DFTZ: what about the losers?

A lot of hype and euphoria regarding Alibaba, Jack Ma and the DFTZ (Digital Free Trade Zone), stories about jobs been created, opportunities for Malaysian SMEs etc.

But not much attention to who the losers will be, surely there will be some.

A good article in The Star: "DFTZ - boom or bane for our local SMEs?", one snippet (emphasis mine):


Losers from DFTZ?

Depending on the manufactured products brought in from China, our importers, wholesalers, retailers, manufacturers and e-commerce SME’s will be badly disrupted due to lower cost products and tax free, GST free imports. It definitely will be an uneven playing field for our local SME’s. Our authorities should note that we have 200,000 retail outlets in Malaysia and the retail industry hires 1.2 million workers. Even if the DFTZ model disrupts 30% of our commerce retail business, we will lose 360,000 jobs and close down 60,000 outlets. And that is not counting the disrupted manufacturing industry.

Customs Revenue. Assuming 30% of the US$65bil DFTZ sales is imported into Malaysia. Collection of GST alone will be lower by US$1.2bil or RM5bil a year. Not counting those items that still attract import duties.

Our National GDP will actually shrink as the whole market will trade on lower prices.


I agree with the above. There will be lots of winners and lots of losers, very hard to quantify at the moment how the results will be in say 5 or 10 years down the road.

I also agree with the writer of the above article: "Alibaba is a sure winner with this unparalleled tax free advantage".

What should be of some concern for Malaysians is that the big e-commerce players (Alibaba, Amazon, Lazada, Qoo10 etc.) are all foreign owned. How will the future look like, taking into consideration network effects and deep pockets, which might crowd out the smaller local players?

Alibaba investigated over accounting practices (2)

In addition to yesterdays posting about Alibaba, I like to point to a posting on "China Accounting Blog" (which is anyhow always a good source of information for all accounting matters related to China): "BABA v the SEC".

There are three issues at hand, all described by Paul Gillis:


The first relates to consolidation policies and practices (including accounting for Cainiao Network as an equity method investee).  

The second issue is related party transactions. BABA certainly has plenty of them and they have been a major concern for shareholders, especially since Alipay was taken out of the BABA structure.

The third issue relates to the reporting of operating data from singles day (November 11, the biggest online commerce day of the year in China). 


Regarding the third issue I also refer to an old posting.

Alibaba investigated over accounting practices

From Bloomberg: "Alibaba Facing SEC Investigation Over Accounting Practices"

Some snippets:


Alibaba Group Holding Ltd. fell the most in four months after the e-commerce giant said it’s being investigated by the U.S. Securities and Exchange Commission over its accounting practices and whether they violate federal laws.

The regulator is looking at data reported from the company’s Singles’ Day promotion, Alibaba’s biggest shopping day, and how Alibaba consolidates results from affiliated companies, including logistics partner Cainiao Network, the Hangzhou, China-based company said in its annual report. Alibaba said it’s providing documents and cooperating with the probe, which is also examining related-party transactions.


Not a new issue, I blogged about this issue before.

Many brokers are reiterating that "the auditor is PWC", but what they're missing (or conveniently ignoring) that its not actually PWC who's auditing them, but a local Mainland Chinese affiliate ...

Alibaba: red flags raised by Barron's (2)

Alibaba has immediately responded in a quite detailed way to the issues raised.

Silverlake Axis (I blogged about the issue here) might want to take note. Their response "the Board has decided not to dignify the Report by preparing its own point-by-point rebuttal" is most disappointing, especially towards their loyal minority investors.

Alibaba: red flags raised by Barron's

From BusinessInsider regarding the cover story for Barron's by Jonathan Laing:


... the bulk of Laing's screed raises red flags about corporate governance, conflicts of interest, counterfeit goods, and various other questionable business practices.


Particularly disturbing was the suggestion that Ma and his team might actually be making up some numbers, including its very flashy revenue growth stats, which Laing notes are considerably larger than other large tech growth companies like Google, Amazon.com, and Facebook.


... Anne Stevenson-Yang, founder of Chinese research firm JCapital Research, has closely tracked the mainland e-commerce industry in general and Alibaba specifically. She finds the growth numbers puzzling. She observes that “Alibaba’s financial reports have broken free of verifiable reality and have reached an escape velocity that doesn’t comport with Chinese government figures of overall retail sales, consumer spending, or online commerce.” Consider this: Alibaba claims to have 367 million users — about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba claims its average shopper spends 26% more on its sites each year than the average U.S. online shopper spends on all sites. Does that make any sense, given American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem?


... That $1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $2,260. It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining ...




