A warning about export weakness hurting B2B leader Alibaba was prescient. Now, can China’s e-commerce sector turn domestic?
By Ming Shuliang 24 October 2008
As the owner of a Beijing-based construction materials company, businessman Shi Feng can’t claim the Internet acumen of Jack Ma, the successful founder of China’s top business-to-business (B2B) Web site, Alibaba Ltd.
But Shi knew enough about the business to warn Ma, after becoming his client in 2004, that Alibaba’s model relied too heavily on export-based companies in the Yangtze River Delta. He said a downturn in the export business, the bread and butter for 64 percent of Ma’s customers, could seriously hobble his B2B business.
Shi’s warning was prophetic. This year, a slowdown in the global economy hurt Chinese exporters as well as e-commerce providers such as Alibaba that link Chinese buyers and sellers with counterparts around the world.
Hangzhou-based Alibaba failed to meet analyst projections when it reported first-half 2008 sales of 1.4 billion yuan, up 48 percent from the same period 2007. The company credited a sharp increase in fee-paying entrepreneur members – to more than 368,000 – and higher average spending per member in the Chinese marketplace. In addition, Alibaba sold its Japanese business and benefited from foreign exchange rates.
But actual customer exports increased only 1 percent in the second quarter compared to the first three months of the year. Investors reacted by selling Alibaba stock, pushing the share price down recently to HK$ 5 from a record HK$ 40 last year.
“With a slowing global economy, high commodity prices and policies by the Chinese government toward the export manufacturing sector, we are beginning to feel the impact on our customers’ businesses as well as on our own,” an Alibaba statement said. “This ‘economic winter’ is making it difficult for some of our customers to conduct business.”
Alibaba is not alone. In September, the competing B2B provider HC, which operates the Web site www.madeinchina.com, closed offices and failed to make payroll. Also, layoffs got under way at the operator of Tootoo.com, the B2B branch of Ninetowns, whose share price recently fell to US$ 1.35, its lowest in a year.
Guo Fansheng, chairman of HC, told Caijing the company’s Chinese B2B client base has declined for several reasons, including the appreciating yuan and a shift in business to industrial goods from consumer products.
Guo compared the B2B slowdown with the aftermath of the dot-com bubble’s burst several years ago. He explained that while unhealthy business models, not funding shortages, led to the dot-com bust, the current situation is tied to a shortage of venture capital.
But it could be worse. Sun Deliang, chairman of B2B provider Netsun, said e-commerce companies are suffering less pain than small- to medium-sized enterprises (SME). “For an SME, it’s a life-or-death question,” he said. “But for B2B businesses, the question is whether they can grow at the same pace as before.”
Alibaba has prepared for a cooler climate by socking away more than 500 million yuan in cash reserves. Nevertheless, Ma recently painted a gloomy picture for his employees.
“Be prepared for a long and brutal winter,” he said. “If our SME clients die, we won’t see the sun rise next spring.”
Alibaba CEO Wei Zhe told Caijing that many clients are hesitating due to an anticipated worsening of the export climate in 2009. The slowdown that’s hit textiles, clothing, shoe manufacturing and metal processing may spread to other Chinese export sectors in coming months.
Ma argues that SMEs can expand during the slowdown by using e-commerce to find the right markets. For example, while the U.S. and European markets are slowing, Middle East and Southeast Asia business has been stable. And Ma told Caijing that, although Americans are expected to spend less this year for Christmas, his company’s total overseas orders for the western gift-giving season has been stable.
Meanwhile, Alibaba has started promoting its business in Japan, Taiwan and India. It also launched an “export to China” project to match overseas SMEs and Chinese buyers.
The best news for Alibaba, however, may be that it faces less competition from HC and Ninetowns, especially in the export trade sector. These smaller rivals are being forced to shift attention to China’s domestic market.
Guo is not complaining, since he thinks China’s next big growth engine will be domestic consumption, not the exports at the core of Alibaba’s model. Nevertheless, Ninetowns CEO Wang Shuang said domestic B2B is riskier than the export business due to China’s immature market and problematic credit system.
E-commerce has created a lot of opportunities for SME owners such as Lv Jiankun, who operates a small cast-iron products company in Hebei Province. He deals with 95 percent of his customers through Alibaba, and exports 90 percent of his goods to markets including Europe and North America.
“Nowadays, a lot of foreign clients are logging on to the Chinese-language Web site of Alibaba to look for sellers,” Lv said. “I got a Canadian and a Spanish client who found me that way.”
But business plunged this year. Two of Lv’s largest clients in Spain stopped ordering in spring. He expects 2008 production to fall to one-third of the company’s 2003 peak. Lv’s profit margin may shrink below 5 percent due to rising labour and raw materials costs, and the appreciating yuan.
“There is just no profit,” Lv said.
Lv now spends time hunting for domestic clients through the B2B system. And he recently scored a hit: an order from a Chinese contractor that works for the foreign automaker Volvo.
