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Alibaba, navigating sea change, reorients business towards bread-and-butter e-commerce and AI, pares down overhaul

  • Alibaba has made dramatic changes to its corporate restructuring plan as founders Jack Ma and Joe Tsai return to the driver’s seat
  • The e-commerce giant is betting on improved shopping experiences, artificial intelligence and a strengthened overseas push to regain momentum

By Ann Caoin Shanghai andKelly Le From South China Morning Post

Alibaba recalibrates after a year of changes. Illustration: Henry Wong

When Alibaba Group Holding bought a controlling stake in supermarket chain Sun Art Retail in late 2020, it paid HK$28 billion (US$3.6 billion), or HK$8.1 per share, for the chance to take a larger bite of the bulging wallets of Chinese consumers.

But Alibaba’s “new retailing” vision of synergising online and offline shopping never took off. Three and a half years later, the acquired stake has lost 80 per cent of its value, based on Sun Art’s recent share price. The asset has also become a heavy burden with its falling revenues and a vast payroll of 100,000 employees.

The Sun Art deal was just part of the price Alibaba has paid for its ambitious expansion since its secondary listing in Hong Kong in 2019. Since then, the Hangzhou-based e-commerce giant has been scrambling to find its footing amid key leadership changes, abandoned plans and the meteoric rise of a younger rival.

By March 2023, Alibaba had lost three quarters of its value from the peak in October 2020, as the e-commerce giant, once seen as China’s answer to, faces questions on whether it can recapture its former glory while dealing with China’s economic slowdown, regulatory scrutiny and fierce competition from old and new rivals.

It was against this backdrop that Alibaba, owner of the South China Morning Post, announced in that same month an overhaul plan to break itself into six independently run entities on top of other smaller units.

At the time, the plan was for Daniel Zhang Yong – founder Jack Ma’s designated successor since 2019 – to sit at the apex of the holding company, while the chief executive of each business unit handles day-to-day operations and fundraising efforts, such as pursuing initial public offerings (IPOs).

Less than three months later, Alibaba announced that Joe Tsai, one of two “permanent partners”, will return to take the helm of the group as chairman, with Eddie Wu Yongming, one of the earlier lieutenants of Ma, assuming the role of CEO. Zhang left the company last September, and his original plan of launching separate IPOs for the Cloud Intelligence Groupand Cainiao Smart Logistics Network were eventually cancelled.

Ma, who no longer holds any management role but has become Alibaba’s largest shareholder after early investor SoftBank cashed out its stake, wrote a rare long memo to Alibaba employees this week, endorsing the changes made by Tsai and Wu and urging employees to embrace innovation.

“We made countless mistakes in the past 25 years, and we will [continue to] make mistakes in the next 77 years”, wrote Ma. “To face problems is not to deny the past, but to responsibly find the way to the future.”

In a podcast interview with Norges Bank Investment Management’s CEO Nicolai Tangen last week, Tsai also said the group has made “mistakes”.

“We have fallen behind because we forgot who our real customers are,” Tsai said. “Our customers are the users who use our apps [for] shopping, and we did not give them the best experience. In a way, we stepped on our own foot and did not focus on where we can add value.”

PDD, which also runs the Temu shopping app in overseas markets, last November briefly surpassed Alibaba to become the most valuable US-traded Chinese company, as its shares rallied after it reported a 94 per cent jump in third-quarter revenue.

According to people with knowledge of the matter, Alibaba’s founders were jolted into soul searching after the company’s market cap was briefly eclipsed by PDD Holdings, even though the online budget retailer’s payroll was just a fraction of Alibaba’s.

At that time, PDD ’s market cap briefly overtook Alibaba’s, reaching US$192 billion on the Nasdaq, while Alibaba fell below US$190 billion.

As of last quarter, Pinduoduo had approximately 623 million monthly active users, while Alibaba’s Taobao had around 892 million, according to Statista.

Alibaba Group Holding chief executive Eddie Wu Yongming also heads the company’s Taobao and Tmall Group and cloud computing unit, which is responsible for artificial intelligence operations. Photo: Alibaba

In addition to impressing investors, PDD has also proved popular among consumers for the attractive pricing of its products. “Alibaba realised that its bread-and-butter business was under serious threat,” according to a source who was briefed on internal discussions.

“Alibaba didn’t have a solid track record under the previous leadership of Daniel Zhang,” said Chelsey Tam, a senior analyst at Morningstar. “For example, the firm wasn’t able to prevent PDD Holdings from overtaking Taobao and Tmall Group as the largest Chinese e-commerce platform by annual customers transacting on a platform.”

Zhang, who initiated the Singles’ Day shopping festival and played a key role in driving Taobao to profitability before becoming Alibaba’s chief executive, last month joined Chinese investment fund Firstred Capital as a managing partner.

“Faced with competition from Pinduoduo and Douyin, Eddie Wu came [to Alibaba’s senior leadership] to do one thing, which is to stabilise the main business,” said Li Chengdong, head of internet industry think tank Dolphin.

Alibaba last December named Wu, who already leads the group’s cloud unit and serves as chairman of Taobao and Tmall Group (TTG), as chief executive of the e-commerce unit, a move seen as part of the group’s efforts to defend its domestic market-leading position against long-time rival and younger competitors that include PDD’s Pinduoduo and ByteDance-owned Douyin.

Alibaba last month launched a campaign to promote its AI tools that Chinese merchants can use to tap overseas markets via business-to-business platform

Despite the efforts, more needs to be done, as Chinese firms are “possibly two years behind” their US peers in AI development, Tsai said in the Norges Bank interview.

