Saturday, 25 February 2023
by Berkeley Lovelace
Hong Kong’s poor old Hang Seng index has taken another backward step this week, perhaps because a bit of ye olde price war has broken out between what remains of China’s formerly world-beating e-commerce platforms.
I might add that those remains – when it comes to buying stuff online – are still mighty substantial.
But first, the war.
There’s several theatres of conflict, and while the COVID-numbed consumer would enjoy a good old price war as much as I do, the cost to China’s stuttering economic renaissance is a bit of a problem.
Hostilities turned a corner last week when Meituan, which dominates China’s stupendous food delivery sector (maintaining a near 70% share in 2022) declared its intention to take on an extra 10k worker/soldiers this quarter to try and fend off a challenge from TikTok-owned ByteDance.
Meituan sees a chance to secure a staging ground in lucrative Hong Kong where new competition from cashed-up players like ByteDance could begin the slow breakdown of its control of China’s US$150 billion food delivery market.
That’s a knee-jerk reaction to the ByteDance’s (TikTok’s) sibling app Douyin which is already trialing a food delivery in Tier-1 markets like Beijing, Shanghai and our west in Sichuan’s capital of Chengdu. ByteDance lived through China’s COVID-zero and knows there’s money to be made in bringing food to the lazy and or locked-down. But the move put Douyin directly in the crosshairs of big guns Meituan and Alibaba’s Ele.me.
Douyin quietly began its push into local commerce last year – it has the reach, audience, brand awareness and trust as well as the cash – and according to Caixin (which quotes “a person from ByteDance”), had immediate traction with rapid growth in traffic for related services. Many local shops and restaurants were already promoting their businesses using Douyin’s live streaming platform to bang on about discount offers via the app.
Away from the maddening online shopping crowd, NetEase and MiHoYo are intensifying their conflict with gaming boss Tencent Holdings.
On Thursday NetEase saw a 4% increase in net revenue in Q4 2022 compared to the same period in 2021, rising to 25.4 billion yuan (US$3.7 billion).
The dominant presence could only manage a a 1.6% year-on-year increase in revenue which predominately came from games and related value-added services, which stood at 19.1 billion yuan (US$2.8 billion).
NetEase CEO and director William Ding talked up the company’s diverse content, but that’s being challenged by the two upstarts.
“Focusing on our flagship titles and new games alike, in 2022 we brought more players into the fold with our diverse and growing game content.”
But pitted in the battle royale – to the last penny of their billionaire owners – are the e-commerce giants JD.com and Pinduoduo and there’s been early losses on both sides.
Shares of the Nasdaq-listed Pinduoduo plunged 9.5% overnight, while according to Forbes.com, PDD founder Zheng ‘Colin’ Huang has taken a personal hit already to the tune of US$3 billion. That “staggering loss makes Huang one of the five biggest losers” on the Forbes World’s Real-Time Billionaires ranking as of Wednesday.
JD.com fell as much as 12.5% in the US pre-market, as reports of a 10 billion yuan cash splash on a customer subsidy program began to filter out. And that sucked US$1.2 billion from JD owner Richard Liu’s net worth.
According to the South China Morning Post, Liu is launching a 10 billion yuan (US$1.5 billion) subsidy campaign in early March targeting PDD and its successful budget shopping app.
The subsidies will cover both JD.com’s self-operated online shops, and storefronts set up by third parties on its platform. The company is still in the process of hammering out the details and readying its system before the campaign begins next month, according to sources cited by the SCMP.
After announcing that “low price” will be the theme of this year’s always fabulous “JingDong retail” event, Sohu.com’s 36 Krypton said it had “exclusively learned that JD.com will officially launch a ’10 Billion Subsidy’ channel in early March.”
Well, directly targeting rival Pinduoduo, JD (JingDong) has gone and promised billions in shopping bargains to shoppers who’ve started to tire of the PDD app and begun looking elsewhere for their goodies.
36 Krypton says JD has now “entered the sprint stage before the product pool is selected and the bidding system is launched.”
I don’t know what that means exactly, but it’s fair to say it sounds like a threat to PDD’s status as the pandemic performer and one of a handful of Chinese co’s which actually did okay out of the pandemic and China’s economic malaise.
Over the last 18 months in particular PDD has managed to woo and win literally hundreds of millions of shoppers with bargain buys across anything that can be made, worn or eaten.
As the stock prices drop and the profit margins evaporate, what’s probably more galling for a central administration – desperate to appear in the best part savvy and the least part competent – is that this is a civil war they’ve themselves have armed and encouraged.
After a prolonged tech sector crackdown which sought and succeeded in stifling the mega growth instincts of what was briefly the world’s most flammable asset class, Xi Jinping’s regulators have called it a victory (which is often a tie), officially/unofficially declaring the problems solved (whatever they were).
