uploads/2017/12/10-6.jpg

Breaking Down NetEase’s e-Commerce Push

By

Updated

E-commerce unit grew 79.5%

China-based (MCHI) video game publisher NetEase (NTES) extracted 29.5% of its total 3Q17 revenue from the division that includes its e-commerce operations. The e-commerce division registered revenue growth of 79.5% YoY (year-over-year), making it the fastest-growing division of NetEase’s three reporting units in the quarter.

In 2Q17, NetEase’s e-commerce division grew 68.9% YoY and accounted for 24.5% of its total revenue. In 3Q16, the division recorded growth of more than 100%, which accounted for 22.1% of its total revenue.

These figures highlight the growing importance of e-commerce to NetEase, which could explain why the company is doubling down on its e-commerce push. NetEase’s CEO, Zhang Lei, told Bloomberg in a recent interview that the company plans to spend over $11.0 billion on inventory acquisitions over the next three years.

China’s demand for foreign goods

In e-commerce, NetEase is largely focused on the cross-border channel, where it sources for items from overseas suppliers for sale to Chinese consumers. In this position, the company is capitalizing on Chinese consumers’ growing demand for established foreign brands from regions such as the United States (SPY) and Europe (EFA).

For its $11 billion inventory budget, NetEase plans to source stock worth $3.0 billion from established brands in the United States, while $3.4 billion of the budget will go into the acquisition of stock from Japan (EWJ). The company plans to source goods worth $3.5 billion from European brands. NetEase also procures stock from South Korean and Australian brands.

NetEase sees a $75 billion market

NetEase’s aggressive e-commerce push is inspired by the rosy projections for China’s cross-border e-commerce sector. According to NetEase’s own estimates, the sector could be worth over 500 billion yuan (~$75 billion) by 2021. On their parts, McKinsey and iResearch predict that cross-border e-commerce sales in China will reach 758 billion yuan in 2018.

According to iMedia Research, NetEase controls a larger share of China’s cross-border e-commerce market than Alibaba (BABA) and Vipshop (VIPS).

More From Market Realist