It’s fight night for China’s Big Tech firms as price wars loom

Just as the dust settles on the end of a long regulatory crackdown, analysts say China’s Big Tech firms now face a new challenge – a period of brutal price wars in a sector with increasingly blurred business lines, pointing to thinner profits and a tough outlook ahead.

JD.com, the e-commerce giant controlled by its billionaire founder Richard Liu Qiangdong, is lumbering up for the first round of these price wars after setting aside 10 billion yuan (US$1.45 billion) in subsidies for consumers starting from March, according to people familiar with the matter.

Under this programme, JD customers will be entitled to receive “compensation” if they can find the same product on sale at a lower price on competitor platforms such as Alibaba Group Holding’s Tmall or Pinduoduo, the budget shopping app owned by Nasdaq-listed PDD Holdings.

JD’s “compensation” will be worth double any price gap found, according to a notice to vendors issued on JD’s website on Tuesday. Alibaba owns the South China Morning Post.

JD’s aggressive promotion – spurred on by Liu himself who has castigated senior executives for not focusing on business basics – will be the Beijing-based company’s second attempt to gain a bigger slice of the country’s lower-tier markets, a stronghold for Shanghai-based Pinduoduo.

Expectations for tougher competition and thinner margins ahead have seen the shares of Chinese e-commerce companies plunge this week, despite relatively upbeat forecasts for fourth quarter earnings. JD shares were down 10 per cent in the past five days in Hong Kong, while PDD was down 9.9 per cent over the same period in New York.

A key development is a reduction in barriers to entry between different business segments. For example, Douyin – the domestic sister app of ByteDance’s hit short video app TikTok – has pushed deeper into China’s food delivery sector. A company representative said in early February that it planned to offer food delivery services in more Chinese cities, expanding an existing trial in Beijing, Shanghai and Chengdu.

With daily active users of over 700 million, Douyin’s expansion into food delivery and local life services will not go unnoticed by market leaders Meituan and Alibaba’s Ele.me.

“Meituan may be in a tough position because I think margins will likely be compressed for delivery services … [which] has always been their core business, which it relied upon to justify new initiatives,” said Wang Kai, a senior equity analyst at Morningstar Asia, who has been an early bear on Meituan since 2021.

“Margins for that core business are now coming under pressure because they will have to use subsidies to protect market share, which will lead to lower margins and monetisation,” added Wang.

In the face of mounting competition, Alibaba is reportedly merging its online restaurant guide app Koubei into its online mapping unit Amap in a move aimed at driving operational efficiencies.

“Big tech companies are likely to do some new things this year. Last year they didn’t have much room when the economy was facing some headwinds and business travel was hard due to pandemic controls,” said Shawn Yang Zi-xiao, managing director of boutique investment bank Blue Lotus Capital.

Analysts say it will be difficult for any players to avoid some damage.

Low prices can be a double-edged sword, hitting revenue at a time when growth in China’s e-commerce sector is stagnating, said Zhuang Shuai, chief analyst at e-commerce consultancy Bailian. “We saw Pinduoduo make significant losses in its early days,” said Zhuang, referring to the practice of subsidising prices to gain market share.

While JD squares up to PDD, it is also extending its tentacles into the grocery delivery sector to take on NYSE-listed Dingdong Maicai, which just turned its first quarterly profit since being founded in 2017.

Li Chengdong, chief analyst at e-commerce consultancy Dolphin, said that Dingdong will have to work hard to fend off more new entrants, all looking for a slice of a market with increasingly thin margins.

And even Shenzhen-based internet giant Tencent Holdings – which has battled for a piece of nearly every tech pie, from e-commerce to short video – will not be able to hide, analysts say.

Tencent is reportedly beta testing a facelift for its public account function on hit app WeChat, which appears to be inspired by Shanghai-based lifestyle social media app Xiaohongshu, as it seeks to retain an edge.

The fight among China apps has even spread to overseas markets.

Following fast fashion firm Shein’s success in the US e-commerce market, Temu, a budget shopping platform that shares the same owner as Pinduoduo, is quickly gaining ground with its low prices and favourable policies to merchants.

“The overseas market [for China apps] is what to look at next,” said Yang from Blue Lotus. “[Because] if your main business is in the mainland … it’s very likely you will see intense competition.”

Some analysts say that the upsurge in competition is a sign that China’s internet sector has matured from the days when a handful of deep-pocketed players were able to carve out large swathes of a relatively underdeveloped market in the world’s second-largest economy.

“Obviously, it is great for the Chinese consumer to have [tougher] competition among Big Tech firms. This gives consumers more options with better quality goods, as well as more available subsidies,” said Morningstar’s Wang.

And it looks like China’s consumers are already catching on.

Huang Kai, a 37-year-old energy sector worker in Beijing, says he used to scroll Meituan’s Yelp-like restaurant guide app Dianping for set meal deals, but has now switched to Douyin.

“In terms of the quantity of deals, there’s still more on Meituan. But I’ve found that Douyin now has better offers, with some deals that are dirt cheap,” he said. South China Morning Post