Alibaba Is Being Hurt by a War at Home, Not a Trade War

Alibaba Is Being Hurt by a War at Home, Not a Trade War

A Donald Trump-inspired trade was between the U.S. and China is not the reason for Alibaba Group Holding Ltd. trimming its optimism.

China's e-commerce giant now sees full-year revenue of 375 billion yuan ($ 55 billion) to 383 billion yuan, the company announced Friday. That's 4 percent to 6 percent lower than it had previously expected.

But the weak comes from a competitive was at home and domestic uncertainty more than global macroeconomic factors.

According to CFO Maggie Wu, since Alibaba's investor day in mid-September, management has taken a look at the weakening Chinese economy and decided to turn it into one of the 601 million sets of eyeballs that China's every year.

In light of current fluid macro-economic conditions, we have recently decided not to monetize, in the near term, incremental inventory generated from growing users and engaging in our China retail marketplaces.

In other words, user numbers are still rising, Alibaba is not going to increase the amount of ads it serves up to that growing base.

This looks like a smokescreen.

Customer management, the category impacted by this monetization freeze, climbed at half the pace of overall corporate revenue for the September quarter, dropping to just 39 percent of sales for the period from 48 percent a year earlier. This growth is already slowing, with that division just climbing 26.1 percent in the June quarter compared with 61.2 percent at the company level.

China's domestic economy are forcing companies to curb their enthusiasm. Baidu Inc. this week forecast December-quarter revenue below estimates, citing a slowdown among the factors. Yet tougher competition from the likes of Meituan Dianping and Pinduoduo Inc. can not be ignored. Alibaba thus decided to double down on non-e-commerce offerings as well as bookings and deliveries through the consolidation of Ele.me and Koubei.

Alibaba faces some hard choices. So it's true that this stiffer competition means that Alibaba faces some hard choices. It could keep pushing merchants to buy ads – which in turn spurs other merchants to buy ads just to keep up and risk some sellers. Or it could dial back that dog-eat-dog competition and ensure that it does not stick to it. It opted for the latter, it wants to have a chance to hit them up later.

E-commerce is a drag on the bottom line. Ele.me, the food delivery business, is the single largest factor dragging down income last quarter. Meanwhile, Southeast Asian retailer Lazada, his brick-and-mortar business, and his Cainiao logistics arm all burned money for the period. Then there's the dumpster fires of digital content and cloud computing that persist in hurting the bottom line.

As the saying goes: only when the tide goes out you can see who's swimming naked. Alibaba may want to grab a towel.

To contact the author of this story: Tim Culpan at tculpan1@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

© 2018 Bloomberg L.P.

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