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Faltering Exports Expose B2B’s Soft Side
A warning about export weakness hurting B2B leader Alibaba was prescient. Now, can China’s e-commerce sector turn domestic?
By Ming Shuliang
24 October 2008
As the owner of a Beijing-based construction materials company, businessman Shi Feng can’t claim the Internet acumen of Jack Ma, the successful founder of China’s top business-to-business (B2B) Web site, Alibaba Ltd.
But Shi knew enough about the business to warn Ma, after becoming his client in 2004, that Alibaba’s model relied too heavily on export-based companies in the Yangtze River Delta. He said a downturn in the export business, the bread and butter for 64 percent of Ma’s customers, could seriously hobble his B2B business.
Shi’s warning was prophetic. This year, a slowdown in the global economy hurt Chinese exporters as well as e-commerce providers such as Alibaba that link Chinese buyers and sellers with counterparts around the world.
Hangzhou-based Alibaba failed to meet analyst projections when it reported first-half 2008 sales of 1.4 billion yuan, up 48 percent from the same period 2007. The company credited a sharp increase in fee-paying entrepreneur members – to more than 368,000 – and higher average spending per member in the Chinese marketplace. In addition, Alibaba sold its Japanese business and benefited from foreign exchange rates.
But actual customer exports increased only 1 percent in the second quarter compared to the first three months of the year. Investors reacted by selling Alibaba stock, pushing the share price down recently to HK$ 5 from a record HK$ 40 last year.
“With a slowing global economy, high commodity prices and policies by the Chinese government toward the export manufacturing sector, we are beginning to feel the impact on our customers’ businesses as well as on our own,” an Alibaba statement said. “This ‘economic winter’ is making it difficult for some of our customers to conduct business.”
Alibaba is not alone. In September, the competing B2B provider HC, which operates the Web site www.madeinchina.com, closed offices and failed to make payroll. Also, layoffs got under way at the operator of Tootoo.com, the B2B branch of Ninetowns, whose share price recently fell to US$ 1.35, its lowest in a year.
Guo Fansheng, chairman of HC, told Caijing the company’s Chinese B2B client base has declined for several reasons, including the appreciating yuan and a shift in business to industrial goods from consumer products.
Guo compared the B2B slowdown with the aftermath of the dot-com bubble’s burst several years ago. He explained that while unhealthy business models, not funding shortages, led to the dot-com bust, the current situation is tied to a shortage of venture capital.
But it could be worse. Sun Deliang, chairman of B2B provider Netsun, said e-commerce companies are suffering less pain than small- to medium-sized enterprises (SME). “For an SME, it’s a life-or-death question,” he said. “But for B2B businesses, the question is whether they can grow at the same pace as before.”
Alibaba has prepared for a cooler climate by socking away more than 500 million yuan in cash reserves. Nevertheless, Ma recently painted a gloomy picture for his employees.
“Be prepared for a long and brutal winter,” he said. “If our SME clients die, we won’t see the sun rise next spring.”
Alibaba CEO Wei Zhe told Caijing that many clients are hesitating due to an anticipated worsening of the export climate in 2009. The slowdown that’s hit textiles, clothing, shoe manufacturing and metal processing may spread to other Chinese export sectors in coming months.
Ma argues that SMEs can expand during the slowdown by using e-commerce to find the right markets. For example, while the U.S. and European markets are slowing, Middle East and Southeast Asia business has been stable. And Ma told Caijing that, although Americans are expected to spend less this year for Christmas, his company’s total overseas orders for the western gift-giving season has been stable.
Meanwhile, Alibaba has started promoting its business in Japan, Taiwan and India. It also launched an “export to China” project to match overseas SMEs and Chinese buyers.
The best news for Alibaba, however, may be that it faces less competition from HC and Ninetowns, especially in the export trade sector. These smaller rivals are being forced to shift attention to China’s domestic market.
Guo is not complaining, since he thinks China’s next big growth engine will be domestic consumption, not the exports at the core of Alibaba’s model. Nevertheless, Ninetowns CEO Wang Shuang said domestic B2B is riskier than the export business due to China’s immature market and problematic credit system.
E-commerce has created a lot of opportunities for SME owners such as Lv Jiankun, who operates a small cast-iron products company in Hebei Province. He deals with 95 percent of his customers through Alibaba, and exports 90 percent of his goods to markets including Europe and North America.
“Nowadays, a lot of foreign clients are logging on to the Chinese-language Web site of Alibaba to look for sellers,” Lv said. “I got a Canadian and a Spanish client who found me that way.”
But business plunged this year. Two of Lv’s largest clients in Spain stopped ordering in spring. He expects 2008 production to fall to one-third of the company’s 2003 peak. Lv’s profit margin may shrink below 5 percent due to rising labour and raw materials costs, and the appreciating yuan.
“There is just no profit,” Lv said.
Lv now spends time hunting for domestic clients through the B2B system. And he recently scored a hit: an order from a Chinese contractor that works for the foreign automaker Volvo.
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