Is Covid-19 a Threat or Opportunity for Alibaba?

The year 2020 has started on an interesting note. Just when the world was trying to come out of shadows of the US-China trade war, coronavirus changed everything.

It has changed the way we work, the way we live, the way we socialise, and even the way we shop and eat.

Although Hong Kong and mainland China has “flattened the curve”, the Hang Seng Index and Shanghai Composite are down by 13.5% and 7%, respectively, year-to-date.

Alibaba and Amazon outperform

Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) has outperformed the broader market.

Alibaba’s Hong Kong shares are up marginally so far in 2020 while its New York-listed shares are down 1.2% year-to-date.

Meanwhile, Alibaba’s American nemesis, Inc (NASDAQ: AMZN), has gained 28.5% since the turn of the decade.

The Covid-19 pandemic has clearly given a big boost to e-commerce, with people stuck in the home quarantine or preferring to order online.

With millions of first-time users buying online and brick-and-mortar stores facing an existential crisis, the trend clearly favours the Alibabas and Amazons of the world.

Will Alibaba benefit from the shift? It depends on how the world shapes up after the crisis.

Global supply chain is shifting

It was happening even before Covid-19 hit. The US-China trade war had pushed companies to look beyond China as their manufacturing hub.

The rising wages in the country and emerging competition from other Asian neighbours also had their own share in the shift.

Lastly, China’s own policies have been focusing on the domestic market. The share of exports that formed part of China’s GDP dropped from 32% in 2008 to 19.5% in 2018.

However, Covid-19 may alter the global supply chain faster than any of these. Countries like Japan and South Korea are already looking elsewhere to source products.

Japan has announced a package for companies to leave China in order to reduce reliance on China. Others may follow suit. With this, Alibaba may be forced to give up on its global ambitions.

The post-coronavirus world may divide the global e-commerce market with Alibaba firmly controlling China and parts of Asia and Amazon ruling the rest of the world.

While Alibaba is quintessentially a China-focused company, it still derives over US$4 billion in revenues from international markets. We may see that share shrinking in the new world.

Trump at it again

Much of 2019 went into US President Donald Trump accusing China of unfair trade practices. The new year seemed to start on a positive note.

However, Covid-19 has hampered US-China relations with President Trump calling it a “Chinese virus”. The Trump administration is now examining theories that state that the virus was created in a lab in Wuhan.

In short, 2020 could also be a washout year for US-China relations. In the election year, President Trump may stoke nationalistic sentiments of his target audience by challenging China.

For Alibaba, which is listed in the US, this could mean further doubts over its global ambitions.

The cart without wheels

While Alibaba may win on many fronts including cloud computing and its dominance in China, Amazon may end up being a winner in most other markets in the post-coronavirus world.

It’s not necessarily a bad thing. China is big and getting stronger. Spreading its wings in its home market may reap Alibaba great benefits. Will that satisfy investors? Only time will tell.