Dangdang Cuts Back in Latest Internet Distress Sign 当当网战略收缩

By newsdoug on March 23, 2012

I’ll close out the week with the latest trouble signs for China’s overheated Internet sector, where Dangdang (NYSE: DANG), the country’s lone major listed e-commerce company, is starting scale back some of its operations to save money. Media are reporting on the cutbacks as separate newly released data is showing just how badly bloated the sector became last year, when a flood of new money gushed in from investors buying into the hype of China’s Internet growth story. Let’s look at Dangdang first, as the company is showing all the signs of becoming the latest victim to feel the pinch of super-heated competition in the e-commerce space, where it competes with big names like 360Buy, also known as Jingdong Mall, as well as online retail sites invested and operated by other global giants like Wal-Mart (NYSE: WMT) and Amazon (Nasdaq: AMZN). The latest media reports quote Dangdang CEO Li Guoqing saying his company is initiating a “strategic pullback” in its geographic coverage, in a bid to lower its transport costs. (English article) Li added his company will put more focus in the future on its VIP customers, who obviously offer better returns than the mom-and-pop buyers in smaller cities that are far more expensive to serve. His comments come after Dangdang swung squarely into the red in its latest reporting quarter, posting a net loss of nearly $21 million after earning a $2 million profit in the year-ago period. (previous post) Hyper competition in the e-commerce space is partly the result of a massive influx of money last year that saw both domestic and foreign investors pump tens of billions of dollars into start-ups and larger companies like 360Buy, which made headlines last spring when it received more than $1 billion in new funds. New data just released by venture capital tracking firm Zero2IPO shows venture capital and private equity firms, who tend to focus on start-ups with smaller investments of $1-$10 million, pumped a record $5.8 billion into young Chinese firms last year, with Internet companies emerging as the clear favorites as 276 such companies received $3.3 billion in new funds — a 3.6-fold rise over the previous year. (English article) Those figures only reflect the smaller investments that Zero2IPO tracks, but other firms like group buying sites Dianping and 55tuan received much larger sums in the hundreds of millions of dollars, truly bloating the sector. One executive at Groupon.cn, another group buying site unrelated to US giant Groupon (Nasdaq: GRPN) summarized the current situation nicely in a recent interview, saying the investors who once fawned on all these Chinese Internet companies have suddenly lost their appetite to provide new funds due to concerns of a bubble, causing companies like his to make mass layoffs just to survive. Dangdang seems big enough to survive this bubble in the long term, but look for more short-term pain at Dangdang and just about everyone else in the e-commerce and group buying spaces for the rest of this year and possibly into 2013 until the bubble finally finishes bursting.

Bottom line: Dangdang’s business scaleback and new investment data from 2011 are the latest reflections of last year’s China Internet bubble, whose bursting is starting to accelerate.

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