Alibaba

[Bibi]

Talking about Ali's overseas online retail e.g. Lazada SG, I wonder if the current business model is sustainable. It seems to be driving sales thru' credit card/Lazada vouchers, free/highly subsidized delivery during major events like GSS, 11.11, National Day. In fact, I think it is actually subsidizing the customers.

Indeed, I was one of the beneficiary of redmart (under lazada) vouchers give away for this year. I bet pp like me contributed to part of their rev growth in lazada but i bet lazada losses increases as well. I was their redmart customer for 3 times for their $10 voucher each time. Once the promo ended, I sourced for the next cheapest online grocery provider.

I am usually not impressed with co with revenue growth but profit drop. I cant appreciate many companies with high rates of rev growth but increasing losses although i know a few will make it to become a highly profitable co after many years.

[CY09]

While China government has been clear that it is prohibiting companies from becoming a monopoly by virtue of burning capital (an unsustainable model in the CCP POV); countries like Singapore are embracing this model.

This is why companies such as Grab, Gojek, foodpanda, Deliveroo, Sea Group, Lazada still practices it; until this model is banned in South East Asia with Singapore leading the way, Lazada is likely to engage in a price/cash burning war with Sea Group. Lazada is currently losing the war but is still trying to gain dominance. They will likely be a drag to Alibaba earnings.

As a shareholder, I would have preferred Alibaba gives up the fight and cede South East Asia to Sea Group. However to us consumers, this will be bad because it is likely once Sea Group becomes the monopoly, they will raise platform fees to cover the s$6 billion hole they burnt in trying to be a monopoly as well as justify their $140 billion market cap in USA

<vested in Alibaba>

[Choon]

While China government has been clear that it is prohibiting companies from becoming a monopoly by virtue of burning capital (an unsustainable model in the CCP POV); countries like Singapore are embracing this model.

This is why companies such as Grab, Gojek, foodpanda, Deliveroo, Sea Group, Lazada still practices it; until this model is banned in South East Asia with Singapore leading the way, Lazada is likely to engage in a price/cash burning war with Sea Group. Lazada is currently losing the war but is still trying to gain dominance. They will likely be a drag to Alibaba earnings.

As a shareholder, I would have preferred Alibaba gives up the fight and cede South East Asia to Sea Group. However to us consumers, this will be bad because it is likely once Sea Group becomes the monopoly, they will raise platform fees to cover the s$6 billion hole they burnt in trying to be a monopoly as well as justify their $140 billion market cap in USA

<vested in Alibaba>

Is SG leading the way to ban money burning model? How so?

I very much doubt these companies' economic-value-add to society. Burning capital, they are seriously misallocating resources and time. We are turning into a nation of delivery man and woman.

I thought SG authorities are just standing by the sidelines and not taking any stand.

[CY09]

While China government has been clear that it is prohibiting companies from becoming a monopoly by virtue of burning capital (an unsustainable model in the CCP POV); countries like Singapore are embracing this model.

This is why companies such as Grab, Gojek, foodpanda, Deliveroo, Sea Group, Lazada still practices it; until this model is banned in South East Asia with Singapore leading the way, Lazada is likely to engage in a price/cash burning war with Sea Group. Lazada is currently losing the war but is still trying to gain dominance. They will likely be a drag to Alibaba earnings.

As a shareholder, I would have preferred Alibaba gives up the fight and cede South East Asia to Sea Group. However to us consumers, this will be bad because it is likely once Sea Group becomes the monopoly, they will raise platform fees to cover the s$6 billion hole they burnt in trying to be a monopoly as well as justify their $140 billion market cap in USA

<vested in Alibaba>

Is SG leading the way to ban money burning model? How so?

I very much doubt these companies' economic-value-add to society. Burning capital, they are seriously misallocating resources and time. We are turning into a nation of delivery man and woman.

I thought SG authorities are just standing by the sidelines and not taking any stand.

What I meant is that this model might only be banned in South East Asia if Singapore is the first country in SEA to ban it. This is because other SEA nations tend to follow suit from Singapore's regulations.

[dzwm87]

As a shareholder, I would have preferred Alibaba gives up the fight and cede South East Asia to Sea Group. 

This is a very short-term thinking just hoping to boost near-term EPS. If your cash flow and core earnings are still growing, it makes sense to reinvest into other growth opportunities.

