Why did Alibaba buy NetEase’s ecommerce business for US$2b

Alibaba is buying Kaola, a largely cross-border focused e-commerce business currently owned by NetEase. The deal is allegedly to be valued at US$2 billion. 

NetEase, which is based in the same city as Alibaba, runs two e-commerce businesses. Aside from Kaola, there is also Yeation, which many believe are following the methodology of Muji. 

Both Kaola and Yeation are focused on the relatively affluent middle class, who crave for quality, premium products from around the world. 

Old hand, for lighter products

Founded in 1997, NetEase is one of the oldest internet businesses in China. Currently, its main business areas include gaming, email client (its 163 email service remains the most popular in China), news and e-commerce. 

It also went into pig farming, way ahead of Alibaba. 

However, in many aspects, NetEase is similar to Tencent, with a focus on light(er) products such as social and gaming. In comparison, e-commerce business has a much longer cycle (and value chain) and takes a much longer time to mature. 

While its pork turned out to be much more expensive than other commercially viable alternatives, NetEase’s e-commerce business, including Kaola, is faring decently. In 2018 Kaola and Yeation did a combined sales of US$2.7 billion, a 64% jump from the previous year. 

However, this growth is already the slowest since its inception. NetEase has a big advantage as many internet users in China – especially earlier ones – use their email client. However, that advantage (they call ‘dividend’ in China) is being used up. How to remain competitive would be a key challenge ahead for NetEase’s e-commerce businesses. 

Challenges in e-commerce

NetEase is not the only one facing challenges in e-commerce:

JD’s advantage of fully controlled sourcing and fulfilment (where it emulates Amazon) is being eroded as Alibaba gets deeper into both areas;

VIP.com and literally all the vertically focused e-commerce platforms are struggling, for the simple fact that Alibaba acquires customers cheaper, and suppliers cheaper because of its economies of scale and market dominance; 

And there is the general problem that online retail growth is slowing down, and how to integrate online with offline to form “new retail” is yet a question mark. Many are exploring, burning a lot of cash, with lots of casualties but success not yet in sight. 

Alibaba also needs to beef up its e-commerce product matrix to arrest the growth of Pinduoduo, by far the biggest threat to Alibaba’s e-commerce dominance.