JD.com (JD +0.65%), the second largest e-commerce company in China, plans to launch a flagship online store in the US on Alphabet's (GOOG +0.50%) (GOOGL +0.55%) Google Shopping platform later this year. This marks JD's first major expansion into the US market, and could potentially diversify its business away from China while widening its moat against chief rival Alibaba (BABA +0.72%).
This move wasn't surprising: Google invested $550 million in JD back in June, and earlier reports indicated that JD was eyeing an expansion into the US and European markets. However, JD's stateside move could still face some tough headwinds, even with the backing of a tech giant like Google.
Image source: JD.
Why JD thinks it has a shot
The US e-commerce market is dominated by Amazon (AMZN +0.95%), but Alibaba squeezed into the market with its AliExpress platform, which lets Chinese merchants sell products directly to customers in Russia, Brazil, Spain, the United States, and other countries.
AliExpress was the sixth most-visited e-commerce marketplace in the US during the first quarter of 2018, with a slim 1.3% share of the overall market. Amazon and eBay controlled 54.1% and 23.7% of the market, respectively, based on visits. AliExpress' presence in the US seems unremarkable, but nonetheless it represents a toehold in the saturated market.
JD likely thinks that it can challenge AliExpress in the US with the same strategies it adopted against Alibaba in China -- emphasizing the authenticity of its products, and claiming that Alibaba turns a blind eye to low-quality and counterfeit products. JD also plans to fulfill orders with its own fulfillment centers and logistics network in the US, as it does in China. Alibaba fulfills most of its orders with third-party couriers.
With Google's support, JD could have a shot at gaining more customers than AliExpress, which merely relies on its own website and mobile app. That would also be a major win for Google, which has repeatedly failed to challenge Amazon in the e-commerce market.
Image source: Getty Images.
If JD carves out a niche in the US market, it would complement its partnership with Walmart, which mainly focuses on the Chinese market, and JD Worldwide, which lets Chinese customers purchase products from overseas markets. It would also complement its planned expansions into Russia, Europe, and Southeast Asia.
Why JD's plans could be derailed
JD's plans are ambitious, but Google could be a weak partner in an e-commerce push. Google Shopping isn't a traditional e-commerce platform. It merely sells product listings to merchants, and customers use the search engine to compare prices. Google expanded that ecosystem with payment processing and delivery options, but it remains largely overshadowed by Amazon.
Most US consumers start their product searches on Amazon instead of Google. 47% of US shoppers start their product searches on Amazon, according to a recent Adeptmind survey, versus 35% who searched on Google first. A large number of online shoppers are also likely go to eBay or retailers' first-party websites or apps.
Most US shoppers also aren't familiar with JD. If they search for any information about the company, stories regarding the rape allegations against CEO Richard Liu will likely pop up first, which could repel potential customers.
Lastly, tariffs on JD's Chinese products would make them more expensive. As a result, it might simply be cheaper for consumers to buy similar products through Amazon or Walmart, which can import products from other countries. Back in June, Liu told CNBC that a prolonged trade war between the US and China would be "horrible".
The bottom line: It's too early to tell
JD has been struggling with high operating expenses related to the expansion of its logistics network over the past few quarters, and an aggressive expansion into the US could exacerbate that pressure. However, JD also likely needs to make a big move to assure Google that its big investment -- which already lost about 40% of its value -- is worthwhile.
It's still too early to tell if this partnership can help JD win over US shoppers, or if it will help Google gain some ground against Amazon. For now, investors should follow this story to see if it can eventually move the needle for either company.
