The second-biggest publisher of video games in China, NetEase Inc (ADR)(NASDAQ:NTES), has disclosed plans to spend more on products sourced from Japan, Europe and the United States in order to sell to its local consumers. NetEase’s Kaola online retail business intends to purchase inventory worth around $11 billion over the next three years from Japan, Europe and the United States according to Zhang Lei, Kaola’s chief executive officer. Other countries Kaola is considering sourcing inventory from include South Korea and Australia.
It is understood that the move is part of NetEase’s strategy of growing its business by tapping into domestic demand for brands that are internationally renowned and established. Following various safety scares in China, cosmetics and health supplement sourced from abroad have grown popular among the Chinese in recent years.
No middlemen
Unlike leading Chinese online retailer Alibaba Group Holding Ltd (NYSE:BABA), which is more of a marketplace, Kaola purchases most of its inventory overseas. Because it purchases this inventory directly, it is able to lower costs as middlemen and local distributors are bypassed.
“This industry could be worth 500 billion yuan ($75 billion) by about 2021. This is a new race course - Kaola wants to be a major leader here and capture much of the market share from the existing leaders,” said Lei in an interview.
In the cross-border online retailing sector of China, the largest player is Kaola with roughly 24% of the market this year in the first half per iiMedia Research data. Tmall Global, which is owned by Alibaba, has about 20% of the market share while Vipshop Holdings Ltd has about 16%.
Health supplements
According to Lei, products worth $3 billion will be bought by the online retailer from companies operating in the United States. One of Kaola’s favored suppliers is GNC Holdings a health supplement chain. Kaola will also spend around $3.5 billion sourcing products from Europe and a further $4.4 billion on Japanese inventory.
A Sanford C. Bernstein analyst, Bhavtosh Vajpayee, has projected that NetEase will generate approximately $9 billion in the course of the coming three years from e-commerce sales.
On Monday shares of NetEase Inc jumped by 10.40% to close the day at $309.69.
