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360Buy Denies VAM Ended Alipay Partnership

Chengdu Evening News, 8/30/11

Liu Qiangdong, chairman of Beijing-based B2C e-commerce platform 360Buy, addressed rumors that 360Buy's recent decision to drop Alipay support was due to a valuation adjustment mechanism (VAM) agreement with private equity investors at the 2011 APEC SME Summit in Chengdu yesterday. Earlier rumors alleged that a VAM requires Liu use any means necessary to reach an undisclosed sales target, and that as a third-party payment processor Alipay was in a position to determine 360Buy's target number and progress, information that 360Buy wishes to keep confidential.

Liu dismissed the rumor as "complete nonsense," adding that 360Buy has no VAM agreement and would never agree to one. Liu added that 360Buy plans to begin building a large-scale logistics center in Chengdu next year with more than 200,000 square meters of floor space, to be completed by the end of 2012.

Editor's Note: According to 21st Century Business Herald, Liu said in May that 360Buy pays RMB 5-6 mln more for Alipay each year than it does for other online payment processors, although 90% of orders are cash-on-delivery and only 10% are online. Liu added that 99Bill is the most common online payment method used on 360Buy, not Alipay, which accounts for only 1-2% of total transactions.

An e-commerce industry insider, however, said that Liu's remarks were not accurate and claimed that in reality, approximately 70% of 360Buy transactions are COD while 30% are online payment, with Alipay accounting for 30-35% of that, giving it approximately 10% of all transactions on the site. "360Buy's sales target for 2010 was RMB 10 bln, and although its not clear whether the company reached its goal, it was probably quite close," said the source, "so in that case RMB 1 bln in transactions were processed by Alipay. With a 0.4% commission, Alipay would earn RMB 4 mln, less than the RMB 5-6 mln difference between Alipay and other payment platforms Liu claims. That suggests Liu is exaggerating, since 99Bill and other platforms are not free."

360Buy recently adopted China Bank of Communications' mobile POS COD payment services, with a 0.3% commission rate, but since 360Buy also provides its own distribution and logistics, an additional RMB 3-5 in costs (including HR and other expenses but not including the costs of building the logistics system) must be added to the cost of each order.

According to one e-commerce industry source, Alipay has partnered with nearly every e-commerce platform and the only plausible explanation for 360Buy dropping Alipay is a VAM agreement.

Earlier industry speculation claimed that after burning through its first two rounds of funding by the end of 2011, 360Buy secured third-round funding from private equity investors by agreeing to a VAM stating that Liu would resign if 360Buy did not hit a sales target of RMB 75 bln within two years. Although Liu dismissed the rumors, one industry source claims the rumors are in fact true and that since 360Buy reached only RMB 10 bln in sales last year, Liu must use all possible means to reach the target number, which he also needs to keep secret.

Alipay records data on all transactions across its platform, including return rates, which would allow it to calculate 360Buy's sales volume, according to the source, who argues that 360Buy ended the partnership in order to prevent that data from becoming public knowledge.

Another industry expert has pointed out that Alipay's access to 360Buy's transaction data, including pricing, sales volume, customer order value, and best-selling items lists, could provide Hangzhou-based C2C & B2C e-commerce site Taobao, Alipay's sister company, with a competitive advantage.

For more information on this topic, please see "Rumor: 360Buy CEO Must Hit 2013 Sales Target or Resign," MD 4/11/11 issue.

Keywords: Liu Qiangdong Bank of Communications e-commerce Taobao Internet distribution 99Bill Alipay B2C 360buy POS sales target sales volume third-party payment online payment logistics e-payment transaction volume

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