How to Understand the Chinese E-Commerce Sector

China is the world's biggest online retail market, and investors looking for exposure to Chinese e-commerce have a wide range of options to choose from, big and small.

In this Motley Fool "Backstage Pass" segment, recorded on Aug. 23, Fool contributors Brian Withers and Jeremy Bowman break down the differences between three of the most popular Chinese e-commerce stocks: Alibaba (BABA 0.25%), JD.com (JD 4.58%), and Baozun (BZUN 5.41%). Though all three offer exposure to e-commerce in China, they do so in quite different ways.

Brian Withers: Let's move on from Tencent and talk about the e-commerce space. There's a number of e-commerce players in China, and we're going to talk about three of them. We're going to talk about JD.com, ticker JD; Alibaba, ticker BABA; and Baozun, ticker BZUN. You put them in an e-commerce basket, but I look at them as very, very different companies.

Jeremy Bowman: I think each one does something different. Alibaba is almost like a conglomerate. I think, along with Tencent, they're the biggest Chinese tech companies, but they're best known as an e-commerce company. You have Tmall, which is like a high-end shopping mall where you're going to find Nike products or luxury goods. They're fully authenticated by the brand, that sort of thing. They have the Taobao Marketplace, which is more of a peer-to-peer marketplace like you might see with eBay. Then they have many businesses outside of China, with Lazada in Southeast Asia and AliExpress, which you can shop here in the U.S. They also have a cloud business and their own kind of YouTube thing called Youku. So there are a lot of things, predominantly e-commerce.

Withers: They are primarily a third-party e-commerce company. When we think of third-party, we think of eBay as people selling to other people, and Alibaba facilitates that in their Tmall marketplace but doesn't necessarily touch the goods. Are they getting into first-party business at all?

Bowman: I don't believe so. They've been a marketplace, so thanks for making that point there. That's an important distinction between them and JD.com. But yeah, they've been a marketplace since the early days of the internet and they've had a lot of success doing that. I don't believe they have any plans to do first-party, though they do own their logistics subsidiary as well, called Cainiao.

Withers: That's through an acquisition, right?

Bowman: Yeah. That was one of the acquisitions they've made in the last few years.

Withers: I vaguely remember the Alibaba founding story. Jack Ma searched on Google for Chinese goods in China and he got nothing [laughs], nothing came up. So he's like, "This isn't right." So the idea for Alibaba was formed. You mentioned JD.com. They tag themselves as the largest retailer in China. Whereas Alibaba might be the largest marketplace for sales, JD is the largest first-party. Think of them as an online Walmart in China. They've come up through the business of putting together a massive amount of infrastructure across the country. I think they have over 1,200 warehouses now and over 200,000 of last-mile delivery-piece people. Not only do they buy the inventory, put it on their platforms to sell; they also manage all of the fulfillment themselves and the last-mile delivery. They have a significant hand in what gets put on the marketplace, as well as how it gets delivered.

Bowman: I think of JD.com in part as really a cutting-edge logistics company, and they're experimenting with delivery drones. I think they have a warehouse in Shanghai that, only, it's pretty much fully automated, with just four employees. I've seen they're trying out autonomous delivery robots. They are doing a lot of cool things with that stuff, I think.

Withers: You and I geek out on their technology. I remember you wrote an article a year or so ago that talked about how JD was ahead of Tesla in a number of avenues on self-driving and other technologies.

Bowman: Yeah. [laughs] Maybe bending it in some ways, [laughs] but they did roll it out. I think last I saw there were testing it in, I believe, Chengdu but --

Withers: Yes, yeah.

Bowman: I don't know if you've seen any updates about that, but it is live, so that's pretty exciting.

Withers: Their delivery vehicles have tiny little things, they have different sizes, but they can run on sidewalks. They're about that size.

The third e-commerce company is Baozun, and its ticker symbol BZUN. Early on, when it was first recommended across The Motley Fool, it was called the Shopify of China, and I bristle with that explanation right now, because that's not really what they do. They're much more --

Bowman: Performance hasn't been very Shopify. [laughs]

Withers: Well, that's definitely [laughs] true. Certainly not the stock performance, but I think of them as a service provider where a Western brand, somebody like Nestle, wants to get into the Chinese market. They don't have a footprint there, they're not sure how to get there, and Baozun walks them through the whole process. We'll take pallets of delivery from Nestle and then put it in the right places around the country, help the market potentially, and ultimately fulfill their goods and help them collect the money. Really, they focus on capturing these brand partners, and that's their growth. That's their niche market that they have.

Bowman: Yeah, I think also it's important to distinguish them from Shopify, which is a software company, whereas Baozun is really handling the logistics, warehousing, marketing, IT, government relations things for these multinational companies to do business in China.

Withers: Yeah. What's interesting is I just took a quick look at the market caps for these three before the show, and Baozun is under $2 billion, JD.com is right at around $99 billion, $100 billion right now, and Alibaba is around $400 billion. Baozun was $1.8 billion, JD's about $100 billion, and Alibaba is about $400 billion. Very different market caps, and although JD and Alibaba's revenue are actually pretty close, but you have to remember that JD's revenue comes from selling goods, and so if they sell a $100 item, they're getting $100 plus their service fee on top, and if Alibaba sells a $100 item, they're getting whatever their take rate. It is maybe 10% of that as a service fee. So very different. Alibaba is moving more goods overall, but JD actually purchased this inventory, and so that's a little bit of the difference between those two.

Bowman: Yeah. I think that's why JD can make that claim about being China's biggest --

Withers: Biggest retailer.