e-Commerce in China: Alibaba and Baidu Face Off in 2009

Includes: BIDU, CAF, FXI, GXC, PGJ
by: Joel Backaler

Despite slowing economic growth, China’s e-commerce market is still growing strong. According to a China Tech News report from last week that summarizes market research firm IDC’s recent report, trade volume of China’s e-commerce market increased approximately 20% in 2008. It is expected to reach CNY3.22 trillion in total trade by 2010, up from CNY1.951 trillion in 2008. China e-commerce giant Alibaba Group’s [SEHK: 1688] C2C auction website Taobao.com was one of the greatest beneficiaries of this growth in 2008, realizing CNY100 billion in trade volume, up from CNY43.3 billion in 2007.

Alibaba’s e-commerce dominance is quite impressive, but how long will it continue? Alibaba founder, Jack Ma, admits that because e-commerce is still at relatively low levels of penetration in China, the online shopping penetration rate is only 26% among China’s internet users versus 80% in the US, competition is necessary for further development of China’s e-commerce market. eBay’s failure in its first attempt to gain a foothold in China despite vast resources and international experience demonstrated that a true competitor is more likely to emerge from the domestic front instead of from overseas.

Can Baidu [NASDAQ:BIDU] become a true e-commerce competitor of Alibaba? Baidu is a Chinese online search leader, but recently entered the online consumer-to-consumer marketplace arena in October 2008. To compete with Alibaba, Baidu released its own C2C marketplace and payment platform. Youa, Baidu’s answer to Taobao, uses its own independent payment service to avoid use of Alibaba’s Alipay (a service similar to PayPal). After only three months of competition, Alibaba has already moved to take defensive measures.

Taobao began blocking Baidu’s search spiders in an alleged attempt to prevent outside parties from cheating Taobao users. According to the China Tech News report Taobao claims that 80% of consumer complaints are the result of just a few fraudulent businesses. These businesses initially obtain customers’ trust though pay-per-click advertisements supported by the search engines. However, while Taobao only partially blocks Yahoo and Google, Baidu is completely blocked. Taobao also improved its product search interface to encourage product search within the Taobao site itself and avoid use of external search engines. To provide additional advertising channels for online merchants Alibaba merged its advertising platform Alimama into Taobao for their support.

So far Taobao has been able to fend off an international competitor in eBay and has done a good job at holding off domestic competitor Tencent Holdings Limited’s [SEHK:900] Paipai. However, 2009 is here, and with it is a new domestic competitor that possesses the local knowledge and capabilities to make things a little more difficult for Taobao. Baidu’s Youa online marketplace is still in its early stages of development, but 2009 will see it begin to grow into a true competitor of Taobao. In an interview with tech publication Red Herring, when describing the well-funded foreign eBay’s attempt to seize the Chinese e-commerce market, Jack Ma said it was like “trying to land advanced jets in muddy rice paddies.” Baidu does not need a landing pad since it is China homegrown just like Alibaba, and while Taobao will likely maintain its position as a market leader for some time, 2009 will be the year that the real competition in China’s e-commerce market begins.