Alibaba Bets $590 Million on Becoming Smartphone Player

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Alibaba Aims to Be the Apple of China: Shah

Alibaba Group Holding Ltd. is betting $590 million it can succeed where Facebook Inc. and Amazon.com Inc. have stumbled -- becoming a player in the smartphone business.

Alibaba’s investment in Meizu Technology Corp. gives the e-commerce giant a key tool in its push to unlock more money from China’s half a billion smartphone users. Along with the proposed minority stake in Zhuhai, China-based Meizu, Alibaba gains a platform for its homegrown operating system, YunOS, the companies said in a statement.

“Alibaba wants to promote its operating system and fight for mobile access points,” Li Yujie, an analyst at RHB Research Institute Sdn, said by phone in Hong Kong. “Meizu is one of the better homegrown mobile-phone makers in China, so it makes sense for Alibaba to work with them.”

Alibaba is using the YunOS software to link services together and carry customers along as it expands from clothes and gadgets to health care and entertainment. Chairman Jack Ma has been under pressure to improve mobile sales since the run-up to its record $25 billion initial public offering in September.

Alibaba gained 0.4 percent to close at $86 in New York trading Monday.

The investment in Meizu is among $6.2 billion in acquisitions announced by Alibaba in the past 12 months, adding services that develop applications, hail taxis and create QR codes. Spending some of its cash on one of China’s many budding handset manufacturers was a likely next step for Alibaba.

Internet, software and e-commerce companies have struggled when they expanded into hardware. Microsoft Corp. and Google Inc. misfired with high-profile takeovers of device makers, while Amazon and Facebook have struggled to lure customers for smartphones using their software.

Meizu Growth

Instead of investing in a company such as Xiaomi Corp., Alibaba chose Meizu, China’s 13th-largest smartphone maker in the fourth quarter of last year, according to Neil Shah at Counterpoint Technology Market Research.

Meizu has come on strong since the release of its MX4 and MX Pro devices this year, increasing share of the world’s biggest smartphone market fourfold quarter-on-quarter to 2 percent, Shah said.

The company began making MP3 players in 2003 and smartphones four years later. Its devices use chips from MediaTek Inc., displays from Sharp Corp. and camera sensors from Sony Corp., according to the company’s website.

Chairman Jack Wong, 38, has tried to position the company as a challenger to Xiaomi, which at $45 billion is the world’s most valuable startup.

“I want to let more people know that, besides Xiaomi phones, people also have a better alternative, Meizu,” Wong wrote last February in the first posting on his official Sina Weibo account.

YunOS Expansion

Meizu plans to ship 20 million handsets this year, spokesman Huang Yixuan said, or about a fifth of Xiaomi’s sales goal. Huang declined to provide a valuation for the company.

Neither Alibaba nor Meizu would disclose the size of e-commerce company’s ownership stake.

“Even though Alibaba will only hold a minority stake, it will have effective control, which is exactly what is needed to put its full weight behind Meizu as its beachhead into developing its ecosystem,” said Richard Windsor, an analyst with London-based Edison Investment Research.

The effort to get YunOS on tens of millions of smartphones dovetails with the Chinese government’s plans to promote national champions to rival U.S. giants Google and Apple Inc. More than nine out of 10 Chinese mobile devices run Google’s Android.

Some smaller manufacturers have adopted YunOS before. Shenzhen Sang Fei Consumer Communications Co. makes phones running the operating system under the Philips brand.

Alibaba also has ties to Xiaomi. Yunfeng Capital, which was founded by Jack Ma, was among those to participate in a recent fundraising round.

Yao Yue, a Shenzhen-based analyst with Morningstar Inc., said Meizu was a better fit for Alibaba.

“The two companies have a real need to cooperate,” Yao said. “Xiaomi, while doing very well, has its own plans to create an ecosystem around its hardware, so it would be hard for Alibaba to work with them.”

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