What is going on in U.S.-China relations and what are the implications for U.S. brands looking for ground in the China market, while mindful of the risks? In the latest round of trade tensions on Friday, China responded to U.S. tariffs with new tariffs of its own, and President Trump tweeted that American companies were “hereby ordered” to start looking for an alternative to China. But Alibaba’s ($BABA) quarterly numbers remind us why it’s usually a mistake to bet against China–at least when it comes to retail sales.
There are numerous of bad news stories about China and relations between the word’s two largest economies. We hear it from sources that the trade issues between China and the U.S. have created all sorts of problems in the market. This is true, but the validity of this statement varies across sectors. U.S. agriculture has been hit hard. U.S. consumer goods, not so much–if at all. And part of the additional costs of tariffs has been offset by the Chinese yuan’s depreciation against the dollar.
Beyond the trade and tariff issues, we see that China’s economy is slowing down. More accurately, China has past its peak growth period. In other words, the rate of growth is slowing, but China should still have a strong 2019, coming in at 6% growth, according to official statistics.
Then there is Hong Kong, where protesters have taken to the street, initially in opposition to an extradition bill, but the protests have evolved into a broader display of grievances toward Hong Kong’s leaders and the police. Will this civic unrest erode retail markets as well? That would be unlikely because mainland China is the main market for e-commerce, not Hong Kong.
So with all of the bad news out there, Alibaba’s quarterly results came as quite a pleasant surprise to the market. Its quarterly e-commerce revenue was up 54%, and its net profit more than doubled. China’s e-commerce market is on fire, and the blaze has not been faded by either the political or economic news.
The key takeaways from these events:
- The bad news might still be out there, but it is overwhelmed by the good news. The economy is off-peak, but will still hit an impressive number this year. The tariffs don’t help, but this additional cost is outweighed by the growth in personal spending power and the currency shift.
- In developing markets, consumer spending tends to outpace overall GDP growth. (China’s GDP is up about 6% this year, but retail sales are up 8.3%)
- E-commerce will outpace consumer spending, and should grow another 20% to 30% this year. Alibaba was not the only winner; JD.com posted a 23% gain in quarterly revenue as well ($JD).
- E-commerce platforms have found new sales growth points in China. About 70% of China’s population lives in tier-3 or smaller cities, where they are looking for lifestyle upgrades, but have limited access to physical shopping facilities. In the most recent 6/18 sales event, Alibaba acquired 300 million new buyers from these areas, and the sales in the tier-3 or smaller cities more than doubled from last year’s event. Likewise, Alibaba’s and JD’s expansion in o2o (online to offline) continues to outperform in the market.
- Political issues and risk factors sometimes affect capital outlay, big ticket items and financial instruments, but rarely affect consumer spending.Any basis for caution in this pretty rosy picture? Sure, there is always the prospect for ups and downs in the marketplace and the laws of economics apply in China as they do elsewhere. So, foreign businesses should be mindful of fixed costs and tilt as much as possible to a variable cost model.
But it is hard to escape the overall conclusion that China remains the fastest growing and most appealing consumer market in the world, potential risks notwithstanding.