The above allegations appear to be very serious, the Forbes report (behind paywall) is called "comprehensive and detailed enough".


Alibaba needs to come quickly with a comprehensive answer to all the issues raised.

Millions of empty packets transported throughout China

After four years managing a private delivery company in the Chinese city of Ningbo, Chen Qian has acquired a new skill: he can tell which packets are fake even before he picks them up. Some are hollow boxes, some rattle with a piece of candy or a keychain. Recently, he says, merchants sending fake deliveries have started putting toilet paper rolls to give some heft.

Mr Chen says these account for about a quarter of the 4,000 packages his company handles every day. The phenomenon is widespread throughout China; a consequence of the country’s booming e-commerce industry and, specifically, a practice known as shuaxiaoliang, or literally – “sales brushing”. Online sellers are recruiting their friends, relatives and even professional fraudsters to make fake orders because shipping more goods would give them better placement – and therefore a better chance to garner more real sales – on websites such as Alibaba-owned Taobao.

“We’ve only started brushing recently,” said one Taobao shop owner in Hangzhou which sells hats and traditional silk scarves, who asked not to be identified. “There is no other choice for us. A lot of the other shops have been doing this for years, and we realised that no matter how well we did in sales, we could not compete with those who brushed.


A rather weird and wasteful practice, as described by the Financial Times.

Every system that allows itself to be gamed, will be gamed, if some people gain from that. Everyone would be better of if nobody would do this anymore, but how to coordinate this?

The above delivery company in Ningbo handles about 1.5 million packets of which about 400,000 are fake. But that is just one delivery company in one city, the total amount of empty packages per year must be huge, at least in the millions, probably more.

Jack Ma, Alibaba and the "Crocodile in the Yangtze" (2)

I wrote before about "Crocodile in the Yangtze".

Porter Erisman, the maker of the movie, commented on this blog:


Ummmm…guys…would prefer you actually buy my film on Vimeo! Not only is it legal, but it's HD! I'm glad you enjoyed the film though - thanks for the compliments! Porter Erisman, Director of Crocodile in the Yangtze.

Here's the link :-)

https://vimeo.com/ondemand/crocodileintheyangtze


Official release date is May 28, 2014. The movie has won many awards, I highly recommend it.

Jack Ma, Alibaba and the "Crocodile in the Yangtze"

I am a great admirer of Jack Ma and Alibaba, and their entrepreneurial story. Here is an interesting article about Jack Ma: "Billionaire Jack Ma teaches you how to be successful in life and business"

I absolutely love the movie "Crocodile in the Yangtze", which is a bit of a cult movie in the start-up scene.

The movie is made by Porter Erisman, one of the early employees of Alibaba. More information about the movie can be found here. 
Classic is the scene when Jack speaks to his first group of employees and let's someone film it, knowing it is an important moment in time. The hallmark of someone who is very assured of his future success.

I also like the strategy that Jack takes to win the battle against eBay by launching TaoBao, more about this can be found here.

The movie can be found on YouTube, the title is in Chinese, but the movie is in English (the quality is unfortunately not that great):

The link has been removed, in the comments a new link can be found. However, that link might also disappear after some time, in that case the reader has to do some own searches.

 

Alibaba and AirAsia, two tantrums (2)

Regarding Alibaba, after calling of the IPO in Hong Kong, most headlines were pretty negative, like this article of Reuters:

"Rattled by Alibaba loss, Hong Kong bankers seek market reforms".

Some snippets:

"Lauded by many for its principled stance in rejecting Alibaba Group's plans to list shares, the Hong Kong Stock Exchange has left the city's financial community fuming at a lost opportunity, and re-ignited calls for market reforms."

"An inflexible Hong Kong's loss is likely to be New York's gain - as the NYSE Euronext and the Nasdaq OMX Group battle to attract what is expected to be one of the world's largest stock offerings in the last five years."

"This has left Hong Kong's banking community ruing the one that got away, and blaming arcane regulations for missing out on a fast growing Chinese Internet stock - and an IPO fee bonanza."


In the last three words we can find the real reason why those bankers wanted to see the IPO in Hong Kong: money, money and money.


Regarding AirAsia, one kind reader send me the mentioned research report by Paul Dewberry, issued on August 22, 2013 when AirAsia's share price was still RM 2.98 (it is now RM 2.62). He has an "underperform" rating on the company, and a price target of RM 2.30.

The report makes a solid impression, apart from pointing out the lower profits and the increased competition from Malindo, it also mentioned a negative reinstatement of RM 1.1 Billion.

Readers of this blog will most likely know that I was never a fan of AirAsia's aggressive accounting (like the deferred tax issue) nor the way of dealing with its many subsidiaries and sister companies (implying a huge amount of Related Party Transactions).

