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Wholesale Change

Alibaba’s structural overhaul aims to shift attention back to e-commerce brand Taobao and reactivate business across its subsidiaries

By Xu Ming , Meng Qian Updated Oct.1

Visitors check out Alibaba’s booth at the 2023 World Artificial Intelligence Conference, Shanghai, July 6, 2023 (Photo by IC)

In a June 20 statement, Alibaba Group announced that Daniel Zhang Yong will step down as chairman and CEO to oversee development of Alibaba Cloud, the group’s digital technology and intelligence spin-off to be listed in a few months. The group is listed in both New York and Hong Kong.  

Zhang will be succeeded by Joseph C. Tsai, current executive vice chairman of Alibaba as chairman, and Eddie Wu, chairman of Taobao & Tmall Group, as CEO. Tsai and Wu are both co-founders of Alibaba. The reshuffle will take effect on September 10.  

The announcement saw Alibaba’s Hong Kong-listed shares fall 1.5 percent after the announcement, in line with a 1.6 percent drop in the benchmark index, Reuters reported. On the New York Stock Exchange, its stock price dipped by over 4 percent.  

It could indicate that market sentiment is somewhat guarded about the result of the executive reshuffle and company restructure, some analysts said.  

A month prior, Alibaba founder Jack Ma, who quit as chairman in 2019 and then from the board in 2020, held a meeting with company leaders and stressed that Taobao and Tmall will need to “return to Taobao, users and the internet,” especially Taobao, reported Chinese technology news outlet LatePost in June. Analysts interpreted the announcement as signaling a return to its origins, promoting small businesses and cost-effective products, as consumption suffers in China amid economic stagnancy.  

Ma seldom appeared in public since the Chinese government blocked the blockbuster IPO of Ant Financial in late 2020, which was expected to raise upwards of US$30 billion, following regulatory concerns over risks in the Chinese fintech sector.  

The reshuffle in senior Alibaba personnel came after the group announced a sweeping organizational restructure. On March 28, Zhang announced what the Group termed a new “1+6+N” structure, which consists of the Alibaba Group and six of its major groups to be spun off. The six new groups are the Cloud Intelligence Group, Taobao & Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics Network Limited, Alibaba International Digital Commerce Group and Digital Media and Entertainment Group, with the “N” referring to other divisions including grocery chain Hema, Alihealth and search app Quark. Alibaba said the groups will have their own boards and CEOs and will operate independently. Zhang said it will “make the organization more agile, shorten the decision-making process and increase responsiveness.” 

The changes come as the giant e-commerce platform is facing headwinds due to complex macro situations, including a slower recovery than expected after strict pandemic controls were lifted, and external economic shocks. 

Identity Crisis 
The tech press inevitably connected Ma’s reappearance in June, where he popped up at all sorts of occasions, with the company’s restructuring. The announcement came just a day after Ma was spotted in China for the first time in a year when he visited a school in Hangzhou, Zhejiang Province, home to Alibaba’s headquarters. Hong Yong, an associate researcher at the e-commerce institute of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, told NewsChina that Ma resurfaced because Alibaba is at a crunch point.  

“On the one hand, its e-commerce business faces challenges and pressure from market saturation, intensified competition and consumer demand upgrade, and on the other, it needs to adjust its development strategy to suit a new market environment,” Hong said.  

In 2019, the growth of online retailing in China started to decline, and dropped below the global average for the first time, according to the annual report on Chinese e-commerce development released by the Ministry of Commerce. In 2022, online retail sales of physical goods grew by 6.2 percent year-on-year to reach 11.96 trillion yuan (US$1.67t), while in countries and regions witnessing rapid growth of e-commerce, the rate reached 20 percent.  

The growth of domestic e-commerce has slowed in the last two years, noted Li Yongjian, a researcher with the Chinese Academy of Social Sciences.  

In 2021, online retail sales of physical goods increased by 12 percent year-on-year, yet were still 2.8 percentage points lower than the previous year.  

In the first cross-platform sales promotion of the year, known as 618, nominally after June 18 when it culminates, sales were lukewarm, according to market watchers. Seen as a barometer to measure consumer spending nationwide, even though all platforms offered billions of yuan in direct subsidies to vendors on their platforms which are passed on as discounts to buyers, consumption remained soft. Neither Alibaba nor its main rival JD revealed their gross merchandise volume (GMV) for 618, which means the figure is “too low to utter,” said big data service provider Syntun.  

