On September 19, 2018, Alibaba announced that it no longer plans to create a million jobs in the US, citing tariff wars.
Alibaba’s departing Chairman and co-founder Jack Ma said that there is no logical reasoning-based relationship between China and the US now and the impact will be felt for decades.
How did this happen?
Timeline of events
It all began when the US, which had been repeatedly accusing China of Intellectual Property Rights theft since early 2018, slammed Chinese exports to the US with tariffs on July 6th, sparking retaliation.
The US has a trade deficit of $375 billion with China because its exports to China are worth $130 billion while imports are $506 billion.
As of Oct-9TH 2018, a total of $250 Billion worth of Chinese exports have been tariffed by the US. In retaliation, China has tariffed $110 Billion worth of US exports.
What will affect the US?
China accounted for 21.6% of all US imports – or $505.5 Billion in 2017, up by 9.3% compared to 2016.
Washington’s tariffs on $250 Billion Chinese exports include categories such as intermediate goods for manufacturing, electronics, furniture, which constitute a major part of US imports from China.
Manufacturing companies in the US that rely on these intermediary goods from China to assemble finished products for exports, will be hit hard as they would have to choose between absorbing high costs or pass on the costs to customers.
Washington has threatened China with a third round of tariffs on an additional $267 billion worth of Chinese goods. This would total the tariffs to $517 billion in imports, exceeding the $505.5 billion imported last year. This creates an inconsistency (see graph above) whereby the proposed tariffs exceed the total value of imports.
However, as per US Census Bureau data, Chinese exports to the US through July 2018 increased by 9% compared to the same period in 2017. Though there hasn’t been an official statement from the administration regarding the proposed tariffs, it seems like Washington is preparing to tariff the possible incremental increase in imports as well.
What will affect China?
China has a trade surplus with the United States but that does not mean that the effect is nil.
China imports about $14 billion of soybeans every year from the US, which accounts for about two-thirds of all US Soybean exports! Besides Soybeans, other food and beverage products such as dry fruits, wine, bourbon, orange juice, pork products have been tariffed.
Other major affected categories are industrial products – stainless steel, Aluminum scrap, iron – and forms of energy such as coal and crude oil.
Major product categories and the estimated number of products affected in both countries are summarized in the graph below:
What does the trade war mean for Alibaba?
Alibaba is a billion-dollar global brand and is heavily domestically focused, much like China. But what effect if any, would the trade wars have?
We delved into Alibaba’s financials and found that out of the company’s US$ 12.2 Billion in total revenue (for the quarter Q2 ending June 2018), revenue from International commerce was $0.9 Billion.
Alibaba categorizes international commerce revenue into International wholesale and international retail revenue streams.
International Wholesale revenue includes sales generated via its B2B platform Alibaba.com, membership fees and value-added services. (Est. $278 million for Q2 2018)
The international retail revenue refers to retail sales from – largely – Aliexpress and Lazada. (Est. $652 million for Q2 2018) The growth in international commerce retail revenue for the quarter Alibaba said, primarily came from sales on Aliexpress and Lazada.
To estimate the percentage of international commerce revenue that is now exposed to risk because of the tariffs, we looked at how significant the United States is as a traffic source to Alibaba and its associated retail sites. Our findings show that except for Lazada, the US is among the top five traffic contributors for all the other retail sites.
Assuming that sales are directly proportional to traffic, it’s safe to say that 60-70% of Alibaba’s international commerce revenue comes from the US. That’s about $550M – $650M, which is about 5% of Alibaba’s overall revenue (Q2 2018)
Even if we were to assume that approximately 20% of the international commerce segment’s revenue came from the United States, that would translate to a tiny US$180,000 or less than 2% of Alibaba’s overall revenue for the quarter.
According to estimates from MKM partners, Alibaba’s domestic share of online retail is about 63%, as opposed to Amazon’s 35% share in the US. MKM also estimated that Alibaba’s share of retail spending is 12% of overall retail spending in China, while Amazon’s share of retail spend is about 4% in the US.
Alibaba also benefits from having international companies use its B2B platform for cross-border trade and US businesses form the biggest user base, only next to Chinese. US businesses importing from Alibaba in bulk/wholesale will face the impact of additional duties and taxes. However, on the B2C front where the importer is an individual consumer as opposed to a business, the scene could be different.
Major consumer-focused product categories that are affected by US tariffs include home appliances, furniture, sporting goods, apparel, toys, and footwear. Electronics are largely exempt from the tariffs list. Incidentally, consumer electronics is the top-selling category on Aliexpress. Many online sellers in China declare the items they sell as ‘gifts’, which renders these shipments exempt from duties in America. This largely allays fears of high prices for the consumers who are importing from Aliexpress.
(There are two aspects which are worth mentioning here. One – there are items which are not listed as ‘gifts’ and will be subject to customs duties upon arrival. Two – there could be individual consumer businesses who import in bulk – making the transaction technically B2B – and thus have to pay duties)
The trend expected given the tariff wars is that American businesses importing in bulk from China will likely face high costs of selling in America while individual consumers importing few shipments (B2C transactions) will largely be oblivious to the impact.
Confidence outlined at Investor Day
At Alibaba’s Investor Day held in Hangzhou, China, Ma, and other senior executives outlined the general outlook for China and Alibaba.
Ma said referring to the trade standoff that he sees few barriers to Alibaba’s growth provided consumption continues to grow and technology does not fundamentally change.
The major drivers for Alibaba’s growth are online sales coming from Tmall and Taobao, cloud computing, digital media & entertainment, and logistics.
Jet Jing, President of Tmall, said that big brands have been partnering with Tmall not just to sell on its marketplace but also to leverage other provisions of Alibaba’s ecosystem such as e-marketing services, omnichannel selling, cloud, and logistics services.
According to Baird analyst Colin Sebastian, the e-commerce giant is reporting an 88% jump in the number of registered users on its online shopping site Taobao over the past 12 months.
He also reported that the Hema grocery stores are generating up to five times the annual sales of traditional stores. That’s due in large part to the integration of e-commerce, digital services, and local delivery. Hema also provides ‘new retail’ services to other retailers to help modify their in-store experience and service infrastructure for an omnichannel experience.
Commenting on the trade wars, Joseph Tsai, Alibaba’s co-founder said that Alibaba had the full backing of the Chinese government and that it would help broker deals with suppliers from non-US countries.
Alibaba’s GMV and operating profit is generated mostly in China and the US contributes marginally to overall revenue.
Thanks to Alibaba’s new retail strategy seen in grocery outlets like Hema, China’s offline retail is seeing high single-digit growth rates, while US’s retail growth is in the low single-digits backed by examples of numerous store closures and bankruptcy filings.
Alibaba’s business continues to expand globally with its B2C site Aliexpress and South-east Asian eCommerce platform Lazada.
Given these reasons, we believe that while a general economic slowdown in China and America can be expected, Alibaba remains well poised to weather the effects of trade wars in the long-term.
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