JD.com Is About to Pass Baidu in Market Value — 10 Charts on the Rise and Fall of China's Internet Companies

The term "BAT" has finally stopped working

Liu Qiangdong came within a hair of catching Robin Li — in market value.

On Monday, two days ago, JD.com's shares hit an all-time high of $44.18 in U.S. trading, and its market cap came within $700 million of Baidu's. Another 1% gain for Liu Qiangdong's company, or another 1% drop for Robin Li's, and China's third-largest internet company would have changed hands.

A few hours later, though, JD.com had not passed Baidu. Then, in the U.S. session that closed this morning, its shares fell 5.55%, widening the market-cap gap to $3.2 billion. The two will keep grappling for a while yet.

This draws so much attention because people have been saying for a long time that Baidu is dropping out of "BAT," the trio that controls China's internet. Being passed by JD.com in market value would be a symbolic moment.

Even though JD.com has slipped back, the way the two companies' market caps have moved over the past year suggests that JD.com passing Baidu is only a matter of time.

JD.com's Ten-Year Story Finally Came True, While Baidu Has Changed Stories Several Times Lately

On who makes more money, JD.com is still a long way behind Baidu. Baidu has posted a profit every quarter since it went public; JD.com turned its first operating profit only in the first quarter of this year. That quarter Baidu made $291 million, JD.com just $122 million — less than half.

But what a stock market values is the market's judgment of a company's future.

Put more directly: whether the company's story convinces the market.

In 2007, JD.com was in its fourth year of e-commerce. It raised $10 million from Capital Today, and as it widened its range from electronics to general merchandise, it began building its own delivery network, willing to give up profit to do so. At the time JD.com had about 100,000 registered users, and roughly 10,000 people shopped there each month.

People often compare JD.com to Amazon — not only because the business models are close, but because founder Liu Qiangdong explains the company's decisions exactly the way Jeff Bezos does. In Amazon's early days, for instance, Bezos said the company should not chase profit but pour large sums into building its own logistics. Liu Qiangdong said much the same in 2008.

The steady cash flow and capital turnover Amazon likes to talk about are also a story JD.com likes to tell.

In retail, JD.com trades heavy spending for scale. When JD.com sells an item, the customer pays at once, but JD.com settles with its suppliers only once every three to six months.

During those months it can use the money in hand to buy more stock. As long as JD.com's sales keep rising, the losses won't sink the company.

The story is not an easy one to tell. Amazon's stock collapsed after the internet bubble burst in 2000; it then spent several quarters cutting back spending, moved into the black, and finally proved that big investment can buy big returns.

The turn JD.com has reached today looks much like Amazon's back then. Over the past few years JD.com has raised the bar for free delivery and spun off its money-losing finance business, and in the first quarter of this year it finally turned a profit — proof that its spending can be converted into profit.

A story ten years in the telling came true.

Baidu is in worse shape. After the medical-advertising scandal broke in 2016 and the management turmoil that followed, Baidu's revenue growth nearly stalled and its profit fell to about 30% of the 2015 level.

From the start Baidu was China's Google: it controlled search, became the gateway to Chinese internet traffic, and sold ads on the back of it.

That model could not be carried onto the phone, because search matters far less there than on the PC. Most of the time people open an app directly — WeChat above all.

Google has a similar problem. But unlike Baidu, Google has several mobile services used every day by more than a billion people each: Gmail, Android, YouTube. Google also depends little on medical advertising, and its ad revenue is still growing.

Baidu has none of that. Once it could no longer tell a search story, it switched in 2014 to O2O (online-to-offline services).

Wall Street was not impressed after Robin Li announced Baidu would spend 20 billion yuan on O2O. He even warned the U.S. press that Baidu might delist: "If one day we find there is no hope left of the U.S. market recognizing Baidu's value, while the domestic market truly understands Baidu's business, Baidu may return to the A-share market."

That confidence did not last long. iQiyi's privatization failed, and O2O stopped being mentioned. On this year's first-quarter earnings call Robin Li said Baidu would cut subsidies and marketing spending at Baidu Nuomi and Baidu Waimai, and that the company's future was in artificial intelligence.

Taking back what you said is not a good way to make the market believe your story.

When AI spending will turn into returns, and whether it will arrive in time to halt the slide in advertising, are both open questions.

But BAT Won't Become JAT

JD.com's story is still not quite today's Amazon story.

Amazon now has a near-monopoly on e-commerce outside China. Half of American users pay $99 a year for its membership, and the Indian e-commerce company backed by Alibaba and SoftBank was beaten so badly it had to merge. Now Amazon has bought Whole Foods for $13.7 billion, going straight at brick-and-mortar supermarkets.

