Will Alibaba's international business take off after restructuring?

Insight from Ivy Yang, a former communication executive at Alibaba: How does it compare with Temu and Shein?

Ivy Yang

May 4, 2023

Bloomberg reported today that

Alibaba Group Holding Ltd.’s international online shopping unit is exploring a US initial public offering as it weighs options to spur growth for the business that includes major e-commerce brands Lazada and AliExpress….
IDCG (Alibaba International Digital Commerce Group) said in response to queries from Bloomberg that currently, there is no IPO plan.

Pekingnology is happy to share an analysis by Ivy Yang, my friend and a communication executive who has worked at the intersection of public relations and reputation management between the United States and China for over a decade, including two years at Alibaba Group. - Zichen

When Alibaba's founder Jack Ma stepped down in 2019, in his departure speech, he lamented: "All growing pains can only be overcome by changing oneself. Everyone needs to evolve from the past self." This is timely, particularly for Alibaba today, as it faces the challenges of change and growth.

Alibaba recently announced that it plans to divide its operations into six new independent units, with each entity enjoying greater autonomy. The news was met with enthusiasm from the investor community, with hopes that the overhaul will tackle long-standing issues like Alibaba's operational complexity and inefficiency that have eroded shareholder value.

As Alibaba's China core commerce growth slows down, one fundamental tenet of the restructuring is to boost Alibaba's overseas business. Of the six newly formed units, the "Global Digital Commerce Group" is tasked with this objective. The unit includes international retail and wholesale operations, such as Lazada, AliExpress, Trendyol, Daraz, and Alibaba.com.

It's about time Alibaba takes the overseas commerce business seriously. Despite substantial investments in overseas markets in the past decade, results have been lackluster. Alibaba's own incubated international e-commerce arms, AliExpress and Alibaba.com, have been trampled by newcomers like Temu and Shein in the U.S. market. While Temu and Shein's way of directly supporting producers by cutting out intermediaries has created supply-side challenges, their pace of market penetration is a force to be reckoned with. These competitors' focus on directly serving consumers has fundamentally upended Alibaba's position.

In the six months ending September 30, 2022, Alibaba's international retail business revenue steadily reached $2.99 billion, which was on par with the same period in 2021. However, according to Bloomberg, Shein's sales in 2020 grew 250% year-on-year, reaching $10 billion. In 2021, the growth momentum continued with a 60% increase, reaching $16 billion. Alibaba had a first-mover advantage; however, in this tortoise and hare race, the tortoises are catching up.

In late December last year, Alibaba launched Miravia, an e-commerce platform in Spain, featuring a marketing strategy strikingly similar to that of Shein. In terms of positioning, Miravia is akin to Tmall, bringing together a wide range of domestic and international brands, such as LEGO, Adidas, and OPPO. However, Miravia also resembles Alibaba.com and the wholesaler-centric AliExpress, catering to both brand owners and expanding business opportunities for local Spanish sellers, retailers, and distributors. Merchants do not need to pay a fixed entry fee. Instead, they only pay a commission to the platform based on their sales performance. Regarding product selection, pricing, and promotional activities, Miravia's merchants have a certain degree of autonomy. Like Shein, Miravia uses heavy discounts and an influencer-heavy model to penetrate the market quickly.

In contrast to Shein and Temu's simplified supply chain and the platform-merchant profit bundling model, Miravia is still quintessential Alibaba in sync with Alibaba's platform philosophy. As long as there are sales and brand resources, the platform can generate profits.

But this points to the exact problem that is a function of Alibaba's size and scale. There is a steep learning curve for small and medium-sized businesses to determine which one of Alibaba's many e-commerce platform offerings fits their needs. And Alibaba constantly adapts its business strategies, finding the right platform for cross-border sellers consumes valuable time and resources.

Since 2015, Alibaba has implemented a mid-platform strategy emphasizing collaborative integration across its business units. The split is an iteration of this strategy. This sudden strategic pivot tests whether the existing organizational structure and internal interests can withstand the shock and execute with efficiency and enthusiasm.

Alibaba has long adhered to the tradition of the "big brother, little brother" system: mature, profitable businesses (the "big brother") subsidize emerging companies (the "little brother"), hoping that the growth of the younger companies can drive overall growth before mature businesses approach diminishing marginal return. Alibaba's complex system and global operations make it increasingly difficult to continue supporting such a strategy.

As Alibaba undergoes the untangling of its business into six parts, the crux of its future success will be to preserve the momentum of innovation while simultaneously bolstering operational and profit efficiency. This critical transition from a period of swift expansion to a “mature” company with sustainable value creation is a formidable challenge. Indeed, navigating this transformation effectively is the billion-dollar question that will ultimately shape Alibaba's long-term prospects. （Enditem)

About the author

Ivy Yang writes a column titled "Discourse Power" (话语权时代) for the Financial Times Chinese, analyzing the strategies and challenges faced by global technology companies as they enter new markets amid increasing geopolitical tensions. Ivy was born in Wuhan and grew up in Los Angeles. She graduated from New York University and Columbia Business School and lives in New York.