Alibaba Ties Up With Philips, Audi

May.30.14 | About: Alibaba Group (BABA)

E-commerce leader Alibaba (ABABA) is forming some interesting new tie-ups with major multinationals, including a new strategic partnership with Dutch electronics giant Philips (NYSE:PHG) and a pairing between its recently acquired AutoNavi (NASDAQ:AMAP) online mapping division and leading German automaker Volkswagen (OTCPK:VLKAY). I've previously said I'm not a big fan of Alibaba's recent M&A binge, as it looks a bit lacking in focus and could lead to operational headaches as the company tries to integrate so many different businesses. But these latest non-acquisitive tie-ups with major global partners look like a smarter strategy for expanding its reach as it prepares for a multi-billion-dollar New York IPO.

I last wrote about Alibaba just yesterday, reflecting the company's constant appearance in the headlines over the last year as it embarks on a nonstop series of new tie-ups. Most of those have been acquisitions and other equity exchanges, in contrast to these latest two deals that are just strategic tie-ups without any cross-investments taking place.

Let's start with a look at the Philips deal, which will see the pair work together in the nascent area of smart devices. I wrote about a similar tie-up last year that saw microblogging leader Weibo (NASDAQ:WB) form an alliance with domestic appliance giant Haier to make intelligent air conditioners. (previous post) That tie-up was aimed at creating devices that users could control remotely from their Weibo accounts, allowing them to turn on their air conditioners from any Internet-connected device such as a smartphone or office computer.

This new tie-up will see Alibaba's cloud computing division team up with Philips in a similar way, aiming to create electronic devices that can be operated remotely over Alibaba's Internet-based cloud computing platform. (Chinese article) In addition to cooperating on such smart devices, the companies also plan to work together on efforts to analyze big data to better understand customers' needs.

Such a tie-up looks quite experimental since smart devices are an emerging area without many users yet. But it could provide an important new customer for Alibaba's Alicloud unit, and could also serve as a template for future customers interested in developing smart devices. The tie-up with Philips will also provide Alibaba with an important global partner for the day when tries to move its core e-commerce services beyond its home China market.

The second deal involves AutoNavi, one of China's leading online mapping firms that Alibaba recently acquired for about $1.6 billion. That deal has Audi, Volkswagen's luxury car unit, agreeing to buy in-car mapping services in China from a partnership between global GPS mapping leader TomTom and AutoNavi. (company announcement)

There's not much detail in the announcement, but I suspect that the globally-connected TomTom will be Audi's major technology partner in the tie-up. Meantime, AutoNavi will probably provide most of the actual mapping services, since the deal is specifically for Audi's models sold in China, starting with its A3.

The deal looks like a good one for both Alibaba and AutoNavi, since Volkswagen is one of China's biggest car sellers and Audi is by far the best-selling luxury brand. Audi's China sales grew more than 20 percent to nearly 500,000 cars last year, and the brand is forecasting more double-digit growth this year despite a slowdown in the broader market.

Like the Philips partnership, this Audi tie-up is important not only for the direct business opportunity it provides but also for the global connections the German automaker can bring to Alibaba. For all its hype, Alibaba is currently dependent on its home China market for nearly all of its business. As domestic growth starts to slow due to a maturing home market and rising competition, these global connections could help Alibaba find new sources of income as part of an eventual global expansion where it will face giants like Amazon (NASDAQ:AMZN) and Wal-mart (NYSE:WMT).

Bottom line: Alibaba's new tie-ups with Philips and Audi look like smart moves that will provide immediate new business opportunities and also longer-term connections with major multinationals.

Disclosure: None.

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