Beyond e-commerce, Amazon's cloud business has pulled away from Microsoft, IBM and Google, which once had the advantage; its market share is twice the second-place company's. In the new field of artificial intelligence, Google and Apple are both copying the Echo smart speaker Amazon launched in 2014.

This company has monopolized one market and successfully entered two new ones. That has lifted its market cap to fourth in the world.

JD.com's e-commerce business, meanwhile, still has to face Taobao and Tmall.

JD.com's sales revenue rises every year, but look closely at the numbers: from the start of 2014 to the end of 2016, the cost JD.com paid on each order went up while the revenue it took from each order went down.

Since Alibaba started selling through content, the time each user spends browsing and the money each user spends have both risen sharply.

While Taobao and Tmall have begun talking about how many people buy something every month, JD.com still reports only how many people buy something there every year.

That says something in itself: companies usually disclose the numbers that look good.

So even if JD.com passes Baidu, BAT won't become JAT.

The companies that monopolize the Chinese-language internet are Tencent and Alibaba.

Come to think of it, we've grown used to calling them BAT. But before 2012 the term was rare.

In 2010, Sohu CEO Charles Zhang said at an event in Changsha, "China's internet has reached the moment of decisive battle. This is a war between giants."

In his eyes there were seven giants: Sina, Sohu, NetEase, Tencent, Baidu, Alibaba and Shanda. "You could call them the Seven Warring States. But there probably won't be a case of Qin swallowing the other six — in the end the world will likely be split among several of them," Zhang said.

But Baidu, Alibaba and Tencent were already the biggest in China.

Baidu alone, at $15 billion, was worth more than Sohu, NetEase and Sina — China's three big portals — combined.

Alibaba's B2B business was listed separately in Hong Kong by 2010, worth about $30 billion; Tencent, then busy suing Qihoo 360, was worth more still at $40 billion, making it China's most valuable internet company.

In 2012 Alibaba delisted from the Hong Kong exchange and spun off Alipay, starting preparations to take Alibaba Group public as a whole. The press had also begun calling the three companies BAT.

In September 2014 Alibaba raised $25 billion in what was then the world's largest IPO, beating the $22.1 billion U.S.-listing fundraising record Agricultural Bank of China had set in 2010.

Two months later Alibaba was worth $280 billion, second only to Google among the world's internet companies — at one point larger than Amazon and eBay combined.

Tencent was worth about $150 billion in 2014, having been overtaken by Alibaba. But as WeChat came to cover the whole Chinese-language internet, with 438 million people using it every month, Tencent's ad revenue rose sharply too: in 2014 Tencent took in more than 80 billion yuan in total revenue, more than Alibaba.

In the Global Market-Cap Rankings, Alibaba and Tencent Are Already in the Top Ten

Market-cap rankings show which industry's companies carry the most weight.

2002

Tech companies had not yet recovered from the bubble bursting in 2000. Among the world's 20 most valuable companies, only Microsoft, IBM and Intel were tech companies, and they mostly sold to businesses. Companies from older industries — finance, manufacturing, oil, retail — filled most of the list.

2007

On the eve of the subprime crisis, the S&P 500 — built from the 500 best-performing American companies — had risen 30% since 2004. Finance and oil were the best-performing industries, and Berkshire Hathaway, AIG and JPMorgan Chase all squeezed into the top 20.

AIG in particular had a hand in nearly every link of the American home-mortgage market.

Oil prices also kept rising sharply without any major war or political event, coming close to $100 a barrel in November 2007. Five oil companies made the list that year, and together they accounted for 34% of the top 20's market value; ExxonMobil, Total and Shell ranked first, second and fourth.

The overheated market cooled fast afterward. Once the subprime crisis hit, AIG fell from a 2006 peak of $190 billion to less than $2 billion. Oil companies fared better: ExxonMobil's decline roughly matched the S&P 500's.

2012

On the eve of another global financial crisis, Apple — selling tens of millions of iPhones a quarter as Tim Cook pushed the phone onto more carriers — became the world's most valuable company. PetroChina and China Mobile ranked third and fourth. Google, whose annual revenue had passed $50 billion, ranked fifth.

Facebook went public around then, its share price topping $45 on the first day and its market value passing $100 billion. But investors soon doubted Facebook could make money, and the stock fell to $17. Amazon at this point was still worth less than half of Walmart.

The boom brought by smartphones still showed up only in the two companies that controlled the platforms: Apple and Google.

2017

With political and economic upheaval everywhere, more money has flowed into the stock market, especially into the largest tech companies.

American companies have always held most of the top 20 spots. After Trump took office, 16 of the top 20 in 2017 were American.

