Alibaba: Setting Up The Iron Triangle

| About: Alibaba Group (BABA)
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Alibaba is looking to invest in a major Indian logistics company to expand its footprint in the country.

BABA already invested in payment and e-commerce, so logistics is the last piece of the puzzle.

Battle against AMZN in India will be a key indicator of potential competition in North America.

The Economic Times reported that Alibaba (NYSE:BABA) is looking to buy or invest in an Indian logistics company. The report cited Delhivery and Xpressbees being two possible partners given that both specialize in deliveries for online retail players.

As India is emerging to be the next battleground for the internet companies, it makes sense for BABA to establish itself in the country to take advantage of the 1bn+ population, rising middle class, young demographic and innovative culture. It's worth noting that BABA has already invested in one of India's largest payment service, Paytm, and e-commerce start-up Snapdeal. (see - Alibaba: Investing In Paytm).

According to a PWC study, India's e-commerce market is expected to reach $10-20b by 2017-2020, growing at a 40-50% CAGR. With China's e-commerce decelerating in recent years, BABA needs to diversify its business model that's heavily leveraged to China's e-commerce space. India is a logical choice given its geographic proximity to China, which allows BABA to conveniently ship items across the border via its Cainiao logistics partnership.

In a highly probable scenario, the Indian logistics companies could be integrated with Cainiao so BABA can ensure a consistent delivery experience. I remain bullish on BABA. The company remains my top e-commerce pick globally and has perhaps the most robust and diversified ecosystem amongst the internet peers, in my view.

India is a market that BABA cannot ignore. Unlike the US where logistics, regulation and competition may hinder BABA's expansion, India is a relatively new market with both the incumbent e-commerce sites and foreign companies such as Amazon (NASDAQ:AMZN) starting off fresh. Therefore, there is no established leader and this presents an opportunity for BABA.

Investing in India allows BABA to scale up the "iron triangle" of payment, e-commerce, and logistics to compete against Flipkart and Amazon. BABA has already invested in Paytm and is in the final leg of building up the e-commerce side with Paytm planning to spin off its e-commerce platform to make way for BABA to establish a direct presence in the country.

The final leg would involve logistics and it is possible that BABA will buy a majority or significant strategic stake in a logistics company within the next two quarters. Both Delhivery and XpressBees are already working with Paytm's market place and third-party logistics so they are two probable partners.

Whichever the logistics partner may be, I believe that BABA could integrate it into the Cainiao platform to ensure global coverage and consistency over logistics. I believe this will drive my medium-term thesis on BABA which is cross-border e-commerce will be a key driver for its e-commerce growth in the next 5 to 10 years.

On a final note, a successful entry into India would be a precursor to an entry into North America given that both AMZN and BABA will battle it out in India's nascent e-commerce landscape. While BABA has been growing via M&A, AMZN is trying to grow organically.

Between the two, AMZN has a higher stake after losing to BABA in China. If BABA manages to remain competitive against AMZN in India, it would be a good model to replicate in North America where BABA may invest or outright purchase eBay's (NASDAQ:EBAY) marketplace to gain entry into the market.

With BABA already working with US Postal Service (see - Alibaba: Scaling Up Logistics In The U.S.), I do not think it is a stretch for BABA to make its way into the US within this decade. Such scenarios would be a threat to AMZN and this is the single biggest long-term concern I have on the company despite my favorable near-term view on the stock (see - Amazon: Beauty Is Only Skin Deep).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.