JD.com may fur­ther test in­vestors’ pa­tience

New Straits Times - - Business -

JAKARTA: The e-com­merce tus­sle be­tween China’s Alibaba Group Hold­ing Ltd and JD.com Inc looks set to en­ter a new arena, with the lat­ter now eye­ing an in­vest­ment in In­done­sia.

JD.com is in talks to in­ject funds di­rectly into PT Tokopedia, one of the coun­try’s largest e-com­merce op­er­a­tors, wrote Bloomberg’s Yoolim Lee and Selina Wang on Tues­day.

The firm, backed by Wal-Mart Stores Inc, may in­vest “hun­dreds of mil­lions of dol­lars”, which could take Tokopedia’s value north of US$1 bil­lion (RM4.34 bil­lion). That in­di­cates JD.com may pur­chase a sig­nif­i­cant mi­nor­ity stake in Tokopedia, and im­plies that its in­ter­est goes be­yond a purely fi­nan­cial one.

By rev­enue, JD.com is more than dou­ble the size of Alibaba. By earn­ings and mar­ket cap­i­tal­i­sa­tion, though, Alibaba comes top. That’s be­cause JD.com gets more than 90 per cent of its prod­uct rev­enue from sell­ing its own in­ven­tory, while Alibaba mostly con­nects mer­chants with buy­ers. So al­though JD.com en­joys a bet­ter rep­u­ta­tion for gen­uine and higher-qual­ity goods, that con­sumer ku­dos has yet to trans­late into an­nual prof­its.

Should JD.com in­vest in Tokopedia, it’ll be fol­low­ing Alibaba’s tak­ing con­trol of Lazada and its own strat­egy of build­ing from the ground up. But Tokopedia is a dif­fer­ent kind of e-com­merce player in that it fol­lows the mer­chant model used by Alibaba rather than the di­rect-sales ap­proach em­ployed by JD.com.

This begs the ques­tion of what value JD.com can get out of the in­vest­ment. It’s pos­si­ble the Chi­nese com­pany will seek ways to in­te­grate op­er­a­tions, cut­ting over­lap in ar­eas rang­ing from cus­tomer ser­vice to lo­gis­tics.

In In­done­sia, with 17,000 is­lands, lo­gis­tics re­mains a key chal­lenge. Yet the size of JD.com’s foot­print in In­done­sia is un­clear, as is whether it will stick to the well-worn Chi­nese play­book of keep­ing a tight con­trol over sales and en­gag­ing in de­liv­ery all the way to last mile.

Com­bin­ing op­er­a­tions might also risk JD.com’s hard-earned rep­u­ta­tion for qual­ity. Yet, if it keeps to its full end-to-end model in In­done­sia, in­vestors can ex­pect sev­eral more years of slim mar­gins as well as prob­a­ble losses be­fore any economies of scale are re­alised.

It’s pos­si­ble a mid­dle ground could be found, with JD.com of­fer­ing only lo­gis­tics to Tokopedia and its users, while keep­ing its own cus­tomer ser­vice and web­sites sep­a­rate.

Such a move would help share the cost of in­fra­struc­ture and al­low JD.com to min­imise the risk to its rep­u­ta­tion from en­gag­ing with third-party mer­chants.

For JD.com share­hold­ers, the risks are re­duced, but not elim­i­nated. They've hung on through years of losses and are fi­nally see­ing neg­a­tive op­er­at­ing mar­gins start to shrink. Be­ing told to wait a lit­tle longer while JD.com tries to make a go of it in In­done­sia may come as a blow. Bloomberg

BLOOMBERG PIC

China’s JD.com may pur­chase a sig­nif­i­cant mi­nor­ity stake in Tokopedia, one of In­done­sia’s largest e-com­merce op­er­a­tors, in an es­ca­la­tion of ri­valry with Alibaba Group Hold­ing.

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