Alibaba published its financial results for the entire year ending March 31 last week and the following sell-off of the stock had some analysts perplexed as to why the company keeps losing value, despite seemingly good results.
After all, the US$1.1 billion quarterly loss that the company posted was a result of an anti-monopoly fine levied by the Chinese authorities and the underlying performance appeared to be good, with the total profit for the year reaching around US$14 billion (after the fine).
Other metrics appear to be positive too with a 41 per cent increase in revenue, 25 per cent increase in EBITDA or crossing the 1 billion milestone for the number of customers served throughout the year, for the first time in the company’s history.
The problem however, is that Alibaba’s strong position is built almost entirely on its Chinese operations — where around 80 per cent of its customers come from (or over 800 million) — and the company is demonstrably struggling with its international expansion.
While its international businesses (Lazada, AliExpress and Turkish Trendyol) increased the number of customers from 180 to 240 million over the last year (with Lazada itself reporting a triple digit growth in orders received during the pandemic), the revenue has grown for all of them by just 42 per cent compared to 178.3 per cent for Shopee.
It’s likely that Lazada outperformed AliExpress and Trendyol but we don’t know for sure since a specific breakdown per business is not reported. The gap between it and Shopee must have also continued to grow in the past year.
This is a big pain point for Alibaba, for which expansion to neighbouring Southeast Asia was a natural direction, but it is obviously losing out to Singapore-based Sea Ltd, despite having started in an highly advantageous position of a market leader upon the acquisition of Lazada in 2016 when Shopee was barely in its first year of operation.
It seems to reinforce the observation that Chinese companies fare poorly outside of their core domestic market, adding to pessimism about Alibaba’s future which drags its valuation down.
Since peaking in October 2020, the company has lost around one-third of its market capitalisation within little over than six months, due to a mixture of problems with the crackdown of Chinese authorities on Jack Ma’s Ant Group and the subsequent lengthy disappearance of the maverick founder, who hasn’t been seen in the spotlight ever since the Ant’s cancelled IPO last year.
What does it mean for e-commerce in Southeast Asia?
It’s hard to imagine Alibaba giving up on the regional market but it seems to be outside of its reach for now. However, unless it can employ new leaders and invest heavily to respond to Shopee’s dominant position, it is equally hard to imagine how it could turn its situation around.
It started as a market leader when Lazada was ideally positioned as the only truly regional e-commerce platform five years ago, but Alibaba was defeated at its own game by a Singaporean upstart.
Today, Sea Ltd. is not longer a small company with a current market cap of US$130 billion. It’s now a major corporation which can easily raise billions of dollars to continue its successful expansion.
Of course, Alibaba’s pockets are much deeper as the entire group remains profitable unlike Sea Ltd., which posted another annual loss in 2020 despite continued growth in orders, revenue and user base.
Nevertheless, if money could buy you success then Lazada should be dominating the market – but it clearly isn’t.
It’s a conundrum that there’s no solution to. Ironically, the acquisition of Lazada for a meagre US$2 billion was still a remarkable deal, as the business is likely worth at least several times that today.
At the same time, however, Alibaba cannot accept playing second-fiddle in a market so close to its Chinese motherland while constantly losing ground to Shopee, which is pulling away every single year.
The goal in acquiring Lazada five years ago was to ensure Alibaba’s dominance in a fragmented but rapidly growing Southeast Asian market. Not only has that not happened, but the company has ignored the rise of a potent challenger which has left it for dead and continues accelerating.
War of attrition: will it lead to an Uber-like exit?
As explained in a previous article, Southeast Asian e-commerce is still in a “war of attrition” with major players burning money despite skyrocketing demand.
For one, Sea Ltd. lost US$1.6 billion in this record pandemic year, despite a huge surge in orders. It’s certain that Lazada is bleeding money too, although Alibaba will not disclose the exact figures.
In a lot of ways, the situation is similar to that in the ride-hailing sector until a few years ago, when the market was fragmented and engaged in a bitter competition, burning through billions of dollars of investors’ money to see who comes out on top.
At some point, one contender had to throw in the towel and sell its business — this is how Uber ejected from Southeast Asia in 2018, ceding the region to Grab.
It’s clear that billion-dollar losses are not sustainable for any business over a prolonged period of time, so it may very well lead to a similar consolidation in the market. Since Alibaba has deeper pockets, it’s likely to be the one to make the call.
The Chinese giant has two options:
A. Dump more money into Lazada in the coming years, in the hope of outspending and outcompeting Shopee, or
B. Simply acquire the company from Sea Ltd. and merge both businesses.
A joint Lazada-Shopee venture would have no challengers in Southeast Asia, while both businesses would complement each other in certain ways — with the former having extensive logistical infrastructure and expertise, and the latter being a more popular and successful platform for independent vendors.
Sea is in a more comfortable position because it’s already winning the market share so it is either going to emerge a regional leader (win) or is going to be acquired for a lot of money by Alibaba (win).
Right now, it doesn’t seem that Jack Ma’s golden goose can succeed in direct competition and time works against it. As Shopee keeps growing, taking a stake in the business is going to get more and more expensive.
Featured Image Credit: The Bangkok Post
