As CNBC.com’s Ari Levy noted a couple of weeks before Chinese e-commerce giant Alibaba’s recent record-shattering IPO, the top six Internet companies in the world by value were about to hail from two countries: the US and China.1
Stand up and take a bow, Google, Facebook, Alibab, Tencent, Amazon, and Baidu.
However, as Levy points out, the Internet titans of each country have faced two distinct paths – US companies have had difficulties cracking the Chinese market, while Chinese companies, which haven’t been shut out of the US market, have mostly been content to diversify within their home country in terms of their product and services lineup.
“Alibaba, Tencent and Baidu are each competing for dominance within the Chinese Internet sector, diversifying beyond their core markets of e-commerce, gaming/messaging and search, respectively,” wrote analyst James Cordwell in a note cited by Levy.
Levy notes that China’s Internet surge dates back about 15 years, when the current behemoths were getting off the ground.
Alibaba, Tencent and Baidu have taken advantage of explosive economic expansion in China, where the number of Internet users now tops 632 milllion, according to the China Internet Network Information Center.
What’s up next? Why not a bid for global domination? As Michael Moritz, chairman of Sequoia Capital, an investor in Alibaba, recently told the Wall Street Journal, “People in the US and Europe are probably in a state of suspended denial about the ambition of the four or five leading Chinese companies.”2
Moritz also preaches the two-country Internet arms war theme. Alibaba’s IPO, he says, “raises all sorts of incredibly interesting questions for Internet companies that aren’t headquartered in China. Over the next decade, what have effectively been separate theaters of activity — China and the West — will become one global battlefield.”
While Moritz believes that the advantage lies with Chinese companies being able to compete better in the US than vice-versa, the US is not without its strengths.
For one thing, as Levy wrote, Android and Apple iOS devices are battling for global market share as Web usage shifts to mobile, and leading Chinese companies need those operating systems for distribution. In its latest quarter, Alibaba said one-third of its merchandise volume was accounted for by mobile.
And in its IPO prospectus, Alibaba declared that winning in mobile is dependent upon “our ability to successfully deploy apps on popular mobile operating systems that we do not control, such as iOS and Android.”
Levy said that research firm EMarketer expects that global smartphone use will grow to 5.1 billion people by 2017, or almost 70% of the global population.
The two-country race is definitely on, and if you’re inclined to believe China’s internet companies stand to benefit in the future, you may want to consider the China Internet motif as an investment alternative worth exploring further. The motif has risen 6.9% in the past three months. The S&P 500 is up 1.35% in that time frame. Over one year, the motif has gained 26.1%; the S&P 500 has risen 17.17%.
1Ari Lvey, “Alibaba IPO propels China Web market across the globe,” cnbc.com, Sept. 11, 2014, http://www.cnbc.com/id/101976709#., accessed Sept. 24, 2014.
2Evelyn M. Rusli, “Sequoia’s Moritz: Alibab IPO Signals New Internet Era,” WSJ.com, Sept. 17, 2014.