Why is Alibaba Stock Trading Below Premarket?

The budget shopping app PDD Holdings Inc, which is owned by JD.Com Inc, plans on increasing its subsidy campaign against the company in early March by 10 billion yuan ($1.5 billion).

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According to SCMP, the subsidies will also cover JD.Com's self-operated online stores and from third parties setting up their own storefronts on its platform using its software.

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Richard Liu Qiangdong, the guy who founded JD.Com, castigated his lieutenants during his annual speech in December for diverging from a low-price strategy and other strategic mistakes he had made.

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There was an internal email sent to employees at the time, warning them that the loss of the low-price reputation would damage the basis of our existence, and that "low prices were the most important advantages that contributed to our past success, and they will be crucial in the future.".

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After the first phase of its multibillion-yuan subsidy program, PDD first rolled out in mid-2019, helping to solidify the company's position in China's small towns, where consumers are typically more price-sensitive, and the company has very good prospects going forward.

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Stocks of Chinese companies, such as JD.com, PDD, and Alibaba Group Holding Limited, have fluctuated significantly in recent weeks.  

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Zhuang Shuai, founder and chief analyst at the e-commerce consultancy Bailian, a leading Chinese e-commerce firm, says that while JD.com enjoys a strong presence in higher-tier cities, its outreach in lower-income regions is not as extensive as Pinduoduo's.

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While Chinese consumers are often attracted to low-cost merchandise, he explained that budget pricing is a double-edged sword that can cause serious conflicts and to lead to red balance sheets, especially for Chinese e-commerce companies whose growth has stagnated after years of rapid expansion. It was common for Pinduoduo to make significant losses in its early years," said Pinduoduo's founding manager.

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There are signs that J.D.com's price war may lead to an extended period of hypercompetition in the industry, which could erode margins in the short-term.

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According to Vey-Sern Ling, managing director at Union Bancaire Privee, the move shows that JD.Com acknowledges that Pinduoduo is putting pressure on its market share. Alibaba Group Holding Limited and the e-commerce industry in general were negatively affected by the move, according to Ling  

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Additionally, JD.com's move suggests that it was not able to beat smaller players due to its superior logistics capabilities. 

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Shares of BABA traded lower by 3.11% on Tuesday morning at $96.90 in premarket trading. There was a lower trading price for JD shares at $48.50, and a lower price for PDD shares at $89.00.