Alibaba Being Repositioned As An Emerging Market Belt & Road Champion
By Chris Devonshire-Ellis & Henry Tillman
Beijing’s Alibaba Tech Moves Are Strategic As The West Sweats Its China Ecommerce Supply Chains
While Western analysts get steamed up about what they perceive as Chinese State interference in China’s tech companies such as Alibaba, the reality is that the Chinese government are repositioning its trading giants to other markets and away from the United States. This can be seen as a strategic move in the light of Alibaba’s developments elsewhere and especially in the China-Russia trade space.
AliExpress Russia is an Alibaba subsidiary. Like other Alibaba facilities it differs from the likes of Amazon as it acts only as a platform and does not sell directly to consumers. It could later allow Russian sales to consumers in China, although work would need to be done in China on this facility as Chinese consumers are more used to Tmall or JD and is why Russian are considering entering these platforms instead of Aliexpress at this time. That is a facility denied to US exporters on Alibaba, and is one reason why Western analysts raised such negativity about changes to China’s tech laws – the changes impacted on US (and a few Chinese offshore investors) in several ways. This included the curtailing the financial and ownership assets that Chinese companies such as Baidu, TenCent, Didi were accumulating in tax havens such as the Cayman Islands and by deliberately limiting (even destroying) the large amounts of shareholder capital owned by US investors. The ability for US exporters to sell to the China market on Alibaba is also blocked. The US is finding itself out-maneuvered in favor of the Russians while the Chinese are becoming choosier about who they sell to.
As a result, Alibaba is gradually being shifted to develop new markets and make it less, not more reliant on US trade and shareholder investment. This can be seen as a direct consequence of Beijing’s perception of the United States as an unreliable trade partner, beginning partially when the US introduced sanctions upon Russia in 2014, and confirmed when Washington instigated a trade war with China in 2017.
Rather than have a major China trade asset dependent upon the US, China is shifting companies such as Alibaba to emerging markets considered to be less volatile in the longer term. Alibaba’s operations in Russia bear this out, where AliExpress Russia is expanding across the Russian and Central Asian regions, including the Eurasian Economic Union member states. This means that Beijing is actively seeking to choose its customers – and increasingly does not want them to be American – a point Western analysts fail to either understand or appreciate. After all, why would they? It is however one that makes sense when looking at how China perceives its treatment by Washington.
What this means is the drawing of market supply chains between the United States, with Amazon and China with Alibaba. This is in addition to a battle for global online competition that is also likely to impact Ebay and other online retailers.
Albaba’s adventures in Russia began in 2019 when they teamed up with Russia’s Mail.Ru to enter a new growth and specific market concentration cycle.
Alibaba, Mail.Ru Group, Russian telco MegaFon and Russia’ Sovereign Direct Investment Fund (RDIF) finalized a deal to establish an e-commerce joint venture, using the existing businesses of Alibaba’s AliExpress Russia, which controlled the bulk of e-commerce flows between China and Russia, and combining this with Mail.Ru’s domestic platforms.
This joint venture kept the name of the original AliExpress Russia and operates in both the cross-border and domestic segments. This created an unmatched value proposition for merchants, consumers and Internet users across Russia and other post-Soviet republics such as members of the Eurasian Economic Union (EAEU) including Armenia, Belarus, Kazakhstan, and Kyrgyzstan. This is significant as China has signed a Free Trade Agreement with the EAEU but is waiting for tariff reductions to be agreed.
Presenting the 2019 joint venture as “an important part of Alibaba’s globalization strategy,” Daniel Zhang, Executive Chairman and CEO of Alibaba Group, said the partnership will “enable regional brands and SMEs to reach and serve their target consumers through our unique and innovative shopping experience” — in line with Alibaba’s goal to “help 10 million small businesses reach profitability and serve 2 billion customers worldwide.”
Mail.ru Group CEO Boris Dobrodeev said at the time that the alliance aimed to “build an undisputed leader in Russian e-commerce” further adding that “building an unmatched level of user services of e-commerce in Russia is only possible with very strong partners.”
To reach such goals, the joint venture used Mail.Ru Group’s leading positions in Russian social media (via the group’s properties VKontakte and OK, whose audience far exceeds that of Facebook in Russia), as well as online gaming (100 million registered users worldwide), email services (100 million user accounts) and online communications. MegaFon, on its side, bought with it a customer base of 77 million users.