Alibaba’s founder, Jack Ma, the truant of the billionaire class, was scrubbed from various boards and positions of influence, his cliques of influence disbanded and in their place party-cadres disguised as semi-state-run front companies took up position.
Game-makers were told they were to get back to publishing with the spoken/unspoken proviso not to be too rude, clever or American.
From the moment Xi was assured of his ongoing presidency, the industry was encouraged to go make some money.
That was a signal for investors to take up their old positions which had been emptied by the ugly few years of state market intervention.
Now comes the blowback as we discover the state is still embedded in the sector, the economy is a 50/50 bet, the household savings stashed away during the pandemic are remaining unused and the success of tapping into that new found frugality is making a kamikaze-style attack on margins a cause of panic for spooked markets.
Bank deposits held by Chinese households have soared over the past year, but according to legendary (well he is to us) Capital Economics head of China economics, Julian Evans-Pritchard, that mostly reflects a shift out of riskier assets rather than a surge in savings.
“In fact, our calculations show that household wealth declined in 2022 for the first time in at least two decades,” he says.
“This suggests that once the initial reopening rebound has happened, we shouldn’t expect a further surge in consumer spending.”
Chinese households have been quick to shake off the shackles of the zero-COVID policy. High-frequency data show that, by mid-January, they were back on the streets and public transport networks in full force.
Less certain, however, is how quickly they will reopen their wallets.
“Private consumption is almost 40% of GDP and was the most depressed type of expenditure last year. The extent of its recovery will therefore be key in determining the strength of China’s reopening rebound.”
A margin squeeze across the platform giants is not going to help. And who knows what pressure that will lace on the restaurants which use them, the farmers that provide them and the drivers that drive them.
Suddenly tech shares, which already faced a post opening pullback, now appeared to have a self-immolating structural problem.
Union Bancaire Privee’s managing director Vey-Sern Ling puts it this way – after two years of model behaviour, of slashing costs and not rocking the party boat, the cut-throat instincts have been let loose.
“They’re willing to invest and compete again,” Ling says.
“The companies are optimistic about China’s consumption outlook and normalisation of the regulatory environment… (but) is negative for the entire e-commerce industry, including Alibaba,” he added.
“Embarking on an aggressive subsidy campaign could (also) be an acknowledgment on JD.com’s part that it is facing market share pressure from Pinduoduo,” said Ling.
Liu’s JD.com has been a beneficiary of this waywardness and has PDD founder Zheng ‘Colin’ Huang in his sights.
JD.com’s attack on the Pinduoduo budget segment stronghold, is the first signs of life from the 48-year-old billionaire founder who only recently sorted his civil rape case in the States before returning to China.
After only getting in on the e-commerce game late in 2015, PDD has smashed it, quickly joining the world’s fastest-growing companies, at an annual growth rate of up to 50%.
As well as catching up with the user base volume of Alibaba and JD.
Pinduoduo delivered a decent Q3 profit of US$1.5 billion, but cracks in the model were already starting to appear. JD.com, meanwhile delivered a US$800 million net profit during the same period.
You might be getting better at it, but China remains the original home of buying crap online.
Last year almost half of all e-commerce sales globally were made inside China.
At around 45%, China’s domestic buyers absolutely eclipsed the next best thing buying online with money can get – the entire United Kingdom, and here we’re including the Welsh, which mustered a 10% share of global purchases.
But what makes China’s e-commercial existence so much more significant is that the vast majority of Chinese online transactions (around 80%) also happen on the same home grown e-commerce marketplaces. Language is a bit of a barrier, but the Alibabas of that world go out of their way to offer merchants incentives, a place to call their own, a bunch of familiar, Yuan and other currency denominated tools to manage their stuff, their stores and which in turn offer their customers a convenient, streamlined and safe as houses shopping experience.
JD has been around forever, beginning life in the mid-90s flogging computer parts. It was the 2002/2003 SARS epidemic which similarly forced JD to pivot fast to the internet while sticking to their tech guns and they’ve never looked back.
JD’s always been technology-minded, and has broken ground on AI and autonomous vehicles, already boasting one of the largest drone delivery infrastructures in the world.
Compared to established platforms like JD, Pinduoduo is the new kid on the block which has quickly become the world’s fastest-growing company.
PDD introduced a bunch of e-com innovations, like team buying, social media e-com programs, and a C2M business model taking consumers into directly influence manufacturers and the products they offer.
It’s also by far the largest marketplace for agricultural produce in China, tapping into the still hulking agrarian economy, connecting Chinese farmers with urban consumers.
However, as Pinduoduo broke into the established markets, it’s woken the dragons, burned through a heap of cash with an unsustainable model and now faces the intense backlash of Alibaba, Taobao and JD.
It’s gloves off.