Despite downward pressure on Alibaba earnings from a number of fronts, the company is confident that a number of factors will keep e-commerce growth steady and with it, Alibaba’s fortunes as China’s largest e-commerce player.
“We had another good quarter with excellent business performance and sound execution against our overall strategy. But we live in an environment where external factors seem to drive investor sentiment regarding Alibaba’s business,” says Joe Tsai, executive vice chairman of Alibaba.
China’s rising middle class consumers, Alibaba’s role in digitising the retail sector and the central governments newfound adeptness at fiscal policy adjustments will all provide opportunities for its e-commerce business to continue on a healthy growth track, Tsai says.
Alibaba and the Chinese economy
On the growth of Chinese consumers, Tsai notes that the growth of China’s 300 million middle class consumers continues its course and by the OECD’s projection, this middle class will grow to 850 million people by 2030.
The increasing availability of credit amongst this growing middle class will also fuel consumption.
With the current size of the Chinese economy at about USD 13 trillion, Tsai argues that, “in the future, obsessing over its rate of growth is not meaningful because of the law of large numbers. The reality is, the absolute dollar amount of new wealth creation in the Chinese economy will be well over USD 800 billion each year.”
Alibaba believes that e-commerce and the digitisation of retail will continue to grow at a faster rate than the overall economy. While the overall Chinese economy grew in single digits, the e-commerce sector’s GMV grew at 20-30 per cent over the last several years. “That is because technological innovation and improved productivity are driving sustained growth over a long period of time,” Tsai says.
Tsai says concerns about trade tensions might affect sentiment, but Alibaba’s exposure to the tangible effects of trade tariffs is small.
“For our businesses in e-commerce, consumer services, entertainment and cloud computing, the primary growth driver is not exports but domestic consumption and corporate transformation,” he says.
Digitisation of the retail sector and the resulting productivity and efficiency gains will accrue to Alibaba with or without a trade war, Tsai notes.
“Alibaba is well-positioned to help solve the structural trade deficit issue vis-a-vis the United States. With nearly 700 million Chinese consumers shopping on Taobao and Tmall, we are the platform of choice for American companies and farmers to gain access to the Chinese market.”
Tsai highltights that recently, investors have asked Alibaba about a perceived regulatory tightening of internet businesses.
Tsais says that, “of all of the economies in the world, China is at the forefront when it comes to the confluence of rapid technology development and large-scale wealth creation. Our perspective is that China’s regulatory landscape should be expected to evolve along with the rapidly changing developments in the new economy.”
He says that the government is becoming more adept at calibrating the interplay between regulation and economic growth.
This includes government moves to implement fiscal policy initiatives that are business-friendly, including the lowering of VAT rates in 2018, with further cuts expected in 2019. The government also introduced lower social-security contributions, which particularly benefitted small businesses.
The government also raised the threshold for personal income-tax exemption, giving lower-income groups more to spend. “This is expected to provide a broad-based spending stimulus as lower-income groups devote a higher percentage of their disposable income to consumption,” Tsai says.
And in early January, China’s State Council announced new initiatives to support small enterprises by reducing corporate income-tax rates and raising the monthly sales threshold for VAT exemption.
“With these policies, it’s clear to us that the government intends to ignite business confidence and encourage business investment as well as consumer spending.”
“It is also clear to us that the government recognises the importance of small businesses as the backbone of the economy and job creation. We believe that anything that’s good for business confidence, and in particular good for consumers and SMEs, will be good for Alibaba,” Tsai adds.
The Alibaba Group reported its earnings for the quarter ended 31 December 2018 today. Net income at China’s largest e-commerce company rose 37 per cent to CNY 33.1 billion (USD 4.94 billion) in the December quarter, outpacing the CNY 22.1 billion it had forecast.
“China’s economy is facing some uncertainty, but we do see opportunities,” Zhang told analysts. “One of the key regions we will stay focused on in the near term is Southeast Asia.”
The company also benefited from a substantial gain of CNY 21.99 billion after re-valuing on-demand services arm Koubei. The share of losses from the numerous companies it’s invested in also narrowed sharply.
Revenue rose 41 per cent to CNY 117.3 billion, the slowest pace in more than two years and fell short of the CNY 119.4 billion-yuan it had forecast. But gross merchandise volume (GMV) – a key metric – grew at a solid 29 per cent.