VKontakte and AliExpress began developing their social commerce project in early 2019, soon after their respective shareholders announced their JV project. Approval from the Russian antimonopoly authority was received in June 2019.
The Russian e-commerce market was therefore entering a promising development cycle. The market for physical goods was worth US$23 billion at the time of the JVs formation, including US$5 billion in cross-border sales (mainly between China and Russia) with the sectors growth estimated by Morgan Stanley at the time to be about 20% a year.
In fact, bilateral trade between China and Russia grew by 30% in the period January-August 2021, reaching US$89 billion. China’s exports to Russia grew 32% in this period over the same months in 2020.
That has been mirrored in other regional trade where AliExpress operate as a JV, with all EAEU member states reporting trade increases with China.
AliExpress Russia though must compete with strong players on the domestic scene. Wildberries is, by far, the current market leader with nearly US$1.8 billion in revenues generated in 2020. Ozon, one of the most established industry players, raised some US$150 million from its existing shareholders to support its ambitious development goals. It also raised US$990 million in an IPO at the end of 2020 in New York, with a valuation near US$6.2 billion. Such competition will benefit regional Chinese, Russian and other consumers.
This is in contrast to the US and in a knock-on effect the more Western consumer markets it serves, where Amazon have been allowed to both dominate and be highly aggressive with their overseas tax demands and contributes as little as possible. That Beijing as a socialist economy finds that abhorrent can be seen in a little noticed inclusion in China’s tech clampdown, with Beijing stating that “employees must receive at least the local minimum wage” – a direct contrast to the dubious labor practices of Amazon. It is a shocking statistic that the minimum hourly wage in East China averages about US$3.7, in eighteen US states it is less than double that.
There are other strategic implications. Both Xi Jinping and Vladimir Putin committed to raise China-Russia bilateral trade to US$200 billion by 2024 – the AliExpress Russia JV is a key component of this.
According to RDIF CEO Kirill Dmitriev, the AliExpress JV partnership provides access to e-commerce services for more than 50% of Russian population, while Russian exporters have the opportunity to reach 1.5 billion customers in China and elsewhere via the Chinese platforms. This will become more apparent when the AliExpress Russia sites permit Russian businesses to sell to Chinese consumers, an area where details are still being worked out, either via AliExpress or a separate Alibaba platform such as TMall.
Knock-on effects also help mutual development either side of the 4,200km Russia-China border. The Heilongjiang Free Trade Zone, based around the Northern Chinese city of Harbin, is unique in China as it is divided up into three sub-zones. Harbin itself is a major rail connectivity hub with links to the China national railway and the Trans-Siberian railway, while the second sub-zone at Heihe also accesses the Trans-Siberian across the Amur River to reach important regional city markets such as Krasnoyarsk, Novosibirsk, Yekerterinburg, Perm, and Nizhny-Novogorod en route to Moscow.
A third sub-zone at Suifenhe connects to the major Pacific Ocean port of Vladivostok and provides access to China’s East Coast, markets in Japan, South Korea, and India in addition to the US West Coast and the Northern Sea Passage. Nearly 9,000 businesses have set up operations in the Heilongjiang FTZ in the past two years.
This heating up of the China-Russia trade space – which is also dragging along smaller regional markets, prompted RDIF to buy out a stake in AliExpress from Alibaba at the beginning of this year. Together with the investment platform Mubadala Investments and other Middle Eastern sovereign funds, RDIF bought out 7.85% of the shares in the AliExpress Russia JV from Alibaba Group, having reserved the exclusive right to do so upon the formation of the 2019 JV.
RDIF states the deal “accelerates the development of the growing digital economy in Russia by pooling the resources and experience of all shareholders” while Kirill Dmitriev, the RDIF Director General said that “a significant increase in e-commerce volumes allows us to predict further robust growth in AliExpress Russia, including in connection with the coronavirus pandemic and changes in consumer preferences in favor of online shopping.” He also expects the AliExpress JV to become one of the largest marketplaces in Europe: it is already operational in Italy, Germany, Poland, Netherlands, Spain, and Turkey and has a fast-growing presence in Brazil and Indonesia.
This growth is also leading to planned IPO’s. In April 2021 AliExpress reported gross merchandise volume (GMV) of US$3 billion for the 2020-21 financial year and possessed 29.1 million monthly active accounts.
GMV for its domestic Russian business was up 151% year-on-year at 54.9 billion rubles, (US$750 million) the company said.
