What's gone wrong with e-commerce? A look at Alibaba's Lazada, TikTok Shop and PDD's Temu

It all started with a bold headline in late November. PDD Holdings, the parent company of Pinduoduo and popular US shopping app Temu, had overtaken Alibaba Group Holding as the most valuable Chinese e-commerce company.

On Nov 30, 2023, PDD’s US-traded stock hit nearly US$150 ($201.70), giving it a market value of US$196 billion and outstripping Alibaba’s roughly US$190 billion at market close. PDD’s gain over Alibaba has widened after the latter’s market cap dipped to US$176 billion as of Jan 16.

For over a decade, Alibaba’s dominance in the e-commerce arena had appeared unassailable. Alibaba reached its peak market capitalisation of over US$800 billion in 2020, which emboldened founder Jack Ma to criticise Chinese regulators. In response, Chinese authorities retaliated by abruptly halting the IPO of the payment affiliate, Ant Group.

As Ma stood up to the challenge, competitors in the e-commerce arena took advantage to outmanoeuvre the master. In response, Alibaba initiated a self-directed organisational overhaul to “unlock shareholder value”. But the outcome was a persistent decline in Alibaba’s valuation, accompanied by reports of frequent leadership changes and power struggles.

Set against this grim backdrop, it seemed the e-commerce incumbent had lost its way. The reverberations of the changes taking place within the company were also felt far beyond its Hangzhou headquarters in Singapore where its regional e-commerce unit Lazada undertook a fresh round of job cuts, first reported by The Edge Singapore on Jan 3.

Top executives, including C-suite members from Lazada’s six markets, were reportedly let go. In Malaysia, a fifth of Lazada’s staff faced layoffs and all employees working on LazMall in Vietnam were affected. There were speculations that Lazada could eventually trim up to 30% of its estimated 10,000-strong regional workforce. To put this in perspective, PDD’s total global headcount is around 10,000. This hinted at a bloated manpower structure within Lazada resulting from an “overly optimistic” hiring policy.

So, how did Alibaba, which had seemingly cracked the code in the e-commerce game, fall so fast and so suddenly from grace? What were the transformations in the e-commerce arena that propelled its competitors to the fore? And will the tech giant ever be able to get back to its feet and claw its way back up to the top again?

Alibaba loses to Temu and TikTok 
 
To put it simply, e-commerce to Alibaba is now “the tail of the elephant”, says Lawrence Loh, professor of strategy and policy at the National University of Singapore’s (NUS) Business School.

E-commerce was able to win over millions of consumers because of generally lower prices compared to physical retail. But operating margins for this channel are slim and were at just 10.27% for Alibaba as at the end of last year.

In addition, consumers and suppliers increasingly have more options. “The current dynamics of the market [with so many new players] is not favourable for Alibaba, which is why they want to move into new things,” says Loh, who refers to the group’s push to potentially list its finance arm Ant Group and its cloud business.

With attention and resources increasingly being diverted to other units, its e-commerce business unit took a back seat. But Loh says the Chinese giant “probably over-diversified” as a subsequent split into six units resulted in a focus that is “neither here nor there”.

“It’s not taking its seat yet, they’re still trying to find their feet,” says Loh, who points out that Alibaba’s current stock price is hovering at its initial offering price of US$68 back in September 2014.

Since its inception, Alibaba has not evolved away from its original online shopping platform strategy, an inertia that has greatly hindered its growth. In Loh’s view, this refers to simply putting the marketplace online and assuming that both consumers and suppliers will find their way to the site.

“Alibaba has been doing the pull strategy,” says Loh. “They cannot do this anymore and need to break out from this mould. They need to be proactive and keep up with the times.”

In contrast, the two biggest competitors — ByteDance’s TikTok Shop and PDD’s Pinduoduo and Temu — have successfully employed the push strategy of offering extremely low prices and have been able to snatch the pie of business since it began in 2022 and 2015 respectively.

Low-cost makers and thrifty shoppers 

From the get-go, PDD in China focused on grabbing users in its third- and fourth-tier cities, sidestepping bruising battles with the incumbents in richer provinces. According to The Wall Street Journal, PDD’s reputation as a platform selling goods at affordable prices took off among more thrift-conscious Chinese consumers, allowing it to turn a profit in 2021 with revenue of some RMB94 billion ($17.9 billion).

By cultivating a network of low-cost manufacturers, PDD achieved 25% y-o-y growth in its domestic gross merchandise value (GMV), outpacing the 5% growth for overall sales of retail goods in China. With the backing of solid financials at its home turf, PDD has since been able to expand its international business, Temu, which cuts out the middleman to hold down costs significantly, explains Loh.

The same WSJ report cites Goldman Sachs’ estimates, which place Temu’s 3QFY2023 GMV at US$6.5 billion, more than twice the amount from the prior quarter. The investment bank believes Temu accounted for around 28% of PDD’s revenue in 3QFY2023. For the whole of 2022, PDD recorded a revenue of RMB131 billion.

Already, the media are questioning the sustainability of Temu’s losses. A report by Wired found that Temu loses about US$30 for every order purchased while Chinese news site 36kr suggests the company currently loses about 30%–35% on every US order.

But this is precisely one of the strengths of Chinese e-commerce giants, according to Jeffrey Towson, partner of boutique consultancy firm TechMoat Consulting. They have a large domestic business that gives them a steady cash flow to expand internationally through low pricing and a lot of marketing, he says.

In a similar vein, Loh of NUS says TikTok Shop’s success was rooted in acquiring a global market base. “Now, it’s just about milking this client base,” he adds.

TikTok Shop quickly cemented itself as a key player in the e-commerce space by marrying content with commerce all in one app and handing out discounts and vouchers by the hundreds in each new market it entered. An estimate by venture builder and insights research firm Momentum Works found that the platform grew from 4.4% in market share by GMV in 2022 to over 13% in 2023.

While Alibaba has strength in infrastructure, TikTok Shop is a master of getting attention and engagement, Towson says. “Depending on the sub-sector, infrastructure versus attention is more important. In fashion, it’s about attention,” he adds, suggesting that TikTok Shop has made its successes by nailing consumers’ attention.

Ultimately, Loh thinks that there is “nothing wrong with the existing e-commerce model”. Instead, a culmination of factors both internal and external has led to the decline of Alibaba while elevating two of its biggest rivals to fame.

E-commerce is here to stay but what is more interesting is to observe how it will evolve and where the final challenger will rest in the spectrum of the buying and selling process, he adds.

Meanwhile, watch out for new e-commerce business models emerging out of China during this slowdown, says Towson. “We have already seen this with Temu, TikTok Shop and PDD. Chinese companies are usually very good at re-inventing themselves when the pressure is on,” he says.