Alibaba Feels the Pinch From China’s Slowing Economic Growth
Posted November 2, 2018 3:49 p.m. EDT
Updated November 2, 2018 3:54 p.m. EDT
SHANGHAI — China’s biggest e-commerce company is expecting rockier times ahead, a troubling sign for a vast economy that is one of the world’s most important engines of growth.
The flagging pace of economic expansion in China and the country’s trade war with the United States led the Alibaba Group to cut its estimate of revenue growth for the current fiscal year, which ends in March, by around 5 percent, the shopping giant said Friday. For the quarter that ended in September, revenue came in at $12.4 billion, a 54 percent increase from a year earlier but less than analysts had expected.
“The global economy is in a state of uncertainty,” Daniel Zhang, Alibaba’s chief executive, said in a conference call with analysts. “The U.S.-China trade tensions create increased risk of instability.”
The decision to lower sales expectations was made only recently, the company’s chief financial officer, Maggie Wu, said. Economic conditions deteriorated noticeably in just the past month, she said. “Merchants are facing challenging times,” she said.
There is mounting evidence that China’s economy, the world’s second-largest after the United States’, is slowing. But Alibaba’s trimming of its sales outlook suggests the downturn is starting to affect more parts of the economy, including China’s growing middle class.
The Chinese government reported last month that economic output grew 6.5 percent in the latest quarter compared with the previous year, its slowest pace in nearly a decade. The country’s stock markets have tumbled, and its currency has slid. Beijing has pushed to add more money to the economy and had prodded local governments to increase spending. But the mountains of debt the country accumulated to fuel past growth are tying authorities’ hands.
China’s shoppers have generally been able to buoy the economy through its past ups and downs, as hundreds of millions of people rose into the middle class and spent their increased earnings on cars, appliances and better-quality food. Lately, though, consumers say they are tightening their purse strings and saving more of their income. Alibaba’s sales of electronics and other big-ticket items have been affected, executives said during the conference call Friday. Shawn Yang, 27, works in finance in Shanghai. He said that distress being felt in his industry had him thinking twice about buying nonessential items like gadgets and video games.
Singles Day, the annual online shopping bonanza in China, comes on Nov. 11. Last year, Yang spent nearly $600 on workout clothes, shoes, a yoga mat and a coffee machine.
This year? He plans to spend less than half that amount, on jeans from Zara, two shirts for work and a bottle of moisturizer.
The other dark cloud hovering over the Chinese economy has drifted in from overseas.
The quarter that ended in September was the first since the Trump administration began its trade war with China. Alibaba executives have sought to reassure investors by pointing out that even if tariffs on imports make U.S. goods more expensive, Chinese customers can still use Alibaba’s platforms to buy more products made domestically or in other countries.
But the effects of the tariffs are only beginning to be felt across China’s $12 trillion economy. Factory activity is slowing, which could eventually result in job losses and a drop in retail spending. Washington and Beijing seem to be hunkering down for a protracted conflict, one in which disagreements about trade seem inextricable from broader questions involving geopolitical and technological dominance.
For Alibaba, the timing is inopportune.
Investors have already been selling off shares in technology companies on both sides of the Pacific this year. Alibaba stock, which trades in the United States, has lost around 30 percent of its value since June. Other major Chinese internet companies have fared even worse, as fears spread over a frostier regulatory environment for the country’s most vibrant enterprises.
Alibaba has long enjoyed an unmatched grip on how Chinese consumers shop on their phones and computers. Lately, the company has said its future depends on extending its consumer empire into the wider, nondigital world.
The company now has nearly 80 of its lavish, full-service Hema supermarkets, up from 20 a year ago. Alibaba’s logistics arm, Cainiao, recently opened what it called the “largest robotic smart warehouse in China,” in which 700 boxy droids wheel around rearranging giant shelves laden with goods.
Expanding its operations offline has helped raise Alibaba’s sales growth. Revenue from retail experiments like Hema jumped 151 percent in the latest quarter from a year earlier. Sales in the company’s cloud-computing division, the market leader in China, soared 90 percent.
But spending on developing the new ventures has squeezed the company’s bottom line. Asked Friday whether the more pessimistic outlook for this year might lead Alibaba to scale back on such projects, Wu, the chief financial officer, said the company evaluated them not on their financial return, but according to other metrics, such as the number of users they attract.