Alibaba Must Deploy Cash to Challenge Android: Real M&A

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Alibaba Group Holding Ltd. wants its mobile operating system to run millions of smartphones in China. The fastest solution: spend some of its cash hoard on a handset maker.

Vice Chairman Joseph Tsai, laying out plans for the next decade, said in an interview last month that Alibaba’s homegrown system, YunOS, can knit services together for the company as Asia’s largest e-commerce giant steps beyond clothes and gadgets to entertainment and health care. With a market value of $266 billion, Alibaba has struggled to push YunOS in China, where more than nine out of 10 mobile devices use Google Inc.’s Android.

Fresh from an $8 billion bond sale, Alibaba could pursue a possible stake in Xiaomi Corp., China’s largest smartphone seller. Or it could invest in Hong Kong-listed Coolpad Group Ltd. to guarantee that YunOS is installed on the factory floor. After Microsoft Corp. and Google misfired with high-profile takeovers of handset makers, another option is to target one of the dozens of smaller, closely held manufacturers in China, according to research firm Canalys.

“We expect Alibaba to take several attempts at the smartphone market over the next decade,” said Neil Mawston, executive director in the global wireless practice at Strategy Analytics Inc. in Milton Keynes, England. “Alibaba is too big, and mobile is too big, to ignore.”

Bob Christie, a spokesman for Alibaba, declined to comment on whether the company is interested in Xiaomi or Coolpad.

Broadening Ambitions

Alibaba, co-founded in 1999 by Chairman Jack Ma in his apartment with $60,000, runs marketplaces including Taobao, which links individual buyers and sellers, and, which connects retailers and consumers. Hangzhou, China-based Alibaba is more valuable than Facebook Inc. or General Electric Co. after listing in New York in September and it also has about $20 billion of cash and equivalents on its balance sheet.

Ma’s not stopping there. He has since toured Hollywood looking for content to win and keep customers. The company’s mobile operating system is key because China’s online shoppers are migrating from computers to phones and tablets. Alibaba wants YunOS to connect its ever-widening range of services.


According to Tsai, Alibaba’s long-term goal is to have YunOS in tens of millions of smartphones. That aim dovetails with the government’s push for manufacturers to reduce dependence on Android and its promotion of national champions to rival Google and Apple Inc.

“Local smart devices are heavily reliant on the Android camp,” China’s Ministry of Industry and Information Technology wrote in a February 2013 report. “The development of self-made operating systems is significantly difficult.”

Some smaller manufactures have adopted YunOS. Shenzhen Sang Fei Consumer Communications Co. makes phones running the operating system under the Philips brand and Meizu Technology Co. adopted YunOS this year. Even so, Alibaba doesn’t yet have a backer among the biggest handset vendors in China.

“We always take the long view -- 10, 15 years,” Tsai said. “What really matters is that in the long run a lot of people are using phones with our OS.”

Xiaomi ‘Possibility’

Android has such a grip in China, the world’s largest smartphone market, that Alibaba needs to do more than just make another mobile operating system, said Vanessa Zeng, an analyst at Forrester Research Inc. in Beijing. A collaboration with Xiaomi is a “possibility” because Alibaba will struggle to win market share on its own, she said.

Xiaomi is in talks to raise funds that value the closely held company at as much as $50 billion, people familiar with the matter said last month. That’s five times the company’s valuation little more than a year ago.

Founded only in 2010, Beijing-based Xiaomi is the world’s third-largest smartphone vendor thanks in part to its domestic success selling directly to consumers online, according to Strategy Analytics. It shipped 18 million devices in the third quarter, compared with 5.2 million a year earlier, Strategy Analytics said.

While an Alibaba-Xiaomi partnership could have the heft to challenge Android’s market dominance, Xiaomi’s ambitions with it own operating system, called MIUI, might thwart any alliance.

“Xiaomi is all about integrating hardware and software and building an ecosystem around that with apps and Internet services,” said Hans Tung, one of the earliest Xiaomi investors and a former board member who is now general partner of GGV Capital in Menlo Park, California. “Xiaomi has built that around MIUI. MIUI and YUN are two different systems.”

Tony Wei, a spokesman for Xiaomi, said the company has no plans to use YunOS currently and hasn’t “had any talks on that issue.” Xiaomi, which sells phones via Alibaba’s Tmall, has a “very good partnership” with the e-commerce company, he said.

Coolpad Proposition

A smaller target for Alibaba would be Shenzhen-based Coolpad, which has a market value of HK$7 billion ($903 million). Coolpad had 11 percent of China’s smartphone shipments last year, ranking it third behind Lenovo Group Ltd., according to International Data Corp.

“Coolpad or Xiaomi are attractive propositions if this ambition is limited to China,” Neil Shah, a Mumbai-based research director for devices and ecosystems at Counterpoint Research, said in an e-mail. “I won’t be surprised” if Alibaba bought a stake in either handset maker, he said.

Coolpad today fell 0.6 percent to HK$1.62 in Hong Kong. The stock has jumped 28 percent this year. Alibaba fell 2.6 percent to $105.07 in New York trading today.

Andrew Cao, a spokesman for Coolpad, said the company does “not have cooperation on YunOS” with Alibaba.

“Coolpad has the Coolcloud platform already,” Cao said.

Outright Purchase

Alibaba may consider buying a manufacturer outright after it has exhausted other options, said Gil Luria, an analyst at Los Angeles-based Wedbush Securities Inc. For example, handset makers have little reason to stop making phones running Android, so Alibaba will probably continue paying them to install YunOS, he said.

“If all else fails, Alibaba may consider buying a handset manufacturer,” Luria said. “They certainly have the capital to do so.”

Alibaba said last year that it would pay certain partnering handset makers 1 yuan a month for every phone they sell with its operating system, as long as the owner uses the software.

Consumer Demand

Even if Alibaba bought a stake in Xiaomi or another handset maker, it’s not clear Chinese consumers would warm to a phone with both an operating system and applications controlled by Alibaba, said Shaun Rein, managing director at China Market Research Group in Shanghai. They’d probably prefer a neutral system from a different company, he said by phone.

Other software leaders have stumbled making the leap to manufacturing. Mountain View, California-based Google this year sold for about $2.9 billion the Motorola Mobility phone unit it bought as part of a $12.4 billion deal in 2012. Microsoft has said its new phone business, formerly the Nokia handset unit it acquired in April, may not break even until 2016.

The mobile industry is so competitive that Alibaba has already missed its chance, said Alberto Moel, a Hong Kong-based analyst at Sanford C. Bernstein & Co. Xiaomi would be overvalued at $50 billion, he said.

“Alibaba is wasting its time with a new operating system and trying to get into mobile,” Moel said in an e-mail. “That ship has sailed.”

That may not be enough to deter Alibaba from pursuing at least one Chinese phone maker to force its way into the market.

The value of Alibaba’s pending and completed acquisitions this year, at $5.1 billion, has already more than doubled from 2013, according to data compiled by Bloomberg.

“Alibaba may become like a Chinese Microsoft,” said Mawston, at Strategy Analytics. “Using its deep pockets to keep plugging away at the mobile hardware or software market for years to come.”

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