China's e-commerce market still has 'ample room' for growth despite slowdown in retail sales, JPMorgan analyst says

China's e-commerce market has the potential to further expand in the next few years amid improved penetration by internet platform operators into key sectors, despite a slowdown in retail sales, according to a senior JPMorgan analyst.

"I feel relatively positive about the outlook for e-commerce growth over the next few years," Alex Yao, co-head of Asia technology, media and telecommunications research at JPMorgan, said in an interview with the South China Morning Post on Thursday. "Even if offline retail [activity] remains moderate, online [sales] could see double-digit growth just by taking market share from [bricks-and-mortar stores]."

"There is ample room for [e-commerce platform operators] to take market share if they are able to continuously improve their value proposition to stakeholders, particularly consumers," Yao said.

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That upbeat forecast reflects the better-than-expected financial results of Chinese Big Tech companies in the March quarter, despite increased market competition, weak consumer confidence and trade uncertainties brought by geopolitical tensions.

Various Chinese e-commerce apps, promoting the Singles' Day shopping festival in mainland China, seen on a smartphone screen. These include Tmall, JD.com, Pinduoduo, Taobao, Vipshop, Diantao, Douyin, Kuaishou, Suning and Taote. Photo: Shutterstock alt=Various Chinese e-commerce apps, promoting the Singles' Day shopping festival in mainland China, seen on a smartphone screen. These include Tmall, JD.com, Pinduoduo, Taobao, Vipshop, Diantao, Douyin, Kuaishou, Suning and Taote. Photo: Shutterstock>

This week, Alibaba Group Holding and Tencent Holdings both beat their quarterly earnings forecast, providing a positive indicator for domestic consumption in the world's second-largest economy, which has the biggest number of internet users.

Alibaba, owner of the Post, reported a 7 per cent year-on-year increase in revenue in the March quarter, while Tencent posted a 6 per cent growth in the same period.

Baidu and JD.com this week reported quarterly revenue gains of 1 per cent and 7 per cent, respectively.

"In general, the sector's revenue is above our expectations," Yao said. He added that there has been "a very robust improvement in online penetration across many key verticals", which means consumer and enterprise activities continue to migrate from offline to online.

"Looking into the rest of 2024, this online penetration will most likely continue to drive the sector's revenue growth," Yao said.

Express workers sort out parcels on an assembly line at an e-commerce logistics industrial estate in Lianyungang, a city in eastern Jiangsu province, on February 16, 2024. Photo: NurPhoto via Getty Images alt=Express workers sort out parcels on an assembly line at an e-commerce logistics industrial estate in Lianyungang, a city in eastern Jiangsu province, on February 16, 2024. Photo: NurPhoto via Getty Images>

China's e-commerce sector achieved a 12 per cent overall growth in the first three months of the year, according to data from JPMorgan. By comparison, total domestic retail sales grew 3.1 per cent in March and 5.5 per cent in the combined January-to-February period.

"The gap between online growth rates and total industry growth rates is widening," Yao said, as he predicted domestic e-commerce competition to remain at a high level in the next few years.

"E-commerce is probably the most intensively-competitive market in China's internet space," he said.

Domestic e-commerce pioneers Alibaba and JD.com currently face increased pressure from younger online retail services providers, including PDD Holding's Pinduoduo and ByteDance-owned Douyin.

Online retail platforms AliExpress and Temu ranked as the two fastest-growing apps in South Korea in 2023, according to market research firm WiseApp. Photos: Shutterstock alt=Online retail platforms AliExpress and Temu ranked as the two fastest-growing apps in South Korea in 2023, according to market research firm WiseApp. Photos: Shutterstock>

Weak consumer spending and greater domestic competition has prompted Chinese e-commerce firms to seek new growth opportunities overseas.

Cross-border e-commerce, according to Yao, could provide a "big structural growth opportunity" for China's e-commerce platform operators over the next three to five years.

Alibaba and PDD, for example, have been aggressively expanding their foothold in South Korea, offering prices as low as US$1 for some small gadgets on their overseas shopping platforms AliExpress and Temu, respectively.

Yao, however, cautioned that it is "critically important" for Chinese companies to manage geopolitical risks in different markets, which is one of the biggest challenges facing the internet industry as a whole.

TikTok, which had more than 500,000 merchants selling goods in the United States via its TikTok Shop operation, recently filed a lawsuit to overturn a new federal law signed by US President Joe Biden that seeks to ban the popular short video app in the country unless parent ByteDance divests its US business.

The progress of artificial intelligence development efforts in mainland China are being hampered by rigid technology trade restrictions imposed by the United States government. Image: Shutterstock alt=The progress of artificial intelligence development efforts in mainland China are being hampered by rigid technology trade restrictions imposed by the United States government. Image: Shutterstock>

Beyond e-commerce, Yao said the efforts by Chinese companies - from start-ups to Big Tech firms such as Alibaba and Baidu - in the fast-growing artificial intelligence (AI) arena ultimately depend on having the talent and semiconductors to drive forward these endeavours.

Advanced chips, such as the graphics processing units from Nvidia, are highly sought after on the mainland for data centres used in various generative AI development projects.

Yao suggested that Chinese companies with in-house chip-design capabilities and foreign semiconductor manufacturing partners "are relatively better positioned" at present.

Existing US tech trade restrictions, however, continue to make things difficult for AI development to progress more quickly on the mainland.

Alibaba chairman Joe Tsai last month said China trails the US in the global race to lead AI development by about two years.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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