Bottom line: The appearance of JD.com as China’s first Internet company in the Fortune 500 and exclusion of the nation’s 3 biggest players underscores major shortcomings of the list due to its reliance on revenue as the basis for its rankings.
Everyone is buzzing these last few days about the latest edition of the Fortune 500, including the rising presence of China on the list of the world’s largest companies by revenue. But as a China tech watcher, the fact that most caught my attention was the absence of China’s top 3 Internet companies from the list, namely Tencent (HKEx: 700), Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU). Adding to the puzzle was the appearance of Alibaba’s much smaller e-commerce rival JD.com (Nasdaq: JD), which became the first Chinese Internet company to make the Fortune 500 list.
All of this seems to underscore that revenue in various industries is earned in many different ways, and that revenue alone often doesn’t reflect a company’s true worth. Different business models can also create big discrepancies, even for companies like Alibaba and JD.com, which generate their revenue in very different ways even though both are count e-commerce as their main business.
The situation seems all the more confusing since Baidu, Alibaba and Tencent, sometimes collectively called the BAT, are all worth far more than JD.com in market value. Tencent and Alibaba are easily China’s largest Internet companies by that yardstick, worth $220 billion and $210 billion, respectively based on their largest share prices. Baidu is a distant third at $56 billion, though even that is about twice the $30 billion that JD is now worth.
All of this raises the question of whether revenue is really a good measure of a company’s size, and who are really China’s largest Internet and high-tech companies. We’ll examine that question shortly, but first let’s begin with some headline numbers about China’s place on this year’s edition of the Fortune 500. At the broadest level, China had 98 companies on this year’s list, up from 95 last year and second only to the latest US total of 128 companies. (Fortune article; Chinese article)
The vast majority of Chinese entrants on the list were big state-run companies that often operate in near-monopoly environments for traditional sectors like energy, raw materials, cars and banks. But the list did contain a few notable high-tech names, led by telecoms giant Huawei, whose 2015 revenue of $63 billion was enough to make it the world’s 129th most valuable company. Huawei was followed by PC giant Lenovo (HKEx: 992) whose $45 billion was enough to make it the world’s 202nd largest.
It’s probably no coincidence that 2 hardware makers led the list for China’s largest tech firms, since PCs, smartphones and networking equipment that account for these companies’ revenues are all quite expensive to make and carry big price tags. By comparison, the ad services that are Baidu’s bread-and-butter may be expensive for advertisers, but cost relatively little for Baidu.
Different E-Commerce Models
E-commerce is a relatively expensive business for companies like JD.com, which directly sell merchandise to consumers over their websites and smartphone apps. But that same e-commerce is much less costly for Alibaba, which simply operates online shopping malls where third-party merchants sell their wares directly to buyers. That means that despite its much larger size compared with JD, Alibaba’s actual revenue is smaller because it never counts the money paid for goods sold on its platforms as revenue. Instead, most of its revenue comes from fees paid by third-party merchants who use the platform.
All of that brings us back to JD, which was named the world’s 366th largest company and China’s first-ever Internet player on the list based on its $29 billion in revenue last year. That figure is nearly twice the amounts for Alibaba and Tencent, the latter of which makes most of its money from games and other services related to its core social networking (SNS) products. Alibaba and Tencent each logged about $15.8 billion in their latest annual reports, and Baidu logged a meager $10.3 billion. Those were all well below the cut-off point to make it onto this year’s Fortune 500 list, which stood at about $20 billion.
All of this raises the question of just how meaningful it is to be included in the Fortune 500, which clearly favors capital-intensive companies that sell high-cost products like real estate, energy and hardware, over more service-oriented companies. The answer to that question is probably that this list isn’t very meaningful when it comes to Internet companies, since China web watchers will know that any list that ranks JD above the BAT probably can’t be taken that seriously.
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