Apple, Alphabet (Google), Microsoft, Amazon and Facebook are the five most valuable companies today, and all five are tech companies. There is no longer an oil company anywhere in the top 20. Apart from Microsoft, the other four sell mainly to consumers directly.

Alibaba and Tencent, listed on the New York Stock Exchange and in Hong Kong, have also entered the top ten. No American tech company except Apple has ever really won China, and these two monopolize the daily lives of more than 600 million people.

The rise of these two giants in recent years has also changed the balance among Chinese companies listed abroad.

The Good Chinese Internet Companies Aren't on the A-Share Market

WeChat, which keeps 800 million Chinese people staring at their phones, is listed in Hong Kong; NetEase, which fights it in games, is listed in the U.S. and worth more than $40 billion; Alibaba and JD.com, each able to sell more than 100 billion yuan of goods on an invented holiday, are in the U.S.; Baidu, which decides what Chinese people see when they search, is in the U.S. too. Weibo and Trip.com Group are also listed in the U.S., each worth more than $10 billion.

By comparison, the most valuable internet company on the A-share market is LeEco. Dogged by one piece of bad news after another, it is still suspended from trading; no one knows what it will look like if it resumes.

The rest of the top ten internet companies on the A-share market are basically gaming companies with a single line of business.

The good Chinese internet companies all went abroad. What's left for Chinese retail investors to trade, apart from LeEco and a crowd of gaming companies, is roughly Baofeng Technology, which hit the daily price limit more than 20 days in a row right after it listed.

The first Chinese companies to list abroad were the state-owned firms that went to Hong Kong in the late 1990s. Then the three big portals — Sina, NetEase and Sohu — landed on Nasdaq after 2000, and the category of U.S.-listed Chinese stocks took shape.

At first, the biggest of those companies still had state backing.

Among the ten most valuable Chinese companies listed outside the mainland in 2003, only NetEase was privately owned. Denway Motors belonged to GAC Group, and Lenovo's largest shareholder was the Chinese Academy of Sciences.

Today Tencent and Alibaba are worth more than giant state enterprises like China Mobile, PetroChina and Sinopec.

But some monopolies are still hard to break. Central and state-owned enterprises still dominate the top ten. Sinopec and PetroChina also have large blocks of shares that aren't publicly traded; count that part in, and it's hard to say whether internet companies would still be the biggest.

A Choice the Securities Regulator Made 20 Years Ago Decided All This

China got its own stock exchanges in 1991.

After two years of wild swings, the Shanghai Composite climbed steadily from 1994 to 2001. But that had little to do with Chinese internet companies: in those years it was simply too hard for them to go public.

Before 2001, China's listing system worked by quota approval. Every province and every ministry had listing quotas, and the most important thing for a company going public was getting one; once you had the quota, you were most of the way there. Add a listing threshold of 30 million yuan in annual profit, and the capital market mainly served state enterprises.

The listing quotas were not abolished until 2001.

Listing abroad was harder still. In July 1999, a new rule from the China Securities Regulatory Commission required a Chinese company listing overseas to have 400 million yuan in assets, raise at least $50 million in the offering, and earn 60 million yuan a year in profit.

That left NetEase, Sohu and Sina no way to list directly in Hong Kong.

Even if the portals had wanted to bring in foreign money to get around a rule aimed at domestic companies, they could not: telecom regulations from 1993 barred foreign parties from telecom operations and value-added telecom services, and internet services counted as value-added telecom.

So in the end came the VIE structure: register the listed entity outside China, keep it separate from the operating business inside China, and have the offshore listed entity control the domestic operating business through contracts.

Sina was the first Chinese company to list successfully in the U.S. through a VIE. A great many Chinese internet companies copied it — Sohu, NetEase, Baidu, and later JD.com and Alibaba all listed abroad through VIEs.

At the same time, the A-share market requires listed companies to give equal rights to equal shares, meaning a shareholder's voting power matches the stake held. It does not allow what Google, Facebook and Alibaba do, where the founder or founding team holds voting power several times their shareholding. So even setting aside the limits on foreign capital, Alibaba would have had a hard time listing on the A-share market.

That is why so many internet companies ended up in the U.S., even though it is harder for a Chinese company to explain its model to foreign investors.

The result is that the A-share market became a more speculative one. It is hard to say whether the people buying in when LeEco's market value once passed 100 billion yuan, or when Baofeng hit 33 straight limit-ups, were speculating or simply had no other good internet company to choose from.

The securities regulator set such demanding listing rules in the first place to protect investors.

But after all that protecting, the biggest internet company left was LeEco.

Charts by Feng Xiuxia

Cover image: Climbing.com, Al Jazeera