Standard Life Investments

Through the Lens

Untangling the web

Untangling the web

  • The growth of online shopping in China
  • Alliances and acquisitions result in a small number of key players
  • Increased marketing spend seeks to capture the untapped potential

Having recently looked at the best-selling list of books in China, the number one selling book was about the search engine Qihoo 360, and also on the list was a book about Jack Ma, the distinguished founder of e-commerce platform Alibaba. Clearly the internet has captured China’s attention.

The Chinese consumer is increasingly accessing goods and services online from various devices and in a number of locations. A report from Boston Consulting Group estimates there are over 16 million people living in the third and fourth-tier cities that are now accessing the internet through mobile devices, as demand spreads from the cities and larger towns. In an echo of the internet boom of the late 1990s, local internet giants have been busy building alliances and making acquisitions. The big players aside from Alibaba are social networking player Tencent, (which has 440 million active users) and search engine Baidu which is ranked the fifth most-visited website in the world, according to Alexa internet ranking. The challenge for these behemoths will be trying to secure a share of consumers’ wallets, as well as a portion of their online time as the competition intensifies.

One event helps to put the scale and growth of Chinese internet companies in perspective and illustrates the online potential. November’s Singles’ Day (a type of anti-Valentine’s Day for single people), is now synonymous with online shopping discounts and has become the biggest online shopping event in China. Although Alibaba was the first to recognise the opportunity back in 2009, many other retailers have begun ‘cashing in’, with some sale prices announced weeks in advance. Alibaba’s gross merchandise volume for the day totalled $9.3 billion, a 58% increase on the previous year and mobile devices now account for 43% of sales.

Almost without exception, companies are increasing online marketing spend. Their aim is to extend online product ranges and invest in analytical tools to enhance the user’s experience, from browsing to transacting to delivery. China has more than 600 million internet users, compared to 277 million in the US and 546 million in Europe. With a population of 1.3 billion people there is still significant scope for growth. However, when high growth levels seem assured, the environment becomes intensely competitive and caution is warranted. At this point in time, it is particularly important not to be swept up in the hype and to identify those stocks with sustainable barriers to entry where profitability will continue to grow and those where profitability will be competed away. We would put stocks such as Baidu, the top PC and mobile search engine, in the former category, but there are certainly plenty of companies in the latter. We believe the key is to resist the lure of the top-ten books on sale with their inevitable hype and focus instead on watching the changes in company profits over time.