenitla of cloud computing.
5. Online and offline retailing: More than 1,600 stores, 3,000 aftersales service centers and other offline service stations of Suning will be seamlessly connected with Alibaba's strong online network.

On August 10th, Zhang Jindong delivered a speech on Internet and Retailing during the Nanjing Internet&Retailing Summit and suggested that it was high time Internet companies teamed up with companies from traditional industries. Coincidently, Jack Ma also said in his speech delivered two days ago on an activity held by Beijing Union University “Startup and Innovation: Q&A with Jack Ma”: “The past two decades see the rise of Internet, while the next two decades will witness the blend of Internet and traditional industries. If not, Internet will ultimately become another traditional industry and fall into insignificance.”

Suning and Alibaba is widely known to be rivals in retailing industry. However, their cooperation is not at all surprising, since long before this final statement, momentum has been gathering.

On August 3rd, trading of Suning's shares was suspended as it planned this round of non-public offering. Generally, non-public offering indicates that a company is going to receive investment from a potential investor. A week later, trading of Suning’s shares resumed.

As early as June 30th, Zhang Yong, CEO of Alibaba, already suggested during the launching ceremony of New Intime Department Store Group that: “Alibaba is open to cooperate with any kind of businesses, whether it’s supermarkets or convenience stores.” Moreover, he compared Alibaba to the air force seeking for help from a ground force.

Actually, during this year’s two sessions, Zhang Jindong proposed to the CCPCC that online retailers should be held responsible for fake products on their platforms. Although his proposal was commonly read as criticism towards Taobao, he denied and explained that his proposal was targeting a prevailing phenomenon in e-commerce industry. Besides, he even showed his gratitude towards Jack Ma for the change he and his Alibaba bring about to Chinese Internet industry.

However, what really brings these two “foes” together is their overlap of interest:

1. Suning needs Alibaba to revitalize its offline stores

Suning’s own e-commerce platform not only fails to generate revenue for Suning. Instead, Suning has to spend much revenue from offline stores in maintaining its e-commerce platform. According to statistics, although Suning’s e-commerce platform registered an overall revenue of 5.897 billion RMB in the first quarter of this year and the sales volume of Suning e-commerce open platform hit 1.177 billion RMB, a year-on-year increase of 101.54%, Suning’s e-commerce platform still bring about a loss of 330 million RMB.

Suning had expected to expand its business through its own e-commerce platform, yet turned out that its e-commerce platform had to depend on Suning’s traditional businesses at least for a while.

Suning tried to step out of the cycle by merging other companies, such as the online retailer of maternal; products Red Kids, online video service provider PPTV, groupon service provider Manzuo, and even smart phone brand Smartisan. However, all these companies were struggling in their own circles, let alone expanding Suning’s business.

Alibaba, however, will definitely bring great benefit to Suning. According to the statement, Suning will be able to open an official store on Tmall, and get access to the encompassing ecosystem of Alibaba. In other words, Suning gets to cooperate not only with Alibaba, but also Weibo, Alipay, UC, Amap, etc. since they are now all on the same boat.

More importantly, Suning gets to revitalize its thousands of offline stores, aftersales service stations with the help of the huge traffic of Alibaba, as did Intime Department Store Group.

2. Alibaba needs Suning to facilitate offline channels

Alibaba’s aim isn’t simply becoming an e-commerce giant, but instead providing services that are as necessary as water, coal and electricity for every Chinese.

According to Zhang Yong, the collaboration with Suning will help Alibaba provide better services to Chinese consumers, since more than 1,600 stores, 3,000 aftersales service centers and other offline service stations of Suning will be seamlessly connected with Alibaba's strong online network. Moreover, he compared Alibaba to the air force seeking for help from a ground force, such as Intime.

Obviously, Alibaba is seeking for cooperation with a series of companies, as is put in Zhang Yong’s recent speech that: “Alibaba is open to cooperate with any kind of businesses, whether it’s supermarkets or convenience stores.”

At the same time, the “marriage” with Suning will not only strengthen Alibaba in 3C sector (Computer, Communication, Consumer Electronic), but also bring great convenience to various suppliers along the supply chain. Moreover, Suning’s more than 5,000 offline service stations will be integrated to Alibaba's Cainiao Network, a network of major logistics service providers, which will make Alibaba deliver products more swiftly and smoothly.

The other side of the story

However, investment is only a beginning, while detailed cooperation plan, negotiation and even change might ensue. At present, we can only tell from the joint statement few possible influences, while only time will see if their cooperation will finally work or not.

1. Some possible influences

According to iResearch, Tmall is the number one B2C platform in China (58.6% share of the market), JD ranks second and grabs another 20% share, Vip.com ranks third, while Suning ranks fourth and grabs 2.8% share of the market. If we combine the market share of Tmall and Suning, they still takes up only 61.6% share, which is far from enough if Alibaba really wants to dominate the B2C open platform market.