The COVID-19 pandemic gave a boost to Russia’s e-commerce sector as health restrictions kept consumers at home. AliExpress Russia, which depends on cross-border transactions for more than three quarters of its business, said an IPO was a possible step, but that such a decision was one for its shareholders although it could take place in 2022 or 2023.
AliExpress CEO Dmitry Sergeev said the company’s cross-border business grew in line with Russia’s total e-commerce market, which analysts from market research firm Euromonitor put at almost 40% in 2020. He also said that its domestic Russian business was growing ahead of the market – a benefit of being able to sell to Chinese consumers. Russian exports to China grew 31% in the first eight months of 2021.
AliExpress plans for include rapid increases of the GMV to US$10 billion by 2023, add to its assortment of local sellers, in addition to an enhancement of its logistics capacity, customer experience and website, mobile app and loyalty programs. The company also aims to invest over US$150mn in its own logistics infrastructure in Russia over the next two or three years.
Sova Capital have estimated that AliExpresses total GMV figure implies that the JV accounted for 8.5% of Russia’s total e-commerce market. This puts AliExpress behind Russia’s largest domestic e-retailer Wildberries (GMV of RUB437.2bn for 2020) but slightly ahead of Ozon, which delivered a GMV of RUB197.4bn for the same period.
MegaFon meanwhile estimated the value of its AliExpress shares (24 billion shares, 24.3% of the capital) at US$1.6 billion (119.7 billion rubles) in April 2021, indicating that a fair value of AliExpress Russia in mid-2021 might amount to US$6.7 billion (492.6 billion rubles). That indicates itself a three-fold growth by AliExpress since 2019.
MegaFon sold its AliExpress Russia shares to its own main shareholder, Moscow’s USM Group just three weeks ago. Today, the shareholders of AliExpress Russia are Alibaba (47.8%), USM (24.3%), Mail Group (15%), as well as RDIF together with venture partners from Middle East (12.8%).
However, AliExpress isn’t yet profitable: net losses widened in the first half of 2021 to almost a billion rubles (around US$13 million) against 533 million rubles (US$7.2 million) for the same period in 2020.
However, this matters less to China and Russia as they look to position AliExpress as a regional trade platform and to use it as a tool. The thinking here differs from the US model where entrepreneurs and lawyers must see profits from supply chain instigators such as Amazon – who made global revenues of US$221.6 billion in the first six months of 2021, an increase of 34.8%.
While AliExpress will be required to become profitable in due course, it is the supply chain development and sustainable delivery infrastructure that AliExpress is being targeted at – with less emphasis on the company taking a large cut of transaction values and more on building up regional trade development. That strategy is aimed at developing the manufacturing businesses that make the goods that are sold on AliExpress. This is an opposite approach to assisting individuals develop the type of ego that saw Jeff Bezos send himself 78 miles into the atmosphere in an unnecessary, egoistic project that several nations had already accomplished in scientific and engineering capabilities in the early 1960’s. This will also make AliExpress competitive in terms of offering competitive delivery rates as exploiting the shipment infrastructure costs are not the primary objective.
While Western analysts were critical of Beijing’s policies as regards the tech crackdown, for China it made sense: a reduction in Chinese owned assets open to US market manipulation, a partial repatriation of those assets back to China, a reduction in US market exposure, a refined approach to developing friendlier markets closer to home, and social awareness of labor rights.
Allowing the likes of Alibaba’s Jack Ma to imitate Amazon’s Jeff Bezos and participate, as a Chinese company in rapacious tax and labor manipulation practices was never going to fit with the CPC. Henry Tillman of China Investment Research comments: “Alibaba has been an early entrant into South Asian e-commerce with a first mover entry into Pakistan (population 220 million) and Bangladesh (population circa 167 million). These markets have subsequently seen substantial domestic growth which then attracted international VC and then equity investors. Seem that they have replicated this financial success in Russia (population circa 127 million). They invested circa $1 billion into its Russian ecommerce JV in Q4 2019 – in August 2021 its share was valued at $3.4 billion. Revenues in all of these businesses are expected to continue to grow leading to even stronger financial returns in these important BRI markets in the future. Whoever says that the BRI is all about “white elephants” certainly missed this data in their conclusion!”
Thank you to Henry Tillman of China Investment Research for his kind assistance with this article.
Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at firstname.lastname@example.org or visit www.dezshira.com