[Wildreamz]

As a shareholder, I would have preferred Alibaba gives up the fight and cede South East Asia to Sea Group. 

This is a very short-term thinking just hoping to boost near-term EPS. If your cash flow and core earnings are still growing, it makes sense to reinvest into other growth opportunities.

I tend to agree (all due respect).

(1) Although I agree that mindlessly throwing money to monopolize a sector, is not sustainable and perhaps, predatory. I do not believe that's the only market dynamic happening under the surface. The key to "winning", in the e-commerce space, IMO, is actually whether or not you can build a viable, profitable business/ecosystem on top of your ecommerce market-share/traffic/GMV. Take for instance, Amazon was able to build AWS/FBA/Prime/Ads/private-label etc. on top of their e-commerce business; hence the reason they are as profitable as they are today.

All in all, I think, even if profits from Lazada is minimal/slightly negative, it's also net value-add to the overall Alibaba ecosystem. And is a good to have, even if just on a strategic standpoint (visibility; presence in international commerce; curb the growth of international rivals etc.).

(2) From the perspective of consumers, I also don't think it's healthy for South East Asia to only have 1 choice among e-commerce platforms. So I welcome Lazada/Coupang/Tokopedia/Qoo10 keeping pricing competitive and promoting competition in goods and services offered by these platforms.

(3) Ecommerce in South East Asia is far from settled. Lazada has been steadily gaining traction. IMO, Lazada offers some unique advantage, particularly with their Taobao integration.

From latest earnings report:

"Lazada – Lazada recorded over 90% year-over-year order growth for the quarter ended June 30, 2021. Lazada continued to focus on its localization strategy that increases product supply to address the local consumers’ needs and preferences in different markets of Southeast Asia. Additionally, Lazada’s investments in technologies to improve user experience and recommendations on its mobile app have resulted in stronger consumer mindshare and user stickiness, as evidenced by improving frequency of visits by users for the last six consecutive quarters."

Source: https://www.businesswire.com/news/home/2...21-Results

2c. Peace.

(vested)

[karlmarx]

Burning cash to dominate markets is not new, and exists in all industries. Many US railroad companies in the late 19th C and early 20th C went bankrupt pouring huge amounts of money racing each other to lay the first tracks. Netflix, and more recently, Tesla (10 years of 'burning'), are modern day examples of burning cash to get ahead. Grab won in SG, but it has yet to reach profitability; a success story in the making?

Probably because money is so cheap, and the potential market of tech is enormous, the practice has been exaggerated and prolonged over a very long period of time in tech.

All businesses need to 'burn cash' in some scale to stay competitive, and more to get ahead of the competition. Many non-essential business expenses can be seen as frills -- and certainly, your results will look good for a short-time when you cut them -- but you risk losing market position without it. Especially when your competitors are giving more instead of cutting back. You can cut bonuses for one year, but how much more can you cut the next year without all your employees leaving?

Another way to look at it is how VBs invests in stocks to with the intention to grow the FV of their portfolio. It could crash and burn or it could succeed. But if you don't 'burn cash' to buy some investments, your money simply won't grow (1% p.a.?). Following this thought experiment, your personal P&L will also be very much impacted by investments (burn cash) if you depreciate it over a few years. The reason that this isn't stopping people from investing is because they don't view their personal finance P&L as businesses would, even though the concept apply to both.

Coming back to baba before we go off topic, I unfortunately do not have any insight on the ultimate winner of SEA's e-commerce market. But I would think an investor looking at baba should see that the real prize is its Chinese domestic, import, and export businesses, and the other units in the value chain supporting these businesses.

[Wildreamz]

Burning cash to dominate markets is not new, and exists in all industries. Many US railroad companies in the late 19th C and early 20th C went bankrupt pouring huge amounts of money racing each other to lay the first tracks. Netflix, and more recently, Tesla (10 years of 'burning'), are modern day examples of burning cash to get ahead. Grab won in SG, but it has yet to reach profitability; a success story in the making?

..

I think the examples you cited here are 4 different examples and strategies. They can't be compared in a broad stroke (if you drill down to the details). 

In particular, companies like Grab, Uber, delivery services like Meituan, many Ecommerce platforms; there is an argument to be made that they might be over-subsidizing (sometimes below cost; in the form of discounts and vouchers etc) so as to gain market share. Somewhat akin to the predatory-pricing strategies employed by Standard Oil (https://www.investopedia.com/terms/p/pre...ricing.asp) when taken to the logical extreme. And once the subsidies go away, so does your customers.

