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Kaola Tmall E-commerce

Alibaba’s Acquisition of Netease E-commerce Site Failed

Sophia Yu

posted on August 27, 2019 4:21 amEditor : Chen Du

The rumored deal between Chinese e-commerce giant Alibaba and Kaola, Netease’ cross-border shopping site, fell through after the two parties failed to reach an agreement on price, according to multiple Chinese media. 

Alibaba was reportedly paying $2 billion in cash to acquire Kaola, according to Caixin on Thursday, August 15. Kaola was expected to be merged with Alibaba’s Tmall Global once the deal completes. Rumors also indicated that the broader deal between the two companies included the acquisition of NetEase Music and NetEase Research institute which incubated Kaola and the streaming music service.

Then news broke out that NetEase backed away, dissatisfied with Alibaba leaking to media outlets that the two parties achieved a deal, undermining NetEase’ ability to negotiate price, according to a media named Career in PEVC citing other sources.

Should the deal have happened, Tmall Global and Kaola would have consolidated into a cross-border e-commerce player with more than 50% of the market in China.

Kaola took the leading position with a 27.1% share of China’s cross-border e-commerce market in 2018, retaining the first place for seven years continuously, according to 2018-2019 China Cross-Border E-Commerce Report released by a iiMedia Research. Tmall Global followed Kaola to be the second with 24% of the market.

Kaola’s business has been slowing down since Q4 2017. The company saw its net revenues increased by 157.0% to CNY 11.6 billion ($1.8 billion) in 2017, and 64.8% to CNY 19.2 billion ($2.8 billion) in 2018. Annual net revenue only grew 20.2% in Q2 2019. The continuous decline in net revenue improvement is mainly attributed to high burn rate, the cost of acquiring new customers, policy change, and more. 

Since Kaola mainly targets females in middle class or above, who can afford expensive items from overseas, user acquisition has been hard. It cost NetEase $30 to attract one new customer.

Moreover, high inventory is another problem, and NetEase implementing a variety of promotion methods to clean up its inventory wasn’t effective enough. Additionally, promotional expenses also harmed its net revenue figure.

China’s cross-border e-commerce policy affect companies in the sector as well. In 2014, China’s General Administration of Customs announced two policies, as known as No.56 and No. 57 documents, waving some tariffs and only requiring e-commerce companies to pay personal postal articles tax, prompting Kaola, etc. to purchase a tremendous amount of items. However, the policy changed in 2016 and only a batch of whitelisted products can be imported through e-commerce platforms.

Selling to Alibaba was previously considered to be the best option for Kaola, for that Alibaba has strong competitiveness in the business, while Netease doesn’t. Top selling merchandise on the two platforms also complement each other’s.

However, since the two parties’ talks failed, who could the next possible buyer be is unclear.

NetEase Kaola declined to comment on the failed deal.