Alibaba on the US-China Trade War: From Exports to Domestic Consumption

During the recent March Quarter 2019 earnings conference call, Alibaba’s Vice Executive Chairman Joe Tsai began by “addressing the elephant in the room”, which is the current US-China trade war. He then went on to analyze what the current trade friction between the world’s two largest economies means for Alibaba and the broader impact for both economies involved. In his discussion, he provides comments on the future development of China’s economy. Tsai seems optimistic in his outlook on the possible trade war outcomes and the natural evolution of China’s economy, reckoning that both nations’ economies would organically align over time.

Let’s take a closer look at his comments.

“In short, the trade talks put Alibaba on the right side of all the issues on the table. First, the reduction of the U.S. trade deficit: China’s commitment to purchase more American products means China will, over the next several years, become a net importing country. Consumers in China will benefit from the availability of quality imported products from all over the world, including from American farmers, brands, and small businesses. Alibaba is set up to benefit from this secular trend of growing imports into China. We are the platform of choice for global producers, products, and brands selling into China because we have the reach and deep insights on over 650 million active Chinese consumers on our platform.”

“Second, the trade negotiations will lead to China opening its markets to more foreign businesses in order to satisfy the massively growing demands of domestic consumers. We’re not concerned about slowing China exports affecting GDP growth because the Chinese economy is shifting from an export economy to a domestic consumption economy. Job expansion is continuing in China. Over the last five years, while China lost 14 million manufacturing jobs, the economy added 70 million service jobs that drove real disposable income growth and consumption. The middle class in China has reached critical mass of over 300 million, almost as large as the entire U.S. population. The middle class will double in the next 10 years, especially from the lesser developed Chinese cities. While total Chinese domestic consumption is $5.5 trillion today, consumption from these third-, fourth-, and fifth-tier cities, with a combined population of 500 million people, will triple from $2.3 trillion to nearly $7 trillion in the next 10 years.”

Here Tsai is describing a mutually beneficial situation where Chinese consumers’ demand for imported products is being met, while simultaneously allowing foreign firms greater access to the massive consumption potential in the Chinese market.

“Third, intellectual property protection: In recent years, China has made significant improvements in reducing IP infringement, as China moves closer to global norms in protecting and paying for foreign IP. China also recognizes the need to protect its own innovators, as well as being focused on Chinese consumers, who demand genuine products of high quality. Alibaba is at the forefront of protecting intellectual property. Leveraging on our cutting-edge technology, we take proactive and aggressive steps to crack down on counterfeits in our marketplaces because the customers who trust our platforms demand it. Alibaba is the only e-commerce company that is validated by global brands as having the highest commitment to IP protection.

The Alibaba Anti-Counterfeiting Alliance, which we initiated in 2017, has grown to 132 global brand companies from 16 countries in 12 industries. The Alliance members collaborate in six key areas: 1) proactive online monitoring and protection, 2) Product test-buy programs, 3) offline investigations, 4) assisting law enforcement, 5) litigation against infringers and 6) public awareness campaigns.”

Here Tsai is addressing one of the key concerns of the Trump administration, which is intellectual property protection. Tsai acknowledges the progress that has been and is continuing to be made in that domain.

“To summarize, the vexing issues in the trade negotiations will resolve themselves, as the Chinese economy is already evolving to close the gap between the interests of the United States and China. This means in the future, there will be bigger Chinese domestic consumption, more foreign imports, continuing focus on enhanced IP protection, and further digitization of industries driven by participation of the private sector.”

CEO Daniel Zhang would echo Tsai’s sentiments in his remarks on the call, saying, “The recent U.S.-China trade negotiations have attracted worldwide attention. I believe this is both a challenge and an opportunity for the Chinese economy. Looking into the future, China will expedite its journey to transform from an export-driven economy to a consumption-driven economy. We believe consumption and the service sector will become new benchmarks to bring new growth potential to China.”

While Wall Street and many firms on both sides of the Pacific Ocean may remain cautious and apprehensive given the current macroeconomic conditions, it seems that Alibaba, under the leadership of Joe Tsai and new CEO Daniel Zhang, is optimistic about the company’s future prospects. Only time will tell whether Tsai’s assertion that the state of current negotiations, “put(s) Alibaba on the right side of all the issues on the table.”

Featured photo credit to Internet