If purely done as a strategy to drive out competition, and that's your only strategy; yes it is indeed unsustainable (IMO); even if the government does not regulate it. Which is why I'm somewhat bearish of Uber/Lyft, and still not vested in promising e-commerce companies like SEA and Mercado Libre, yet (unclear about their end-game).

Alibaba's core business on the other hand, is already profitable, right? Lazada is just experimentation, and it will not be consequential at least in the near term, whether or not it will become a strong profit driver in the near future (at least, IMO; not an e-commerce expert).

Alibaba should definitely play the long game here.

Peace.

[CY09]

The beef I have with the e commerce space in South East Asia, particularly Singapore, is that the platforms are doing business on negative net margins. Even if revenue grows, the loss in the segment grows (I am basing on SEA Group shopee results) - Orders up 150% but losses has widened by 58%, no doubt losses per order is narrowing, but it wont turn profitable until shopee starts levying platform fees and increasing seller fees.

Hence now it is a period of price war. If one tracks the history, in 2013-2016, Lazada was the market leader but it lost out to shopee from 2016 due to frequent price wars and with shopee literally burning US$200 million per quarter fighting Lazada. The selling point is that shopee has been generous with its discount vouchers and offers a stackable 33% discount (cap at $10) on daily coins you earn from logging in and playing its free-to-play games. I have been a constant beneficiary of them.

The end result is that both e commerce platforms are burning cash and dependent on other segments of its conglomerate for cross subsides. With Sea Group getting a full banking license to tap into the banking industry which earns $10+ billion annually; the price war on the e commerce is going to be a long drawn attrition. Lazada can bank on the profitable China e commerce market, ANT financial; shopee can bank on the profitable gaming segment and upcoming banking license (MAS doesn't allow banks to constantly make losses so likely Sea Group's financial arm will turn profitable in a few years and become a segment of money).

The victor of the e commerce space tends to be the lowest price offerer. Hence once Lazada/Tokopedia dies out, another e commerce platform may come in and Sea Group has to take on the challenger. This too is applicable if lazada is the victor in an alternative scenario

[Choon]

The beef I have with the e commerce space in South East Asia, particularly Singapore, is that the platforms are doing business on negative net margins. Even if revenue grows, the loss in the segment grows (I am basing on SEA Group shopee results) - Orders up 150% but losses has widened by 58%, no doubt losses per order is narrowing, but it wont turn profitable until shopee starts levying platform fees and increasing seller fees.

Hence now it is a period of price war. If one tracks the history, in 2013-2016, Lazada was the market leader but it lost out to shopee from 2016 due to frequent price wars and with shopee literally burning US$200 million per quarter fighting Lazada. The selling point is that shopee has been generous with its discount vouchers and offers a stackable 33% discount (cap at $10) on daily coins you earn from logging in and playing its free-to-play games. I have been a constant beneficiary of them.

The end result is that both e commerce platforms are burning cash and dependent on other segments of its conglomerate for cross subsides. With Sea Group getting a full banking license to tap into the banking industry which earns $10+ billion annually; the price war on the e commerce is going to be a long drawn attrition. Lazada can bank on the profitable China e commerce market, ANT financial; shopee can bank on the profitable gaming segment and upcoming banking license (MAS doesn't allow banks to constantly make losses so likely Sea Group's financial arm will turn profitable in a few years and become a segment of money).

The victor of the e commerce space tends to be the lowest price offerer. Hence once Lazada/Tokopedia dies out, another e commerce platform may come in and Sea Group has to take on the challenger. This too is applicable if lazada is the victor in an alternative scenario

But could the results at the end of this long battle be worth it? Market dominance (say 60-70% market share)? 

I mean Amazon's ecommerce business made losses for many years too. And the many years of cash burning that DiDi did with domestic competitors then with Uber.

I think (I could very well be wrong) that Ali thinks there are strategic and synergestic benefits to having a strong presence in SEA. Lazada's contribution would not just be a profit centre. Perhaps a strong LAZADA in SEA can also aid to protect/promote the entire Ali/Taobao/Tmall/Cainiao ecosystem from currently unforseeable threats?

Or are you thinking that Lazada and Shopee are just holding out for the other to make an offer for itself?