Alibaba expands in Russia through the AliExpress Russia JV, creating unprecedented opportunities for both the Chinese firms and Russian digital transformation. But behind the joint venture, there is much more than just a commercial partnership
On June 5, 2019, the investment plan that involves the Russian Direct Investment Fund (RDIF) and aims to foster the Dragon’s expansion in Russia has been finalized.
It is a strategic agreement between the Chinese giant Alibaba and a team formed by the sovereign wealth fund of Moscow, the provider Mail.ru, and the telephone operator MegaFon. A multi-million dollar joint venture, which will focus on pushing a market that was worth $14 billion in 2017, creating unprecedented opportunities for both the Chinese firms and Russian e-commerce environment.
The Framework Agreement signed at the Eastern Economic Forum in September 2018 created a Russian subsidiary of the AliExpress retail site. Today, with support from the RDIF, the three companies are forming a new operation called AliExpress Russia Joint Venture (JV), which includes business assets and investments from all the three in order to join forces on building e-commerce services to better serve consumers and businesses in Russia and neighboring countries.
The joint effort – controlled by the three Russian players at 52% and by Alibaba at 48% – is estimated to have a value in the region of $2 billion. “It is a significant step for the digital transformation of our economy,” commented Alisher Usmanov, who controls both MegaFon and Mail.ru, in addition to VK, the “Russian Facebook”.
© 123rf. Alibaba is turning AliExpress Russia into a joint venture with the RDIF, MegaFon, and Mail.ru to integrate e-commerce platforms and launch a leading social commerce JV in Russia and the CIS.
On June 5, the companies agreed that the joint venture will promote its services on Mail.ru Group’s platforms through exclusive product integration and marketing solutions. Currently, Mail.ru counts 100 million internet users across its social media, messaging, email and online gaming properties, with 90% of all internet users in Russia using at least one of its properties each month.
Therefore, in addition to blending social media and e-commerce, the joint venture will work to support Russia’s consumption upgrade by delivering a greater selection of high-quality products to the market. For Russian small and medium-sized enterprises (SMEs), it’s a chance to benefit from a newly connected ecosystem in the domestic market while accessing over 600 million consumers using Alibaba’s platforms, including in China, Southeast Asia, Turkey, Europe, and India.
The joint venture also plans to participate in the acceleration of Russia’s digital economy by leveraging the parties’ respective strengths in e-commerce, social and digital media, logistics and the local market and help build the future infrastructure of commerce in Russia and globally.
The final deal has been signed during Xi Jinping’s three-day visit to Russia, while leaders from countries including the United States, Britain, and France were meeting in England, on the 75th anniversary of the D-Day landings, the Allied invasion of Normandy during World War II.
During their own summit, China and Russia have defined and cemented themselves as allies and true friends in response to the tensions with the United States. But the friendship between the two countries is also and above all an economic partnership, with commercial trade growing by 25% and reaching a record $108 billion in 2018.
If the D-Day ceremonies celebrate the past glories of one historical alliance, Putin and Xi may be hoping to emphasize a new one. In fact, according to the Kremlin, not only the two have met 29 times since 2013 but Russia is also the country that President Xi has visited the most times.
The Sino-Russian “counter-summit” and the AliExpress Russia JV have taken place at a time when e-commerce is boomingin Russia. Although it represented 4.8% of total retail sales in 2018, according to a study by the Gaidar Institute published in March, the figure is expected to double by 2024, reaching 8.5% of Russia’s total retail sales, meaning $53 billion of total turnover.
Indeed, although Russian e-commerce is not fully developed yet compared to neighboring markets, the Russian Federation is one of the markets with the highest e-commerce development potential. According to Internet World Stat, with over 110 million internet users, Russia ranks 7th in the list of countries with the highest number of internet users globally, therefore, representing one of the most significant digital markets.
Moreover, for what concerns the rising popularity of cross-border e-commerce, it is mainly driven by purchases from China, which represent 90% of the cross-border transaction. In 2017, the cross-border turnover of e-commerce in Russia reached 400 billion rubles (over $5.6 billion), 25% more than the previous year. In economic terms, 52% of cross-border trade comes from China, while Europe and the US only weight 23% and 12% respectively.
© Pixabay. Outside the Chinese exception, the Russian e-commerce sector is actually reluctant to the settlement of foreign giants.
In particular, the growing use of mobile devices is what will lead the e-commerce improvement in Russia. Although Russian users still prefer to finalize purchases via computer accounting about 63% of online sales, young adults under the age of 25 have indicated smartphones as their favorite tool to shop online. Data Insight says that in 2017, 13.4% of customers made purchases from smartphones via the store’s website, and 12.3% made orders via the mobile app. These figures, however, are expected to double very soon.
Therefore, although MegaFon is not contributing with an e-commerce business into the joint venture like Mail.ru and Alibaba are, the fact that online commerce is now moving to mobile creates some interesting possibilities to make the telephone operator strategically useful in the longer term.
For its part, instead, building a strong digital link between Asia and Europe for e-commerce is the main strategy of Alibaba, which is pursuing its expansion plan in Russia within the context of the Digital Silk Road launched by the Chinese government.
Nine months after the first agreement, AliExpress is expanding its sales platform to offer Russian SMEs access to their sales and delivery infrastructures. This move will allow SMEs in less central regions, often burdened by prohibitive logistics costs, to compete with companies located in Moscow and St. Petersburg, enjoying greater access to the domestic market and to the international one as well.
According to Daniel Zhang, CEO of Alibaba Group, “Alibaba’s mission is to make it easy to do business anywhere. This JV is an important part of Alibaba’s international expansion and step toward our goal of supporting 10 million small businesses reach profitability and serving 2 billion consumers around the world.”
But beyond the joint venture, Alibaba is also strengthening ties with other digital operators in the country as revealed by the fact that Jack Ma has intensified his business trips to Russia in recent months. The Russian market represents a strategic market for China’s e-commerce giant, which is not only launching a bridge to Europe but it is also landing on a potentially boundless market, where the big Western players have not yet laid their foundations.
But most importantly, Russia and China find themselves increasingly at odds with the United States. Moscow is facing down a barrage of sanctions from Washington, while Beijing is in the midst of an economically damaging trade war.
Therefore, in a context where the commercial war with the United States contributes to slowing down the Chinese economy and the Russian economy is still affected by sanctions, bilateral cooperation between Moscow and Beijing seems to take on increasing importance, both at the regional and global level.
The AliExpress Russia JV thus represents more than just a commercial partnership. It is bringing the two countries closer especially in the face of Washington. But it is also marking a milestone in Russia’s digital transformation and e-commerce boom while the Dragon expands its Digital Silk Route by leveraging Alibaba’s areas of influence. An environment from which both the Chinese and the Russian firms will largely benefit.