JD.com Flees China's Brutal Retail Wars For Europe, As Beijing Fails To Tame Price-cutting At Home

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Two recent developments tell a single, compelling story about the immense pressures within the Chinese market. The first is e-commerce giant JD.com's JD surprising pivot toward brick-and-mortar retailing in Europe, marked by its recent deal to acquire German electronics chain operator Ceconomy. The second is the plight of companies like Autohome (ATHM.US), a car-trading platform whose fortunes are sinking in tandem with an auto sector ravaged by a debilitating price war. Both stories are symptomatic of the same disease: a hyper-competitive, deflationary home market that is forcing companies to seek refuge abroad or suffer the consequences at home.

We believe JD.com's European venture is a direct response to a domestic battlefield where it, Alibaba, Pinduoduo and others have competed so fiercely that profits have been driven into the ground. At some point, a company must look for new hunting territories where it doesn't have to engage in such foolish, money-losing behavior. This isn't JD.com's first trip overseas; an earlier foray into pure e-commerce in Southeast Asia ended in a withdrawal after clashing with established players like Alibaba.

This time, however, the strategy is different and, in our view, has a better chance of success. Instead of pure e-commerce, JD.com is pursuing a supply-chain-centric model. It has always been distinct from a pure platform like Alibaba, with a greater focus on the retailing of goods and a formidable, self-built supply chain. The company appears to be planning to leverage this strength by acquiring established European retail outlets like MediaMarkt and Saturn, which have a presence across the continent. By controlling the distribution outlets, JD.com can push goods from its vast network of Chinese manufacturers — who produce most of the world's electronics anyway — directly to European consumers, effectively eliminating the middleman and building a more robust business model.

We think there is still significant value in physical stores for showcasing electronics, allowing consumers to touch and compare products while getting advice from knowledgeable staff. We've seen firsthand the healthy foot traffic in a MediaMarkt in Belgium.

However, the success of this strategy hinges on a critical "if." This is not just about managing the flow of goods. In acquiring a company like Ceconomy, JD.com inherits thousands of European workers and must navigate local unions that are far from the compliant, party-controlled unions in China. Managing the cultural and labor dimensions of this acquisition will be a far greater challenge than logistics. If they can manage it, the strategy should work.

Why Beijing's jawboning won't end the auto sector's pain

Back in China, the picture is far less optimistic, as illustrated by the struggles of Autohome. The car-trading platform has seen its revenue contract for a fourth straight quarter, with profits also falling as its clients — China's carmakers — slash their advertising budgets to survive. The company expressed hope that government intervention might cool the vicious price war that has plagued the auto market for over a year, but we'll only believe it when we see it.

For nearly two and a half years, since the end of Covid restrictions, the Chinese government has repeatedly promised to support consumption. Yet its measures have delivered nothing close to a major boost. A subsidy program to exchange old goods for new ones created a temporary blip of activity but has largely run its course. The net result has been persistent deflation across nearly every consumer sector. Consumers have grown accustomed to the reality that goods will likely be cheaper next month, so they wait.

The government has made increasingly loud comments about ending this "unbridled competition" that destroys value and profits. But we believe its ability to control the situation is weak. Years ago, Beijing could rein in industries like steel because most producers were state-owned. Today, the key players in the auto, solar and other embattled sectors are mostly private companies. The government has little leverage; it cannot simply declare price-cutting illegal. The recent news that BYD, after being criticized for excessive production, agreed to cut production by just 1% illustrates the reluctance of private firms to bow to pressure.

The situation is complicated by local and provincial governments, which rely on these companies for jobs and taxes, even if they are losing money. This creates a gigantic beast that is not easy to tame. We see a parallel in the renewable energy sector, where polysilicon manufacturers have operated with overcapacity estimated at 50% for two years. After long discussions, a plan was finally announced to cut capacity, but no one knows where the billions to fund it will come from.

Until Beijing finds a way to mandate change, we don't expect a dramatic turnaround. Companies like Autohome are suffering not from their own missteps, but because they are tethered to an industry caught in a deflationary spiral that the government seems powerless to stop.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.

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