Will Alibaba be able to regain the magic?

Alibaba was once synonymous with Chinese e-commerce’s success. More recently, the company has become synonymous with its woes. In 2021, it became the scowl of an official crackdown on China’s biggest tech companies, whose growing size and apparent social necessity must have spooked the Communist Party. It was fined a record $2.8 billion for monopolistic practices that the government said hurt customers and merchants. Its co-founder, Jack Ma, disappeared into self-imposed exile. Rivals like PDD, which started as a group-buying platform, and ByteDance, which owns TikTok and its Chinese sister app, Douyin, have proven better at catering to budget-conscious consumers and adapting to new trends like “social commerce,” which combines shopping and showbiz.

By the end of 2022, Alibaba’s market value, which had topped $800 billion two years earlier, had fallen below $170 billion, close to its lowest level since its blockbuster initial public offering (IPO) in 2014. To reverse the decline, the company decided last March to split into six. Five companies were spun off: a logistics company (Cainiao), a cloud computing company (Aliyun), an international e-commerce business (comprising Alibaba’s main global platform, AliExpress, and several regional subsidiaries), a digital services business (which controls Ele.me, a food delivery app) and a small media group. Alibaba kept its domestic retail business, which is centered around Taobao and Tmall, two giant marketplaces, and which account for almost 70% of the group’s revenue.

Over the past year—and especially since Daniel Zhang was replaced as CEO in June by Eddie Wu, one of Mr. Ma’s co-founders and closest deputies—that dismantling strategy has been dismantled bit by bit. First, Mr. Wu was named head of the cloud business that Mr. Zhang had taken over after the split. His IPO was canceled in November. The next month, Mr. Wu became head of Taobao. In March, he withdrew from Cainiao’s IPO, buying instead the 36% of the shares that Alibaba didn’t already own.

Mr. Ma seems to approve. In April, he sent a memo to employees, many of whom still respect him, about fixing “past mistakes.” He didn’t say what those were, but many observers saw it as a troubled breakup plan and a struggle to compete with PDD and others. It’s easy to dismiss this as Mr. Ma’s hubris: No empire builder likes to see his life’s work destroyed. But staying intact may be Alibaba’s best chance to restore its fortunes.

The split always looked like a defensive move, aimed primarily at appeasing the party rather than unlocking shareholder value. China’s rulers now seem reassured, perhaps because a weakened Alibaba no longer looks like a threat, or perhaps because they have bigger concerns, like an economic slowdown. With its target out of the way, Alibaba is once again in control of its own destiny. That destiny is tied to its ability to compete with new e-commerce competitors both at home and abroad. And that ability, in turn, could have repercussions on its logistics and cloud businesses.

Keeping Cainiao is a bet on international business. It allows Alibaba to seamlessly deliver packages to shoppers anywhere in the world—and in the Americas and 10 other markets in just five days. That’s key as Mr. Wu experiments with a new business model. Alibaba has long been primarily a collection of marketplaces connecting buyers and third-party sellers. AliExpress’s new feature, called Choice, involves the company actually buying products from sellers and shipping them to its overseas buyers.

It’s a departure from Alibaba’s original business model. It’s similar to Amazon, to Shein, the Chinese clothing company beloved by young Western fashionistas, and to some extent to the thriving U.S. PDD business Temu (whose sellers agree to strict pricing and shipping rules). It’s more capital-intensive—it requires Alibaba to keep its own inventory—but it allows for better quality control of the products it ships to consumers. That’s important in rich-world markets, where shoppers expect nothing less, but also in China, where consumers are becoming increasingly discerning. It seems to be working. The choice drove a 44% year-over-year increase in international revenue in the last three months of 2023.

While keeping Cainiao should help Alibaba compete with Temu and Shein abroad, reintegrating Aliyun is expected to provide a way to counter ByteDance and others at home. The value of goods sold on Douyin and Kuaishou, a rival video app popular in China, is soaring. TikTok is experimenting with social commerce in overseas markets. Alibaba doesn’t have a significant social media business and doesn’t plan to build one. Instead, it’s trying to retain shoppers by improving its customer experience with artificial intelligence. It says more users are trying Wenwen, Taobao’s own ChatGPT-ish AI feature that guides users through purchasing decisions.

Gross value of goods

Alibaba has a lot to play for. Temu and Shein have spent more on logistics and marketing overseas, especially in America. A big push there could cost money and unnerve anxious investors. In China, the internet economy is slowing. Ratings agency S&P Global predicts digital transactions will grow 8% to 9% annually over the next two years—faster than GDP but slower than the average of 13% over the past five years. In the last quarter of 2023, Pinduoduo’s Douyin and PDD platforms accounted for 90% of additional sales, according to Bernstein, the broker. Alibaba has lost ground. Talkative AI may not be enough to stop shoppers from looking for more economical options or for a bit of social commerce fun to brighten their days.

Mr. Wu may outline his next moves when Alibaba reports its full-year results on May 14. He may be right that the company is worth more as a whole than as a collection of separate parts. How much more will depend on factors beyond his control.

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