This article was originally posted on the Chinese website Geek Park. Chinese original here. It's about a recent price war - or some kind of war - waged between Chinese e-commerce electronics giant 360buy.com and Suning, a major retailer of electronics. Xinhua covered it in English here, but I found this Chinese article to be a better explanation of it. My English translation:
Summary: 360buy.com has declared war on Suning, but why now? Who is wining and who is losing in this battle? A butterfly effect is going to take place in the electronics sector. In 3 minutes, this piece explains the truth behind this “war,” helping you see past the so-called price war and no longer be subjected to information asymmetry.
If you use the phrase “price war” you’ve marked yourself as an industry outsider.
Those who’ve actually compared the prices are all aware that in an amusing turn of events, Suning and 360buy.com are not the two companies who have lowered their prices the most. Under the cover of “different models” and “sold out” goods, what these two giants are waging today is an advertising war, a psychological war, a test of pressure. Objectively, what they have done is join hands to carry out the opening ceremony for a new era in home appliance sales. However, the price war has been nothing close to extreme.
So then why has Liu Qiangdong [CEO of 360buy.com] declared war on Suning? Is it really because he was unhappy with Suning’s participation in the 6/18 attack [when electronics retailers held sales and promotions to draw business away from 360buy.com on the anniversary of its founding]. Or because, as he said, he can no longer endure all this scheming behind his back? In actuality, even if you know nothing else, you should remember this: the truth is heavy, so how can it rise to the surface?
It’s widely known in the industry that Liu Qiangdong is a master of social media. He has gone on Weibo many times to make an initial announcement or discredit a rumor, retreat or make a comeback. Time after time, he has guided and shaped discourse and public attention. This success is no exception. It’s said that even when other suppliers lowered prices, they have to take out ads in print media, while Liu Qiangdong uses only a few Weibo groups to get himself coverage in print media that is far more valuable, including headlines. It’s even said that many retail giants have said it’s a waste of talent for him to be a CEO, and industry journalists gave him the “Golden Spray Bottle” prize last year. On some level, this really shows that he is ahead of his time in terms of public relations power, with an understanding of how to disseminate information and accomplishments in multiple areas.
So then where did this so-called price war come from, and what kind of butterfly effect will it set off? Without any further delay, I give to you an explanation of what’s going on behind the scenes.
The cause of war: capital never sleeps.
Behind this war is capital that never sleeps.
Liu Qiangdong posted at 8/13 23:00 on Weibo that “This evening I’ve found myself spectacularly excited.” At that time, Suning had just released information showing it would issue 8 billion RMB in bonds to the public to generate funds, clearly showing that they would enter the competition in e-commerce sector. Previously, in July, Suning had just completed 4.7 billion RMB private placement. By this point, a head-on collision between 360buy.com and Suning had already become inevitable.
Therefore, Liu Qiangdong made his declaration of war on Suning’s main business the next day at 10:00 AM.
Veteran China Business Herald reporter Zhou Bin made this analysis: before this placement, Suning pledged a large amount of stock to a third party bonding company as collateral. If stock prices fell past a certain point, the bonding company would require Suning to supplement its stock in order to guarantee the value of the collateral, otherwise, the bonding company would forcefully sell the stock held as collateral –this would be a disaster for Suning.
Liu Qiangdong’s goal in setting off this war was very clear: by lowering prices in home electronics, of which 360buy.com holds less than a 20% market share, he could force Suning, which holds over 60%, to respond to his challenge; the price war would cause investors to turn bearish on Suning’s future profits, causing stock prices to fall. The bonding company would then require Suning to supplement its stocks, or otherwise seize them. Either of those two consequences would set off a chain reaction and Suning would lose funds.
This is the reason Liu Qiangdong says his investors all support him waging a price war. Because the true war is not on Weibo, or in the electronics sector, but in the investment market. If he didn’t attack Suning at the level of capital, the traditional retail giant would truly enter the e-commerce sector, which would have a huge impact on 360buy.com’s business and capital.
An investment analyst visualized it this way: the e-commerce sector was already crowded. No one could get a foothold and everyone was struggling for survival. This is the time that the great elephant Suning chose to jump in. If 360buy.com didn’t fight Suning at this point, it would just be waiting to be eaten.