According to Syntun, overall e-commerce sales grew by 14.7 percent year-on-year to 798.7 billion yuan (US$110.2b) between May 31 and June 18, the slowest growth in three years. Newer platforms like short-video e-commerce livestreamer Douyin, equivalent to TikTok, did see sales growth of 27.6 over last year. However this is a sharp drop from 2022’s 124 percent growth. Established platforms like Alibaba-owned Tmall, JD and Pinduoduo increased sales by only 5.4 percent.  

Retail sales of Douyin increased by 66 percent during the 618 sales promotion, while fellow short-video platform Kwai saw orders surge by 40 percent, according to multiple sources.  

Established platforms like Alibaba and JD face increasingly fierce competition from platforms like Pinduoduo and Douyin. In 2022, JD’s GMV grew by 5.6 percent year-on-year, while Douyin’s increased by 80 percent.  

In the first quarter of 2023, Alibaba’s total revenue increased by only 2 percent year-on-year, the worst performance since it went public, while its domestic retail business, its main source of income that includes Tmall and Taobao, declined by 3 percent to 132.06 billion yuan (US$18.1b). In 2022, Alibaba announced total revenue growth of 19 percent, down on the average of 30 percent for previous years. In comparison, Pinduoduo’s revenue rose by 58 percent year-on-year.  

Between 2019 and 2022, the combined market share of Tmall and Taobao declined from 66 percent to 44 percent. Forecasts predict this share may slide to around a third of the e-commerce market, even if Alibaba’s restructuring is effective. Upstarts like Pinduoduo, which focuses on rural markets and discounted goods, and livestreaming platform Douyin have grown rapidly.  

The Covid impact, the deceleration of e-commerce across the board and fierce competition are all factors in the slow growth of Alibaba, analysts said.  

“For Alibaba, its position in traditional e-commerce is threatened by new forms of e-commerce and its growth in the cloud business is challenged. The overall economic environment is changing. It’s not enough for Alibaba to be the best version of its old self,” noted Cui Lili, executive director of the e-commerce research center of Shanghai University of Finance and Economics. 

Taobao Redux 
Media reported that in June, Ma met with key executives, saying that in such challenging times, the company needs to return to its roots of supporting small- and medium-sized enterprises through Taobao, with lower priced products, rather than focusing on Tmall with higher-priced brands.  

It could herald a return to the low-price era for the e-commerce industry, noted interviewed analysts. Taobao, established in 2003, had dominated e-commerce. In 2008, Tmall was established as an upgraded version of Taobao to focus on brand merchants and provide consumers with a better shopping experience. It was seen as a timely step to embrace the trend of consumption upgrading. Taobao was marginalized particularly after Tmall became an important source of revenue for Alibaba and it was prioritized within the company, focusing on better-quality products.  

“For years before 2020, with China’s rapidly expanding economy and increasing disposable income, consumers paid more attention to the shopping experience and product quality. In this period, the market share of high-end shopping platforms led by Tmall expanded quickly,” Xing Xing, director of financial advisory firm Bestar Consultant’s research institute, told NewsChina. 

During this time, Alibaba neglected markets in small cities, counties and rural areas, leaving an opening for new platforms like Pinduoduo and Douyin. The focus on Tmall and brand merchants also led to an exodus of smaller merchants who found it increasingly difficult to earn money on Taobao. Many turned to Pinduoduo and Douyin.  

The last three years during the pandemic saw unprecedented headwinds. As the economic recovery stalled, consumers prioritized saving or spent only on cheaper items. This has upturned the market for platforms like Tmall and highlights the importance of Taobao, Xing said.  

As Taobao and Tmall have different market positioning, shifting the focus back to Taobao is an important strategic adjustment, Yang Delong noted. “The biggest advantage of e-commerce remains low prices. The quick rise of Pinduoduo and JD’s return to low prices are impacting Tmall’s business mode that relies on high-quality and higher-priced products,” Yang said.  

Observers say price wars are a feature of the new e-commerce landscape.  

Alibaba is already making efforts to get small sellers back. In May, the Taobao and Tmall Group set up a center to assist individual sellers and small businesses, including support policies during 618 promotions. The 2023 event saw 2.56 billion transactions for SMEs on the platform, higher than for the 2022 promotion.  

Meanwhile, Alibaba is striving to strengthen its livestreaming platform on Taobao.  

In June, it started allowing viewers to tip livestreamers who are content creators but do not sell products. This attracted many livestreamers who are either new to the field or from Douyin or Kwai. If their follower numbers grow rapidly, Taobao offers subsidies.  

“The logic here is using content to increase user engagement. The longer they stay, the more likely they may buy or the more they buy,” Zhuang Shuai told NewsChina. 

