JD.com, Tencent, and Wal-Mart Join Forces Against Alibaba
JD.com (NASDAQ: JD), China's second largest business-to-consumer e-commerce marketplace after Alibaba's (NYSE: BABA) Tmall, recently enlisted the help of Tencent (NASDAQOTH: TCEHY) and Wal-Mart (NYSE: WMT) as Singles Day (Nov. 11) -- China's equivalent of Black Friday -- rapidly approaches.
JD will merge its customers' shopping history with data on Tencent's WeChat messaging platform, which has 963 million MAUs (monthly active users) worldwide. JD will use that data to make suggestions for customer purchases, while helping vendors promote their goods. JD will also grant customers online discounts at brick-and-mortar stores when they use Tencent's mobile payment app, WeChat Pay. Tencent is JD.com's largest shareholder with a 20% stake in the company.
Meanwhile, JD and Wal-Mart will merge their membership systems so members can receive the same discounts and other benefits at both retailers. The two companies will also launch a new system that enables JD.com to fulfill customer orders from Wal-Mart inventories. Wal-Mart, which owns a 10% stake in JD, currently runs about 400 stores in China. These partnerships indicate that JD is getting very serious about toppling Alibaba -- but can it succeed?
Understanding JD's growth strategy
JD competes against Alibaba's Tmall, its B2C equivalent of Amazon, and not Taobao, its customer-to-customer (C2C) equivalent of eBay. JD controls about 33% of China's B2C industry, according to eMarketer, compared to Tmall's 51%.
Much of JD's growth comes at the expense of smaller competitors like Vipshop and Suning. But JD also benefited from ongoing problems with counterfeit goods at Alibaba's marketplaces, as government studies found that JD sold a much lower percentage of knockoff products than Tmall and Taobao. JD recently capitalized on that reputation by launching Toplife, a dedicated e-commerce platform for luxury goods.
JD also isn't shy about experimenting with new technologies, like autonomous trucks and drones, facial recognition technology for payments, and artificial intelligence. It's sharing some data with Baidu, the largest search engine provider in China, to refine its shopping recommendations, and it partnered with Toutiao -- one of the fastest growing news aggregator apps in China -- to add links to JD.com.
JD has its own logistics subsidiary, JD Logistics, which directly competes against other leading logistics players like Alibaba-backed Best. It's expanding that business with other partnerships, including a refrigerated logistics chain partnership with Japan's Yamato Holdings and a plant manufacturing partnership with Mitsubishi Chemical Holdings.
Those investments could help it in its upcoming clash with Alibaba over grocery deliveries, a conflict that closely mirrors Amazon's clash with supermarkets across the US.
Will one company crush the other?
JD and Alibaba are considered fierce rivals, but there could be plenty of room for both companies to thrive. China has an internet penetration rate of just 52%, compared to 89% in the US and 91% in Japan. Only 15% of China's retail sales were made online last year, but that's up from about 4% in 2011.
However, JD's rapid-fire investments and partnerships indicate that Alibaba shouldn't become complacent. The support of companies like Tencent, Wal-Mart, Baidu, and other companies -- which all likely fear the growth of Alibaba's cloud and e-commerce platforms -- could give JD an edge across the social media, brick-and-mortar, and big data markets.
Analysts don't see one company emerging victorious anytime soon. They expect JD's revenue and earnings to respectively rise 39% and 309% this year. Alibaba's revenue and earnings could respectively grow 49% and 39%.
JD's bottom line growth rate looks stronger, but only because it was previously unprofitable. If we compare the two companies' operating margins, Alibaba is still the undisputed victor:
The key takeaways
JD's new partnerships with Tencent and Wal-Mart are win-win deals for all the companies involved, and Alibaba should certainly watch its back. But investors should remember that JD still operates at much thinner margins than Alibaba, and those margins could collapse once Alibaba strikes back.
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Leo Sun owns shares of Amazon and Baidu. The Motley Fool owns shares of and recommends Amazon, Baidu, eBay, and JD.com. The Motley Fool has a disclosure policy.