NetEase to spend about $11 billion on goods for e-commerce unit

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NetEase Inc., China’s second-largest video game publisher, is deepening a push into e-commerce with plans to increase spending on products from the U.S., Europe and Japan to sell to local consumers.

The company’s Kaola e-commerce business will buy about $11 billion of inventory over the next three years from the U.S., Europe and Japan to woo customers with everything from Dutch baby formula to Japanese cosmetics, Kaola Chief Executive Officer Zhang Lei said in an interview. The number will probably be higher after factoring in purchases from Australia and South Korea.

Best known for games, including bringing global title Overwatch to the Chinese market, Netease is bolstering growth by tapping into local demand for established international brands. Overseas health supplements and cosmetics have gained favor in recent years among a populace unnerved by a rash of safety scares. While Alibaba Group Holding Ltd. dominates e-commerce in the country by acting as a digital landlord to sellers, Kaola buys almost all its inventory directly from companies overseas, bypassing local distributors and middlemen to lower costs.

“This industry could be worth 500 billion yuan ($75 billion) by about 2021,” Kaola Chief Executive Officer Zhang Lei said in an interview. “This is a new race course — Kaola wants to be a major leader here and capture much of the market share from the existing leaders.”

Kaola is the biggest player in China’s cross-border e-commerce sector with about 24 percent of the market in the first half of 2017, according to data from iiMedia Research. That’s ahead of Alibaba’s Tmall Global with 20 percent and Vipshop Holdings Ltd.’s 16 percent.

In the next three years, Kaola will buy $3 billion of products from U.S. companies, Lei said. She singled out health supplement chain GNC Holdings Inc. among its favored suppliers. This comes on top of announcements made last week and in April that the company would spend 500 billion yen ($4.4 billion) in Japan and 3 billion euros ($3.5 billion) across Europe respectively over the same period. Further funds would be spent buying stock from Australia and South Korea, she added.

Bhavtosh Vajpayee, an analyst at Sanford C. Bernstein, is currently projecting NetEase to generate $9 billion in e-commerce sales across its platform over the next three years. Cross-border e-commerce may triple to 15 percent of the total e-commerce market within five years if it’s not curbed by new regulations, according to McKinsey & Co. The channel is projected to grow 43 percent in 2018, with goods valued at 758 billion yuan, according to McKinsey and iResearch.

E-commerce has rapidly transformed from a side business into a core part of NetEase’s future. The division that houses Kaola now accounts for 21 percent of revenue. The company doesn’t disclose specific sales for the business.

The company is opening a 300,000 square meter (74 acres) warehouse in Ningbo that is licensed to handle cross-border e-commerce.

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