INTERNET: Alibaba Works on China’s Railroad

Bottom line: Alibaba’s potential new partnership with China’s rail operator could become a major new business opportunity, and could see the pair sign a strategic equity tie-up within the next year.

Alibaba ties with railway operator

Up until now, I’ve written about China’s mixed-ownership reform program mostly in the context of China Unicom (HKEx: 762; NYSE: CHU), the nation’s second largest wireless carrier, which is in the final stages of drafting a plan to sell some of itself to one or more private companies as part of a strategic alliance. But now the latest headlines on the program are coming from a decidedly low-tech source, with word that China’s railway operator has invited Internet giant Alibaba (NYSE: BABA) to participate in its own mixed-ownership reform plan.

This particular development is interesting because it marks the second time that Alibaba’s name has come up in the context of the mixed-ownership reform plan. The e-commerce giant has also come up in reports as a potential partner for Unicom, as have China’s other two Internet giants, Baidu (Nasdaq: BIDU) and Tencent (HKEx: 700).

As to what kind of a business opportunities these programs represent, the answer seems to be decidedly mixed, excuse the pun. The program is meant to inject some fresh blood and hopefully vigor into China’s largest state-run behemoths, in hopes of making them someday capable of competing with private sector rivals. Thus the shape of the partnership will be key, as will the resolve of the state-owned partner to making the tie-ups work.

All that said, let’s look at the latest headlines that quote the railway operator chief saying he had a discussion with Alibaba founder Jack Ma about partnerships under the mixed-reform plan. (English article) This particular development doesn’t come as a huge surprise, since Alibaba and China Railway have worked together in the past on the company’s ticketing system.

According to one report, areas where Alibaba could theoretically work with the railway operator could include electronic payments and station navigation and a broader integration of China’s rail network with the Internet. We should point out that any tie-up on payments would more likely come with Ant Financial, which has no financial connection with Alibaba but counts Jack Ma as one of its major stakeholders.

This case looks relatively interesting, because it appears the rail operator is reaching out to Alibaba rather than being forced into a pilot program, which was the case with Unicom. That’s significant, because it shows the operator is actually taking some initiative in this instance, meaning it wants to make the program work. That’s consistent with previous signals that have come from China Railway, which is in charge of the nation’s state-of-the-art high-speed rail network.

Ordered Participation

By comparison, I get the sense that Unicom was ordered to enter the mixed-ownership reform program, much the way that oil giant Sinopec (HKEx: 386) was ordered to do so when it sold a stake in its retail arm to a group of private companies nearly three years ago. That initiative saw some improvements to Sinopec’s chain of convenience stores in its huge network of gas stations, but the number of private partners was so big that no one really ended up as a major stakeholder.

I was originally skeptical of Unicom’s effort, as the company is a classic laggard in China’s telecoms space and seemed to have little interest in shaping up its subpar performance. But it does seem to be trying to right its ship under recently installed chief Wang Xiaochu, so perhaps that means he will be more committed to making the program work.

Moving back to China Railway, this particular move does seem relatively significant for both the rail operator and also Alibaba. There’s huge potential in China’s high-speed rail network, which Alibaba could easily help to tap if it received a stake in the company and formed a serious partnership. The fact that both sides are talking about such a deal also indicates there’s some serious momentum and determination behind this initiative, and that perhaps we could see an initial tie-up announced, including an equity swap, within the next 12 months.

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