An aerial view of the new headquarters of Cainiao Smart Logistics Network (Cainiao Network), Hangzhou, Zhejiang Province, April 17, 2023 (Photos by VCG)

Cainiao logistics workers sort goods at its logistics hub, Nanjing, Jiangsu Province, April 21, 2023 (Photos by VCG)

Cloud Competition
In his resignation letter, Daniel Zhang said the spinoff of Alibaba Cloud had reached a crucial stage, which required his undivided attention.  

This unit is regarded as having high potential at a time when the cloud computing market is rising, as well as enormous development in big data and artificial intelligence.  

Data from the Forward Industry Research Institute shows that in 2020 and 2021, the scale of the domestic cloud computing market increased by 56.7 percent and 48.4 percent respectively, totaling 310.2 billion yuan (US$43.22b) in 2021.  

In Alibaba’s financial year of 2023 up to March 31, Alibaba Cloud’s revenue rose to 77.2 billion yuan (US$10.76b), according to Alibaba’s financial report released on May 18, which accounted for 9 percent of the Group’s total income. It posted 1.42 billion yuan (US$197.8m) in adjusted EBITA (earnings before interest, taxes, and amortization, a measure of company profitability), a year-on-year growth of 24 percent, having only been in the black for two years since its establishment in 2008.  

The market share of Alibaba Cloud has expanded for six years, ranking third in the global IaaS (infrastructure as a service) market in 2021, behind Amazon Web Services (AWS) and Microsoft Azure, according to data released by research firm Gartner in 2022.  

By March 31, the cloud unit had provided services to over four million customers worldwide, including 80 percent of Chinese tech companies.  

After Taobao and Tmall, which contribute 70 percent of Alibaba’s income, the cloud unit is expected be the second-biggest source of income, although it faces challenges both in expanding global market share and fierce competition at home.  

This is likely why Daniel Zhang is prioritizing it, observers said.  

A report published by market research platform IDC in April shows that Alibaba Cloud remains the top IaaS+PaaS (platform as a service) provider in China, followed by Huawei Cloud and China Telecom’s cloud unit CTYun, accounting for 31.9 percent of the domestic market. But its market share dropped from 36.7 percent in the first half of 2022 and 42.7 percent in the second half of 2018. Huawei Cloud and CTYun both increased their market share in the latter half of 2022.  

In recent months, domestic cloud service providers including Alibaba Cloud and Tencent Cloud have lowered prices, starting a new price war.  

Separating the cloud unit from Alibaba Group is seen as a step to allow it to complete an IPO and attract more outside investors to help it compete with other domestic cloud service providers.  

On May 18, Zhang announced that Alibaba Cloud would completely spin off from Alibaba Group and is expected to complete its IPO in the next 12 months. The cloud unit will accept strategic investors from abroad.  

Cainiao, the logistics unit, and the grocery brand Freshippo with its Hema brick-and-mortar stores, have also started the listing process, while Alibaba International Digital Commerce Group, which includes platforms like AliExpress and Southeast Asia-focused Lazada, has brought in external financing, and the six major business groups have officially established their boards of directors, according to Alibaba’s 2023 financial report released in July.  

The spinoff and separate listing will bring brand new challenges for both Alibaba Group and the six business groups, according to analysts.  

The “1+6+N” structure means the holding group will manage the subsidiary groups: It needs to both think as a whole and coordinate sections and assist in innovation, Cui Lili said.  

The purpose of the spinoff is to let these business groups be responsible for their own profits and losses, pointed out Wong Yi, a senior researcher with DE Thinktank. He believes that the spinoff will strengthen each one and test their market capabilities.  

But ensuring synergy and avoiding internal competition while following a consistent strategy will be an issue, director of Bestar Consultant Xing Xing noted. With separate listings, the parent company will focus on management and improving its subsidiaries’ profitability. But after the advantageous assets are separated, maintaining the parent company’s investment value will be a challenge, Xing said.  

On August 10, Alibaba announced its financial results for the second quarter of the year, the first following its organizational restructure. The results show year-on-year growth of 14 percent in revenue while income from operations increased by 70 percent year-on-year. Among the main spin-offs, the revenue of Taobao & Tmall Group grew by 12 percent year-on-year while its local service, logistics and cloud service spin-offs respectively grew by 30 percent, 34 percent and 4 percent. Its China commerce retail business increased by 13 percent over the same period of 2022. The result was better than market expectations, and analysts believe it shows tacit market approval for Alibaba’s reshuffle.

A Tmall poster for the “618” cross-platform sales promotion advertises cheap prices at a bus stop, Beijing, June 11, 2023 (Photo by IC)