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JD.Com’s Google Tie-Up Won’t Save It From Decelerating Performance

Summary

Google investment too small to represent partnership.

Google booted from China and has minimal expertise there.

JD tinkers with volume figures in self-serving manner.

If China’s online retailer JD.com aims to slay the giants that are industry leaders Alibaba and Amazon, its tie-up with Google isn’t going to do the trick.The news that Google will invest $550 million in the Chinese e-retailer generated some frothy headlines earlier this week. But as the initial buzz fades, investors may find this deal doesn’t make sense for a number of reasons.The investment, which is a drop in the bucket for the $800 billion behemoth that is Google parent company Alphabet Inc., doesn’t give it enough incentive or influence at less than 1% stake in JD.com to put serious effort into turning it into a meaningful partnership. In online retail, JD is stuck as a distant second in China behind Alibaba - JD’s $60 billion market cap is just one-tenth of Alibaba’s $522 billion value. The tie-up with Google, which got booted from China after a spat with authorities in Beijing, brings no obvious expertise or edge to JD in mainland China.To make up for its perennial also-ran status at home, JD has tried to stake out a claim for itself abroad where it bumps into Amazon and a host of local competitors. JD prides itself on a go-it-alone business model that has made it harder to get scale and caused it to struggle with past investments and joint-ventures. Google, while a giant in search and advertising in the U.S., is hardly an ideal partner as JD.com tries to grow e-commerce sales internationally.

Google has never been able to turn its search advantage into a viable e-commerce platform to compete with Amazon. Analysts at 86 Research say they don’t expect any synergies to result from the deal given JD doesn’t have the scale to help it tackle Amazon abroad or Alibaba in China. Their analysts see little prospect this tie-up can make inroads on the two e-commerce giants because they “are early movers in markets such as Southeast Asia, building up infrastructure for years.”

What JD’s publicity blitz this week did do was draw attention away from decelerating sales growth during a key annual online sales promotion – known as 6.18 – that JD created as a copycat to Alibaba’s yearly Singles Day shopping event in November. JD has a history of changing its measuring stick for gross merchandise value (GMV) generated by this annual shopping festival by adding extra days, making it harder for analysts to compare annual sales trends. The 6.18 promotion has gone from one-day shopping event to an 18-day affair, inflating overall sales figures. But even taking their headline figures – RMB159.2 billion, up 33% from last year – that’s a significant deceleration from the 50% rise a year ago. Analysts from Citigroup in a research note were unimpressed by those numbers, saying it “leaves limited room for upside” to their quarterly earnings forecast. Salvo Capital’s own analysis indicates JD’s second-quarter GMV growth could dip under 30%. While at first glance the partnership with Google seems like a win for JD.com’s fight against bigger Chinese rival Alibaba, a closer look shows neither side has much at stake in making the partnership more than a press release. Longer-term the bigger issue for JD.com and its investors could be decelerating sales trend catching up with a distant No. 2 player in a winner-take-all industry.

When it comes to JD and Google’s e-commerce tie-up, the old deal making adage “Two weak players don’t make a strong one” rings true.