He said US export restrictions that bar Chinese companies’ access to advanced semiconductors, such as the highly sought-after graphics processing units from Nvidia, have “definitely affected” tech firms on the mainland, including Alibaba

Alibaba last November cancelled the spin-off of its Cloud Intelligence Group, asserting that the plan “may not achieve the intended effect of shareholder value enhancement” because of the uncertainties brought about by expanded US export curbs.

The shift in its restructuring strategy reflects Alibaba’s “process of readjustment after [a period of] trial and error”, said Chen Duan, director of the Digital Economy Integration Innovation Development Centre at the Central University of Finance and Economics in Beijing. “This not only involves a change in business ecology, but more importantly, the internal management structure and incentive system.”

Alibaba’s adjustments also underscore the impact of China’s shaky post-pandemic economic recovery, which has weakened consumer spendingand resulted in slower growth for the domestic internet sector.

Alibaba in February reported lower-than-expected financial results in the quarter ended December 31. Although revenue rose 5 per cent year on year to 260.35 billion yuan (US$36.67 billion) in the quarter, it missed analysts’ consensus estimate of 261.25 billion yuan. Net income attributable to ordinary shareholders was down 69 per cent year on year to 14.4 billion yuan.

In the same quarter, Alibaba said it cancelled the spin-off plans for its Cloud Intelligence Group and put on hold the public listing of its Freshippo supermarket chain, citing poor market conditions.

“Alibaba expanded a lot in offline retailing and paid a lot for these businesses over the past years,” Dolphin’s Li said. “Now they’ve become a burden.” He indicated, however, that divesting such assets could result in short-term pressure on the company’s earnings.

In February, Alibaba was said to be considering the sale of Freshippo and RT-Mart, a business under Sun Art, according to a Reuters report citing unnamed sources. This was subsequently denied by Alibaba.

Still, Sun Art last month appointed a new chief executive as part of efforts to strengthen its operations. Alibaba also suspended the operations of Ling Shou Tong, an online platform used by family-run stores to source products.

Separately, Alibaba in March unloaded nearly US$360 million worth of shares in Bilibili at a significant discount. In the same month, Alibaba also raised about US$314 million from its sale of 33 million US-traded shares of electric vehicle maker Xpeng.

AliExpress is the international shopping platform of Alibaba Group Holding. Photo: Shutterstock

As a weak consumer sentiment lingers in its home market, Alibaba has boosted its efforts to expand e-commerce operations overseas.

The company’s international shopping platform, AliExpress, was recently revealed to be a sponsor of this year’s European Football Championship, known as Euro 2024, a move that comes after rival Temu made a splash in the US through Super Bowl adverts that ran in February.

Early last month, the company expanded its “five-day delivery” servicefor AliExpress shoppers in the US, where competition has intensified against PDD’s Temu and China-founded fast-fashion retailer Shein.

Cainiao and AliExpress jointly launched their five-day global e-commerce delivery services last year. Coverage has since been expanded to cover GermanyFrance, Portugal, Saudi Arabia and Mexico.

In the quarter ended December 31, the strong performance of AliExpress lifted revenue at Alibaba’s International Digital Commerce Group by 44 per cent to 28.52 billion yuan. AliExpress delivered year-on-year order growth of more than 60 per cent.

Beyond increased competition from the likes of Temu and Shein, escalating geopolitical tensions between Washington and Beijing have also posed a challenge to Alibaba in expanding its overseas operations, especially in the US.

“Just generally being a Chinese company in the US, we have to be very careful,” Tsai said in the podcast interview.

“For example we don’t have much of a consumer-facing business in the United States because of concerns about data privacy, cybersecurity and things like that,” he said. “These are some of the issues that we will have to navigate in the future.”

“For such a large ecosystem, there are so many things that can affect the whole group, whether it is a change in structure, personnel or products,” said Chen from the Central University of Finance and Economics.

Earlier this year, Alibaba’s Ma and Tsai emerged as the two-largest shareholders of the Chinese e-commerce giant after aggressively scooping up its shares in New York and Hong Kong in the December quarter, when the stock’s price saw an 11-per cent drop.

Ma, who retired as Alibaba’s chairman in 2019, bought about US$50 million of shares in that quarter, which raised his stake beyond the 4.3 per cent reported at the end of 2021. It marked the first time in nearly 25 years that a Chinese investor owns the largest stake in Alibaba.

In the first quarter, Alibaba stepped up its stock repurchase scheme in Hong Kong and New York by spending US$4.8 billion to buy 524 million ordinary shares, or the equivalent of 65 million American depositary shares. That marked the company’s most aggressive stock buy-back since 2021.

Alibaba also decided to revamp employee incentives from April 1 by combining more exercisable stock options with cash to boost staff morale amid the challenging market environment.

E-commerce logistics powerhouse Cainiao last month said it will double the year-end bonus for all employees in its next financial year, a move that is expected to help boost staff morale after parent Alibaba scrapped the unit’s IPO plans. The new financial incentive to Cainiao employees shows parent Alibaba’s focus on keeping morale high at an integral business under the e-commerce giant.

“Now with the restructuring and with the new management in place, we feel a lot more confident in placing as one of the top e-commerce players in China,” Tsai told US business news channel CNBC in February. “Where we didn’t feel as confident as before, we felt the competitive pressure, but now we’re back.”

For more on this story go to: SOUTH CHINA MORNING POST


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