The most important paragraphs from Dewberry's report:

 

 

The share price of AirAsia has been under some pressure lately:

 

 



 

 

Alibaba and AirAsia, two tantrums

Alibaba is going for an IPO, the question is: where? The most logical choice is Hong Kong or NASDAQ.

There is a lot at stake, the size of the IPO could be huge, the company could be valued at USD 75 Billion, about RM 242,000,000,000.00.

Some background information about the company can be found here:

"Alibaba has established itself as a behemoth in the business of buying and selling products online. The company is itself made up of several businesses, including Alibaba.com, a Web site for business-to-business sales; Taobao Marketplace, a giant eBay-like platform; and Alipay, an online payment service."

Alibaba wanted a dual class of stock, which is not possible on the HKEX:

"The Internet giant and its executive chairman, Jack Ma, have sought to keep control of the company firmly with its founders, following in the footsteps of Facebook and Google. But the rules of the Hong Kong Stock Exchange prohibit dual classes of stock and other types of corporate structures that let minority shareholders preserve control of companies."

Negotiations with the Hong Kong Stock Exchange were on-going, and who could better comment on this then Hong Kongs "Mr Corporate Governance", David Webb.

Here is an interview with Webb, done by Eric Jackson from Forbes.

David wrote three articles about this matter on his website:

Alibaba's spotlight on HK regulation
We had a dream too!
Aligaga


The last article is in response to a "corporate tantrum" thrown by Joe Tsai, which can be found here.

Webb's response to that:

"Alibaba, you see, has come up with an entirely new and better way to govern companies, and if HK or the USA does not embrace it then we will all be left behind. Alibaba "never made any proposal" that involved a second-class shareholding structure, he says. So presumably, they won't be proposing that in the USA either. They want US regulators or investors to get their heads around something that even America has never seen before, where a self-selecting perpetual pool of managers gets to nominate more than half the board of directors.

You have to marvel at the breathtaking arrogance and hubris that comes from being a successful e-commerce firm in a sheltered market where foreigners cannot directly own telecommunications companies or payment systems. Mr Tsai tells the world that this "innovation" in corporate governance is to "protect the long-term interests of... all shareholders". This, of course, is because management knows what is best for shareholders, and shareholders don't. If this has a familiar ring to it, then the back of your mind is making the analogy with the Party and the people of China.

Then he gets to the nub of the 28-member Politburo (sorry, Partnership) proposal: "Partners are not just managers but they are owners of the business", he says. Um no, Joe. The shareholders are the owners of the business. Get it right. You are either a partnership where the partners provide all the equity, or a company, where the shareholders do. You can't be both."


Luckily, prudence has prevailed, the HKEX did stuck to its guns, despite the inherent conflict of interest (commercially the IPO would be great for the HKEX). Once you cross the line, there is no going back anymore, more and more companies would have asked for exceptions to the rules.


Regarding corporate tantrums, does Malaysia have any? Yes, they do, and, no surprises here, Tony Fernandes is involved (hat tip to the tipster who commented on this):

Is the above tweet rather childish? Yes, I think so. But I do appreciate the fighting spirit and the heart that Tony puts into it. Not sticking to much formality, which one would expect on that corporate level.

I can't find the exact research note by Paul Dewberry, but this comes probably close to it:


Bank of America Merill Lynch’s analyst Paul Dewberry also had concerns on AirAsia’s ability to manage and grow its JVs in a note written in March. “It is noted that Philippines is still making losses and its proposed joint venture in India is likely to consume significant time,” Dewberry wrote.

“While Indonesia had a good Q4 results aided by seasonality, Thai AirAsia remains the star performer among associates due to a lack of domestic competition.” More recently, aviation consultancy firm Centre for Asia Pacific Aviation said on August 27 that intense competition in south-east Asia has already begun to hurt AirAsia’s affiliates in the region.

“While AirAsia still reaps the benefits of first-mover advantage in several of its markets and continues to outperform nearly all of its peers, competition is intensifying,” CAPA wrote in a research report on AirAsia. “Indonesia AirAsia reported both a yield and operating profit improvement for 2Q2013, but it remains by far the least profitable of the group’s original three affiliates. Meanwhile, the group’s newest surviving affiliate, Philippines AirAsia has struggled almost as much as the failed affiliate AirAsia Japan. Even in Thai AirAsia, profits increased in second quarter of 2013, but there was a 3% drop in yields.”

“While AirAsia is well positioned and has the cash to fight back, inevitably profits and yields will come under pressure as competition continues to intensify,” the CAPA report added.