When elephants fight, it’s the grass that gets hurt: collateral damage
We have nothing but money. Go after him, to the death.” Liu Qiangdong said these were the moving words of support offered to him by 360buy.com’s investors. It seems that the naïve or simple-minded image of 360buy.com’s investors made 360buy.com more impressive and imposing in that instant. However, it’s not correct to say that these investors were used as fodder for the cannons. In actuality, the price war didn’t ever get far out of hand, so it was mostly hype; it didn’t cause any collateral damage for investors. At most, they were just helping out by shouting encouraging slogans.
Then who were the true losers?
First of all, they were the suppliers, especially suppliers of premium products. This is because these intermediary companies never fight price wars or hold promotions by themselves. They will always drag the suppliers into it, and rarely shoulder the burden or losses all by themselves. For these reasons, you can tell from this price war who participated in the intermediary company’s strategic moves and ended up on the front lines.
In actuality, Samsung, Sony, and other international brands didn’t participate for the most part. This shows that suppliers of premium home electronics still have a certain amount of say-so when facing intermediaries. There’s also Haier Electronics: rumors had been circulating since June that Haier had ended its cooperation with 360buy.com. Today, several media Weibo accounts reported that Haier had officially ended relations with 360buy.com. Haier’s official response was that it had never released information saying it would cease cooperating. However, many netizens reacting to this price war could not find any Haier products participating. Another television company could not keep its executive from complainting about it on Weibo, saying it destroyed society’s prosperity. He later deleted the post.
Business Value Magazine’s senior journalist and long-time friend of Geek Park @孙彤 provided this analysis: “Home electronic suppliers are of course not pleased by price wars, but their reliance on intermediary companies forces them to bite their tongues. Some home electronics suppliers expressed their displeasure and immediately took back these statements, showing that since the advent of the Suning/Gome era, these intermediaries have developed a great power over manufacturers, and in the e-commerce era their power remains.
Of course, it’s worth mentioning that these two giants’ posturing hurt another company that’s always struggled through hardship – Xiaomi
A friendly reminder: Who remembers today’s the release of the Xiaomi 2?
A change in the ecosystem: the butterfly effect
Whether it’s a war of words or a war of capital, this war has had a bit of a butterfly effect.
Most worth noting is that Suning can no longer be seen as a merely a traditional retailer. It must now be treated as an e-commerce company just like 360buy.com. In truth, this also shows that Suning has clearly made a strategic shift of its core from offline to online. You might say that this battle is Suning’s baptism and rebirth as an e-commerce company. This retail giant will face many complex problems in the future, but its all-in move into the e-commerce sector will definitely have a long-reaching impact on China’s e-commerce sector and the retail sector at large.
It is Alibaba’s Tian Mao and Taobao that played this situation most skillfully. They were clever enough not to take part in the war, and Alibaba’s price-comparison platform ETao made a show of staying out of it. From its own report, you can see that 360buy.com’s one-morning average price didn’t fall but rose, while Gome and Dang Dang actually went through with their price cuts. This is where third-party Alibaba made some money.
In truth, some price-comparison apps will become more popular in the future. This is because as far as companies and individuals go, price wars are actually psychological wars, which are in turn wars of information. The rise in individuals’ ability to verify information will generate great demand. But at the same time, price wars as a kind of strategy must inevitably become less effective.
Do you still remember last year, when 360buy.com had a price war with Dang Dang? You almost never heard customers complaining about “fake price cuts” then. This time, on the other hand, the number of consumers complaining that 360buy.com and Suning hadn’t cut prices at all was very high. This is a sign that the effectiveness of price wars as a hook to sell products has decreased.
An e-commerce industry insider said, “Up until now, sales have been made by treating customers like idiots, but their understanding of this will only grow. Even if they don’t understand it better, they’ll become more and more resistant to fake promotions and promotional prices. e-commerce companies must be wary of this trend.”
Perhaps the e-commerce sector’s “legendary price war” should exit the stage for a time. Everyone’s on Weibo, so no one is going to be completely out of the loop. Besides price, e-commerce users also deal with so many other things. It’s time to roll up your sleeves and do a little hard work, not just make a quick buck by being clever.
Liz Carter