Alibaba: A Good Start With Internet Cars But More Work Is Needed

| About: Alibaba Group (BABA)


BABA unveiled its internet connected car model with SAIC. The RX5 is priced for the mass market and could be used to push BABA’s ecosystem expansion.

Automotive OS could potentially be a commoditized and hypercompetitive segment. Innovation in drones and driverless cars are necessary for BABA’s LT growth.

Remain bullish but do note that competitors, most notably BIDU, is pulling ahead in driverless tech.

Alibaba (NYSE:BABA) has unveiled its internet car for the China market as part of its Internet-of-Things strategy. The model is based on the RX5 SUV from SAIC Motor and will be powered with BABA's YunOS operating system. The mass-market model is priced at Rmb148k, or $22k USD, with delivery expected in August.

The positive(s): Ecosystem expansion on track

I believe that this is accretive to BABA's overall ecosystem, as it could potentially drive location-based services, payment and O2O by leveraging BABA's key assets. In the RX5, YunOS will be the key delivery platform for BABA's services. For example, drivers could book and pay for parking spots, gas stations and simple O2O commerce via Alipay. Notifications and updates from other BABA services on news, weather, navigation (from the AutoNavi acquisition back in 2013) will all be utilized. Relative to other ecosystems, BABA has the best, given its exposure in payment, media, navigation and mobile services. Automotive OS is certainly the right delivery platform to fully utilize these assets. On a lighter note, the exposure to the SUV segment is also a positive, in that it is the only growth segment in China's moderating auto market.

The negative(s): Competitive market and the need for innovation

Although this is a good start, I also note that internet-connected cars can be a very competitive space with Baidu (NASDAQ:BIDU) and Tencent (OTCPK:TCEHY) having sufficient resources to become major players in the space. In some way, this feels like the early 2011-2012 time frame when competing internet companies were getting into the smartphone OS race that drove the proliferation of the Android forks in China. The automotive market is no different from the smartphone market in my view in that internet companies could be competing to partner with auto OEMs to drive ecosystem penetration. SAIC is a good start, but BABA needs quality, and the only way to achieve this is by attracting foreign OEMs, which have much higher standard for automotive OS.

Equally important, BABA has yet to roll out an autonomous model while rival BIDU and Leeco have all rolled out concept models. Autonomous vehicle is perhaps a more important area for BABA to focus on given China's congested streets. Failure to move into driverless cars or delivery drones in a more meaningful way could be the biggest risk to BABA's long-term growth outlook.

To be clear, I am bullish on BABA and have been bullish since the beginning, but like any other corporation, it needs to innovate and stay ahead of the competition. BIDU is already testing its driverless car, so BABA has some catch-up to do.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.