Can Alibaba rise again?

After three years, China’s tech titan Alibaba has emerged from its “rectification” process, potentially signalling a turning point for the nation’s platform economy. But the path to redemption is fraught with challenges. Can Alibaba, once a shining beacon of China’s tech prowess, reclaim its former glory in a market transformed by its absence? 

The past three years have been particularly challenging for the tech giant. Once considered China’s darling technology company, Alibaba saw its share price plummet by 70% from its peak, eroding investor confidence. Simultaneously, the company faced significant pressure from antitrust regulators. In response, Alibaba has worked to restructure its business model and diversify into new areas, aiming to become more agile and adaptable for the future. 

Prior to the investigation by China’s State Administration for Market Regulation (SAMR), Alibaba had faced longstanding accusations of monopolistic practices, including requiring merchants and brands to sign exclusive contracts to sell their products solely on its platform. In December 2020, SAMR commenced its antitrust investigations on Alibaba.

Alibaba was fined a record US$2.8 billion for monopolistic practices in 2021. As part of the rectification process, Alibaba announced plans to split its operations into six independent business units in March 2023. This move aimed to reshape its business model, accelerate decision-making, and achieve greater operational efficiency. 

Alibaba’s bold move to split into six distinct entities — Cloud Intelligence, Taobao Tmall Commerce, Local Services, Cainiao Smart Logistics, Global Digital Commerce, and Digital Media and Entertainment — grants each the autonomy to chart its own course, with the potential for independent financing and even public listing. While this decentralisation promises greater agility, it is worth noting that the heart of Alibaba’s empire still lies with its core e-commerce powerhouse, Taobao Tmall Commerce, responsible for a commanding 70% of the company’s revenue.

By decentralising, Alibaba aims to streamline its operations and mitigate the risks that often plague sprawling conglomerates. This strategic shift could trim costs associated with bureaucratic bloat and counter the dreaded “diseconomies of scale”, where growth paradoxically leads to higher average costs. By breaking itself up, Alibaba is also aiming to lower the chances of future regulatory clashes.

With each business unit operating independently, Alibaba can also concentrate on specific growth areas and devise clearer and agile strategies for growth. This autonomy will enable faster responses to emerging opportunities and more effective competition against rivals. A good example is Cainiao accelerating its international expansion plans by introducing a next-day delivery service in Europe in September 2024 in response to the slow growth in the China e-commerce market.

However, decentralisation is not without its challenges. Coordinating across multiple independent units can be complex and resource intensive especially if two divisions are vying for the same budget. Robust central oversight will be crucial to ensure resources are allocated wisely and potential conflicts of interest are kept in check.

Beyond the surface-level benefits of agility and regulatory compliance, Alibaba’s restructuring could signal a deeper strategic shift. By empowering individual business units, the company might be fostering a culture of intrapreneurship, allowing for greater experimentation and innovation. This could lead to the development of new products and services that were previously stifled, potentially unlocking new avenues for growth.

This is much needed in today’s rapidly evolving e-commerce landscape, where standing still is akin to falling behind. While Alibaba grappled with regulatory hurdles, new players like PDD capitalised on the shifting tides, redefining the market with innovative strategies and aggressive growth.

According to London Stock Exchange Group (LSEG)’s research in May 2024, PDD, the company behind the Chinese app Pinduoduo and online platform Temu, had a market capitalisation of about US$208 billion. This has allowed PDD to overtake Alibaba’s US$196 billion market capitalisation to become the largest player in the Chinese e-commerce market. Pinduoduo has also set itself apart from other e-commerce platforms with its clever blend of social features, gamification, and low prices. Additionally, China’s economic slowdown has fuelled the company’s growth, drawing in many low-income, price-sensitive consumers to shop through the app.

This heightened competition is not just from emerging players; established giants are also evolving. Douyin, ByteDance’s short video app in mainland China, has expanded into the online shopping sector to become one of the country’s top shopping platforms. Although its gross merchandise volume grew at a slower pace of 46% compared to the previous year, it still outperformed other well-established e-commerce platforms in China.

Taking a page from Amazon’s playbook, JD.com, China’s third-largest e-commerce platform, has leveraged its robust warehousing and supply chain infrastructure to offer superior quality control and lightning-fast delivery. This customer-centric approach has fostered a loyal following, evidenced by the record-breaking transaction volume and orders during its recent 618 Grand Promotion.

While JD.com’s focus on quality and logistics is commendable, it’s worth noting that this model might not be easily replicated by Alibaba’s Taobao and Tmall platforms, which thrive on a vast network of third-party sellers. Alibaba’s challenge lies in finding a way to enhance its quality control and logistics without compromising the flexibility and diversity that attract merchants and consumers to its platforms.

In addition to domestic competition, Alibaba is facing significant challenges in international markets. Temu is experiencing explosive growth while disrupting e-commerce giant Amazon in the US. Meanwhile, fast-fashion retailer Shein offers unbeatable prices to overseas customers, intensifying the competition. Additionally, TikTok is leveraging its social media advantage to compete in the international e-commerce market.

Alibaba’s journey from regulatory scrutiny to a restructured conglomerate is a testament to its resilience, but the road to reclaiming its former glory remains steep. While Alibaba has taken proactive steps to adapt, the path forward is fraught with challenges. It is facing competition both domestically and abroad. The company’s recent layoffs, with reports suggesting over 54,000 job cuts since 2022, underscore the ongoing challenges it faces in optimising its workforce and cost structure.

While the road ahead is undoubtedly challenging, Alibaba’s restructuring and strategic focus on international expansion could pave the way for a long-term resurgence. The company’s vast resources, technological prowess, and deep understanding of the Chinese market remain formidable assets. If Alibaba can successfully leverage these strengths and navigate the complexities of its new structure, it may yet emerge from this period of turbulence stronger and more innovative than ever before.

The opinions expressed above are those of the writer and do not represent the views and opinions of NUS.

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