Our thoughts on Alibaba restructuring and PDD earnings

On 21 November, two stories rocked China’s ecommerce scene, with global implications.

First was Alibaba Group’s announcement to merge its domestic Chinese and international ecommerce businesses into a single unit called Alibaba Ecommerce Business Group. Jiang Fan, hitherto CEO of Alibaba International Digital Commerce Group (AIDC), will head the new unit as CEO. The new unit will also include B2B marketplace 1688 and 2nd hand C2C marketplace Xianyu.

Second was PDD Group, the parent company of Pinduoduo and Temu, again missing revenue consensus in its Q3 earnings. It also missed on earnings. The stock price plunged more than 10%. Not as drastic as the 30% drop after previous quarter’s earnings and a peculiar CEO remark, but still …

These two events are closely related to each other, signifying the further intensification of the ecommerce platform competition in China. Some of our thoughts: 

1. On Alibaba first. Jiang Fan joined Alibaba in 2013 after the group had acquired his startup for US$80 million. He successfully led the transformation of Taobao into the mobile age, and was a big proponent of Taobao Live which unleashed the whole live commerce revolution in China;
   
   
2. Jiang Fan was widely seen as a potential future leader of the whole Group when an alleged affair with an influencer broke out into the public in 2020. He transitioned to lead the international business of Alibaba, comprising marketplaces AliExpress, Lazada, Daraz, Trendyol, Alibaba.com etc. in December 2021. We commented on this back then;
   
   
3. Since Alibaba kicked off its largest transformation last year, there have been many speculations that Jiang Fan eventually would come back to lead Taobao and Tmall – compared to international businesses, the stake in China is much higher and requires a trusted, smart and capable leader. Jiang Fan would fit the bill, and his youth (born in 1985) is also a big advantage;
   
   
4. Merging international and domestic ecommerce businesses under the same leadership also made sense for Alibaba, especially when its main competitor PDD manages domestic business Pinduoduo and international platform Temu with the same leadership team. In two years, Temu has achieved a scale which took AliExpress more than a decade;
   
   
5. The competition in China will definitely be the main focus for Jiang Fan. That said, the international businesses are an important growth pillar that the Group could not let go. The question is how to balance the team, organisation and resources. During the 11.11 shopping festival which just passed, Taobao probably achieved significant GMV growth in international markets. How Jiang Fan will further align the various departments will be interesting to watch;
   
   
6. In Alibaba Group CEO Eddie Wu’s internal note, he also mentioned that all business units’ heads of finance will now report directly to the Group CEO. That is probably confirming the reversal of the earlier 1+6+N strategy;
   
   
7. On PDD, the ‘miss’ of revenue and profit is a result of its merchant support initiatives – including RMB10 billion fee reduction and ‘high quality merchant’ support initiatives. While the advertising revenue held steady, PDD’s reduction in fees and increase in support obviously drove the revenue down;
   
   
8. Here comes the interesting question. Was the ‘miss’ engineered deliberately because all the merchant support costs were planned, or was it a lapse in execution? Our friends who follow PDD’s organisation and operations tend to believe in the former (i.e. engineered precise execution). When Alibaba is raising the take rate, PDD seems to have sensed an opportunity to capture more ‘high quality’ merchants;
   
   
9. Chen Lei, Co-CEO of PDD Group, did not make any bombastic statement as he did during the last earnings. However, Jiazhen Zhao, the other co-CEO, said “our team’s gradual ageing and lack of certain capabilities might cause us to miss out on some macro opportunities, especially when facing new or evolving situations”. He was most likely being frank about what he was thinking – but you rarely hear this type of comments by any listed co management in earnings calls;
   
   
10. Zhao even went on to give an example: “For instance, multiple macro policies introduced this year have brought significant support to industries and fueled consumer demand. However, our team was unable to fully leverage this macroeconomic shift due to the limitations in our operation experience solely as a third-party platform. Consequently, to stay competitive with similar products, we had to incur much higher costs than peers, which inevitably affects our profitability now and in the near future.”;
    
    
11. He was referring to the government subsidiary of CNY150 billion (US$20.7 billion), announced in Q3, to help residents replace their ageing home electronic appliances. This subsidiary became a key driver for Alibaba’s Tmall during this 11.11, and apparently Pinduoduo missed out;
    
    
12. The management is also quite frank about the international pressure it was facing: “as our business continues to grow, consumers and external stakeholders have placed higher requirements on us”.  Unlike other Chinese platforms which hire a lot of lobbyists and government relations people, PDD or Temu seems to choose to directly engage. It has also evolved its business by recently opening up a full marketplace (as opposed to full/half consignment) model to US based sellers. 

The ecommerce competition in China and internationally is entering a very interesting and probably even more intensified phase now.

Wang Xing, founder of Meituan, seems to have predicted this. In a social media post in 2019, he wrote:

“In the coming years, it will be fascinating to watch how the extremely intelligent Colin Huang of Pinduoduo and Jiang Fan of Taobao/Tmall compete with each other. It should be quite exciting. If Jiang Fan manages to win this round, he will undoubtedly become the successor to the Alibaba CEO role—if he has any interest in taking on that position.”