Maverick China Research

Alibaba Group has announced that its online B2B trading platform Alibaba will split its management team into international domestic groups. Hong Kong's Media magazine speculates that the move is due to disappointment over the company's international expansion efforts:

Alibaba’s restructure runs in parallel with its plans to bolster its name internationally. Earlier this month, it announced the appointment of a lead creative agency in Europe, the Middle East and Africa as part of its US$30 million advertising campaign launched last year to promote its brand internationally.

 

David Wolf, CEO of Wolf Group Asia, said that while launching a large-scale advertising campaign to attract worldwide users to its site is good practice in the current e-commerce environment, the restructure may be a forced move as Alibaba has spread itself too thin.

 

"Alibaba has chosen to go wide and spread across global markets, but in China its competition is getting stronger and if it doesn’t focus on the domestic market, it may find it’ll be losing its leadership position," Wolf said....

 

Christie Travers, corporate marketing manager of DHK, a competitor of Alibaba, points out that hiring a creative agency in July, nine months after Alibaba launched its global campaign, is also indicative that its global push has struggled to gain traction....

Granted, Media focuses on the advertising industry, so its analysis focuses on aspects of the move that relate to advertising. We have a different take on the situation, however. We believe the split in Alibaba's business is primarily an attempt by Alibaba Group to place even more emphasis on the domestic market. The global economic downturn has hurt many Chinese manufacturers who depend mostly on international buyers through Alibaba's platform. At the same time, domestic e-commerce has been growing rapidly. Helping Chinese manufacturers sell to domestic merchants reduces these manufacturers' dependence on foreign clients, and at the same time it should help Chinese online merchants, many of whom use Alibaba Group's Taobao to sell their products.

This strategy becomes even clearer when Alibaba Group's payment processor Alipay and online advertising exchange Alimama are factored in. Of these four major businesses, Alibaba is the oldest. It is also the most dependent on participation from entities outside China. The company's recent growth is mostly coming from the domestic market, and this action allows Alibaba to build stronger links between China's manufacturers and its merchants. As domestic consumption becomes a more important part of China's economy, Alibaba Group is extremely well positioned to benefit multiple times as a products are manufactured, distributed to merchants, and sold to consumers.

Alibaba Group surely wants to build its international business, but to us this move shows that the company knows where its strength is and continues to build its business inside China.

With the official launch of Baidu's Youa, a C2C e-commerce site under Baidu that works very much like Alibaba's Taobao, the two companies are now in direct competition. When trying to predict the outcome of this battle, it's worth a brief look back at each company's accomplishments.

I have been recently quoted in Anita Davis' article titled Baidu faces massive lawsuit, where Anita describes Baidu's latest challenge:

More than 50 companies are reportedly gearing up to launch a mass-litigation suit against Chinese search engine Baidu for violating anti-trust, fraud and infringement laws. 

With its recent launch of Youa.com and BaiFuBao, Baidu has made an emphatic entrance into China's quickly growing e-commerce market, a territory dominated by incumbents, the Alibaba Group and (to a lesser extent) the Tencent Group.

The Alibaba Group includes:

• Alibaba.com, a Nasdaq-listed B2B e-commerce website
• Taobao.com, China's leading C2C and B2C e-commerce website, and
• Alipay, the Group's online payments processor.

The Tenpay Group includes:

• QQ and QQ.com, China's top instant messaging program and online digital community
• Paipai.com, the Group's B2C e-commerce sit, and
• Tenpay, the Group's online payments processor.

Baidu is following a similar model of binding an e-commerce website with its own online payments provider, which is a telling sign for the future of online commerce and online payments in China. Independent third-party payment companies in China, many of which are struggling with user signups and transaction volumes, are in trouble.