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Russia’s Economic Desert Is Fertile Ground for Alibaba
The Chinese e-commerce giant has made big inroads in the Russian market with its wide offering of low-priced goods.
Not many titans of multinational industry turned up last June at the St. Petersburg International Economic Forum, Russias would-be answer to the World Economic Forum in Davos, Switzerland. But Jack Ma did. The founder and chief executive of Alibaba Group Holding, the Chinese e-commerce giant, donned his patented electric blue suit to sit at President Vladimir Putins left hand during the events ceremonial dinner.
Mas enthusiasm for Russia is easy to understand. Even as Alibabas sales growth slows in China and its stock languishes roughly a third below the level at which it went public in September 2014, the company has found a growth market in Chinas large northwestern neighbor, where it is turning Russias economic problems to its advantage.
Alibaba launched a dedicated site for sales outside China, AliExpress.com, in 2010. It quickly gained traction in Russia, where incomes were growing and Internet penetration was soaring before the oil crash began in late 2014. The company kept forging ahead last year despite recession and a major decline of the ruble. Russians cross-border purchases from China, the large majority of them from AliExpress, jumped 43 percent in dollar terms during 2015, according to Moscow industry analyst Data Insight. That was a stunning result considering that Russias currency dropped by 20 percent against the dollar last year. Cross-border sales accounted for 20 percent of Russias $12 billion e-commerce market last year, up from 13 percent in 2014.
Alibabas access to the wide world of cut-price Chinese goods is proving a winner during tough times in Russia. Leading domestic e-merchants like Ulmart, Wildberries and OZON.ru offer a select assortment of goods for a relatively affluent consumer. The average order was $70 last year about three days average wages at the current exchange rate. The average Russian purchase on Chinese web sites was less than $30.
AliExpress offers assortment along with economy. Low price is just one motivation to shop at AliExpress, says Data Insight co-founder Boris Ovchinnikov. Another is the enormous choice, millions of items that are not sold by Russian retailers at all.
One more advantage is a legal loophole that exempts foreign retail purchases of less than 1,000 ($1,120) and 31 kilograms (68 pounds) from Russias 18 percent value-added tax. A bill introduced in the Duma in December would offset this advantage with new tariffs on Internet sales. Eventually, the government will see that jobs in Russia are being lost so that foreign companies can enjoy big profits, says Brian Kean, communications director for St. Petersburgbased Ulmart.
For now the exemption stands, though, and Alibabas Russian competitors need to fight back with quality and service, says Daniel Perekalsky, OZON.rus Moscow-based CEO. We dont see shoppers coming to OZON to duplicate the Chinese offering of very cheap goods, he says. We are focusing on certified, branded products; quick deliveries and convenient returns; and investing a lot in mobile solutions.
Perekalsky spins AliExpresss success as less a threat than a symbiotic force growing the overall e-commerce market. He may have a point. Russians currently make less than 3 percent of their retail purchases online, compared with more than 7 percent in the U.S. So even if the Russian economy continues to sputter, e-commerce has ample room to grow. Domestic sites are largely maintaining their dominance among richer customers in Moscow and St. Petersburg, analysts say, whereas AliExpress is expanding rapidly in smaller localities, where incomes are lower and a package from a Moscow warehouse can take almost as long to arrive as one from China.
For Alibaba, ex-China sales are a mere blip at the moment, bringing in just 2 percent of revenue, reports Cynthia Meng, who covers the company from the Hong Kong office of Jefferies Group. But with 89 percent sales growth in the companys financial year ended March 31, 2015, AliExpress may become more significant in the future, says Gil Luria, an e-commerce analyst at Los Angelesbased Wedbush Securities.
Markets like Russia and India are very important to Alibaba, which still needs a five- to ten-year game plan, he says. These countries dont have a dominant e-commerce player of their own yet, and Alibabas sales growth in China is decelerating. The companys China sales growth slowed to 23 percent in the OctoberDecember quarter last year, from 56 percent in the same period of 2014.
For Putin and his aides, Jack Ma would not be their first choice of Chinese business partner. Russias president made much of a strategic shift eastward after the European Union and U.S. slapped Russia with economic sanctions in response to its seizure of Crimea and support for separatists in eastern Ukraine. But the linchpin of that policy, a $400 billion pact to supply China with Russian natural gas for 30 years, now looks shaky in a world of cheaper energy; state monopoly Gazprom says agreed volumes may shrink. Chinese investments that the Kremlin hoped for in Russian industry have failed to materialize. Far from investing in Russia himself, Ma boasted at St. Petersburg that Alibaba is storming the consumer market with a single local employee.
Ma was more diplomatic when Prime Minister Dmitry Medvedev visited China last December with a proposal from Putin for an e-commerce platform to promote Russian goods abroad. We hope very much that we can contribute to its implementation, Alibabas boss commented, but he implied that this might take a while. The history of Internet technology has seen 20 years, and the next 30 years will open up new opportunities, Ma said. Alibaba hopes, together with the youth of Russia, to create a new platform adapted for commercial development.
All the same, Alibabas push into Russia suggests that investors shouldnt write off an economy that remains the worlds sixth-largest on a purchasing power basis, according to the International Monetary Fund. For now, Putin should be happy to have Ma on his side.