Wal-Mart Quits China E-Commerce, Amazon Next?

| About: Wal-Mart Stores, (WMT)

Bottom line: JD.com will quietly close Yihaodian after acquiring the online store from Wal-Mart, and Amazon is the most likely next large player to withdraw from China’s e-commerce market in the next few years.

In what can only be described as a major surrender, Wal-Mart (NYSE:WMT) is selling its struggling online flagship Yihaodian in exchange for about $1.5 billion worth of shares in JD.com (NASDAQ:JD), China’s second largest e-commerce player. The development isn’t a complete surprise, since Yihaodian has struggled to compete with JD and industry titan Alibaba (NYSE:BABA) since Wal-Mart purchased the company 4 years ago. The withdrawal also shines a spotlight on the very real fact that foreign companies often can’t compete on China’s Internet, and raises the question of whether Amazon (NASDAQ:AMZN) might be the next to abandon the complex market.

Under the terms of its China e-commerce shift, Wal-Mart will receive 145 million newly issued class A shares of JD, which will give it 5 percent of the Chinese company. (company announcement; English article; Chinese article) In addition to handing over Yihaodian, Wal-Mart will also open a flagship store for its Sam’s Club chain on JD.com’s online shopping mall that competes with Alibaba’s popular Tmall.

JD shares shot up as much as 9.5 percent after the deal was announced, and ultimately ended the trading day up 4.6 percent. At that value, the deal values Wal-Mart’s new JD.com stake at nearly $1.5 billion. Wal-Mart joins local Internet giant Tencent (OTCPK:TCEHY), which also sold its struggling e-commerce business to JD.com 2 years ago in exchange for an even larger stake in the company.

This particular deal looks similar to other surrenders by foreign companies that failed to make it on the Chinese Internet. Two of the biggest of those came about a decade ago, one when online auctions giant eBay (NASDAQ:EBAY) put its struggling China business into a joint venture with a local partner after failing to compete with Alibaba; and the other when Yahoo (NASDAQ:YHOO) transferred its dying local search business to the same Alibaba after failing to compete with homegrown leader Baidu (NASDAQ:BIDU).

Destined for Obscurity

Both eBay’s joint venture and Yahoo’s former China search business are now insignificant players, if they even still exist. I suspect the same could happen to Yihaodian, which will probably be quietly shut down in the next few years after its core customers are channeled to JD’s own similar channels.

At the end of the day, China’s e-commerce market is still too cluttered and sorely in need of consolidation. Whereas most major markets have 2 or 3 big players, China still has at least half a dozen contenders, led by Alibaba and JD. Others vying for a place at the table include electronics retailing giant Suning, industry veteran Dangdang (NYSE:DANG) and discount specialist Vipshop (NYSE:VIPS). Amazon is the last major foreign player also trying to find a spot.

While Alibaba is the clear industry leader with about half of the B2C market, JD does appear to be gaining momentum through its partnerships with Tencent and now Wal-Mart. Despite that, the company is still losing massive money, including a $140 million net loss in its latest reporting quarter, and has never reported profits on a sustainable basis.

Of the remaining players, the most likely to follow Wal-Mart’s lead in my view is Amazon, which perhaps could strike a similar alliance that would allow it to exit the market. Despite huge investments and years of trying, Amazon has failed to make a major impact in China and is still a tiny player. Like Wal-Mart, one of the biggest challenges it faces is obsession with low prices by Chinese consumers. That factor works to the disadvantage of the big foreign companies, which usually insist on maintaining a higher level of overall product quality than their Chinese peers, even if that means charging higher prices.

In that kind of environment it really will be hard for Amazon to make a major mark anytime soon. What’s more, the Chinese players are mostly controlled by their founders, who would usually rather see their companies go bankrupt than cede control to a rival. Accordingly, Amazon really does look like the next biggest bet to surrender in China, though such a move could still be a few years off.