China’s animal spirits appear to be back. The country’s equities have been among the strongest in the world, up more than 40% through September. Yet the Chinese economy has continued to experience a long hangover from its real-estate downcycle. Faced with consumer demand that continues to be sluggish, companies across numerous industries—from commodity materials to solar-power equipment to electric vehicles—have engaged in intensifying competition in recent years by building ever more capacity to flood the market with their products at unprofitable prices to gain market share and overtake their peers. Observers in China call this neijuan, or involution, referring to how this fierce corporate competition can lead to a self-defeating, deflationary spiral of excess supply, cratering prices, and diminishing returns on capital.
While no company can entirely avoid the damage from an involutionary cycle, strong businesses with durable competitive advantages and financial resilience enjoy an edge in navigating this dynamic, and can even use the competition to their benefit.
One such example is Alibaba, which regained its dominance in e-commerce via a raucous competition this year with rivals Meituan and JD.com in food delivery. Alibaba boosted its market leadership by dramatically upending the industry structure in food delivery and “quick commerce,” the fastest growing segment of online retail in which food and other convenience-store items are delivered in minutes rather than days. It achieved that by leveraging widening competitive advantages—some long-held, and some new—at the expense of Meituan, its longtime nemesis and leader in food delivery.
While no company can entirely avoid the damage from an involutionary cycle, strong businesses with durable competitive advantages and financial resilience enjoy an edge in navigating this dynamic.
A year ago, Alibaba was in a weaker spot, having seen its early dominance of online retail in China eroded by faster-moving, more innovative rivals, especially live-streaming platforms such as Bytedance’s Douyin (China’s TikTok and this decade’s answer to QVC) and Pinduoduo, a platform focused on low-priced products that excelled at helping small merchants offer their wares. Last year, Alibaba began to reverse its slide by using its broad expertise in artificial intelligence (AI) to offer better software and marketing tools to merchants. These helped merchants generate content and target shoppers more accurately at lower cost, boosting their sales and Alibaba’s own profitability in the process. Alibaba also began an internal restructuring, undoing plans hatched under its previous CEO to separate its businesses—including local services, consisting of its long-neglected but industry-leading maps and second-largest food-delivery platform—in favor of integrating them within its core e-commerce and cloud units.
That management reshuffle allowed Alibaba to act quickly when e-commerce rival JD.com entered food delivery in February to challenge long-dominant Meituan, which had up to then been enjoying ever higher returns in food delivery. JD.com—whose main advantage in selling products such as electronics had been the speed and quality of its integrated logistics network—likely saw food delivery as a convenient way to bolster its own fleet of delivery riders and defend itself against competitors. The company also saw it as an effective way to convince shoppers to buy more things on its e-commerce side, by offering food delivery and e-commerce in the same mobile app. Alibaba saw logic in the strategy; newly empowered by a common management team and synergies across food delivery and e-commerce, it followed JD.com’s lead within weeks. Quick commerce in China was quickly reshaped.
In three months, Alibaba used its financial firepower (US$22 billion in operating cash flow in 2024) to decisively outspend its rivals. In food delivery, Alibaba transformed its position from a perennial also-ran to a near-equal to Meituan, doubling its market share to 43% against Meituan’s 47% and enabling Alibaba to deal with restaurants and other merchants with similar bargaining power as its rival. Meanwhile, it destroyed nearly all of Meituan’s earnings, turning food delivery from a profit center into something more like a marketing expense. It marginalized JD.com, which remains a distant third in the war it started and saw its earnings cut in half. And after merging food delivery into its core Taobao e-commerce mobile app, Alibaba succeeded in driving more traffic to the Taobao app, surpassing its biggest rival Pinduoduo, and sustaining the highest consistent growth in its China e-commerce revenues in three years.
Alibaba achieved all this at significant expense—billions of dollars went to fund suddenly very cheap cups of milk tea and lunch boxes for eager office workers and families alike—but it overturned the industry structure in quick commerce and boosted its leadership across online retail in a way that it can now plausibly sustain. Alibaba showed that it could defend its position not only by splashing around cash, but leveraging unique synergies across its businesses and innovating, as it offered higher-value items for quick delivery from its traditional e-commerce business and became the first to launch AI-enabled maps of merchants, and offering consumers personalized recommendations for restaurants. It also disproved long-held views about the supposed competitive barriers enjoyed by Meituan.
In three months, Alibaba used its financial firepower to decisively outspend its rivals. In food delivery, Alibaba transformed its position from a perennial also-ran to a near-equal to Meituan.
This shift in fortunes in food delivery was so sudden, intense, and visible to consumers that the industry also caught the eye of policymakers who were worried about involution in other parts of China’s economy. As prices of materials and electric cars continued to drop precipitously, policymakers had shifted their tone from celebrating the ability of vigorous market competition to make new technologies more affordable to pointing out the broader risks of persistent deflation, which reminded some of Japan’s struggles during its “lost decades.” Over the past few months, policymakers intervened across several sectors to encourage companies to cut supply. With policymakers’ aversion to broader fiscal and monetary easing, their logic was that if demand couldn’t rise enough, supply had to come down in order for prices to stabilize and avoid a deflationary spiral. They had done the same thing a decade ago to stabilize prices for steel, coal, and cement, so they had empirical evidence it could work.
This strategy had some early successes in areas such as lithium mining, in which local governments could easily suspend operating permits to force supply lower. But in other industries, especially ones that are not state-owned or contingent on resource licenses, the state has relied upon softer forms of persuasion. In food delivery, regulators held discussions with industry leaders in July, focusing on the abuse of market dominance at the expense of small merchants and garnering commitments to avoid such tactics. They had a point: during the food-delivery melee, platforms with stronger bargaining power, initially Meituan, had pushed smaller, weaker merchants (often family-run restaurants) to fund a large portion of promotional incentives and shoulder the burden to avoid losing out on orders amid an influx of lower-priced alternatives on other platforms. After meeting with regulators, Alibaba, Meituan, and JD.com all put out statements within minutes of each other pledging to ease off the gas. It’s possible that as the battlers exhaust their resources the war may continue to de-escalate. But it’s clear from Alibaba’s much stronger position in the quick-commerce industry today—and from the economies of scale and synergies that enable it to keep that position—that its strategy had worked. ∎
The above is adapted from our third-quarter report for the Emerging Markets Equity strategy. Click here to read the full report.