Although Alibaba can’t cooperate with Suning in selling products, since Alibaba sticks to its role as a platform, not a retailer, they can surely work together in the supply chain. For example, while JD can buy tens of thousands of smart phones and sell them by itself, Alibaba also gets to sell products directly to consumers through Suning’s official stores on Taobao. Imagine the huge transaction volume such cooperation will bring about! Personally, I think highly of their cooperation, since Alibaba is actually beginning to directly compete with JD.

By the way, their cooperation will definitely be bad news for Vip.com, since Suning will enjoy Alibaba’s huge traffic and challenge Vip.com’s market. Tmall has always been uneasy towards the competition with Vip.com in clothes market, so its cooperation with Suning comes pretty naturally in this case.

Moreover, I can say for sure that Alibaba and Suning will cooperate in logistics service. Better logistics service has always been Alibaba’s key concern in improving user experience. Many companies seem to attach great importance to logistics service, but only few of them make in in providing really convenient logistics service. JD solves the problem by setting up its own logistics division, so that it can provide in-time delivery service to customers in major first and second-tier cities in China, which help JD win a huge crowd of customers. Alibaba and Suning’s cooperation in logistics service sector will certainly help Alibaba improve its logistics service and deliver products as quickly as possible to customers.

2. Some tentative influences

So far, we can still not say for sure how Alibaba and Suning are going to cooperate to integrate offline and online retailing channels. The cooperation between a leading online retailer and a leading offline retailer should generate great interests for both of them.

Although the statement stated that more than 1,600 stores, 3,000 aftersales service centers and other offline service stations of Suning would be seamlessly connected with Alibaba's strong online network, we can still not tell how exactly they will do.

Let me give you an example where reality differs a lot from the contract. Alibaba invested in Intime Department Store in March, 2013 and vowed to integrate the member, payment and product system of both companies, so that Intime’s shopping, discount service and member service would be seamlessly connected with Alibaba's strong online network. Alibaba even promised to open their platform to other offline department stores, retailers, shopping malls, etc.

In reality, however, Alibaba and Intime’s joint venture only carried out three products, including Intime Wallet, Yintai.com and an app MiaoShopping. They still have a long way to go to fully fulfil their goal and open their platform to other businesses. However, Alibaba has a larger say in the development of their joint venture, since Alibaba is the biggest shareholder of Intime and Zhang Yong is the chariman of Intime’s board of directors.

Still other tales

We can say for sure that the cooperation between Alibaba and Suning is not an end, but rather a beginning of Alibaba’s future mergers and acquisitions.

A month before Alibaba’s investment in Suning, Alibaba invested 100 million RMB to hold over 50% shares of Mei.com, an online luxury products retailer. This is the first online retailer of specific sectors Alibaba invested B2C industry. After the investment, Alibaba gets to both receive retailing permission of affordable luxury brands that haven’t opened official stores on Tmall and grab Vip.com’s market in this sector.

In the future, Alibaba will invest in more online retailers of specific sectors and local service providers. Wu Wei, CFO of Alibaba, said in an analysis session of Alibaba’s Q1 financial report that Alibaba had invested in various sectors, including cloud computing, digital entertainment, local service and mobile Internet, etc. in the past year, and would increase its investment in these sectors.

According to the Q1 financial report, Alibaba spent 5.672 billion RMB (around 915 million dollars) on investment. In this case, Alibaba don’t have much money left after investing in Suning. For sure, Alibaba has nothing but money and can easily raise enough money for investment, but I expect that Alibaba will do so in the following two ways:

1. Cash

Alibaba should invest in online retailers of specific sectors directly by cash but never hold their shares. These online retailers are quite promising, but don’t have the ability to list on stock market yet, so Alibaba might as well integrate them into its own ecosystem. Although they may not boost Alibaba’s development, they won’t challenge Alibaba in the future at least.

Besides that, Alibaba should invest in online retailers focusing on specific purchase occasions. These online retailers emerge along with the rise of mobile Internet and SNS, and gradually grab some of Alibaba’s users. Since Alibaba can’t focus on such specific purchase occasions, it could invest in them instead.

Anyhow, merely investing in other online retailers is quite easy for Alibaba.

2. Cash & Share

However, not all companies can be integrated to Alibaba’s ecosystem merely by investment. That’s when the importance of Alibaba’s shares get to play a role.

Such strategy will help keep its advantage and stand out. This recent investment into Suning indicates that Alibaba adopts this strategy quite well.

Firstly, the golden days of Alibaba has already passed, so it needs to add more variety to its business model;

Secondly, in the face of competition of other online retailers such as JD, Vip.com, Mei.com, etc., it’s high time Alibaba opened its platform and benefit both itself and other businesses;

Thirdly, up to now, Alibaba’s advantage still lies in online retailing, so it has to stick to this field and keep its advantage.

To achieve this goal, Alibaba need to make use of its shares so as to invest in big-scale online retailers.

“Market is created, not born with”, Akio Morita, founder of Sony, once suggested. So how big a market is Alibaba and Suning will “create”?

[The article is published and edited with authorization from the author @showalk, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at ECHO), working for TMTpost.

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