Alibaba's takeover of NetEase online shopping unit Kaola highlights a consolidation underway among top Internet companies and a changing landscape for smaller players.

The US$2 billion takeover is aimed at strengthening Alibaba’s dominance in online retailing. The company’s Tmall import business will be integrated with Kaola, though Kaola will continue to operate independently.

Alvin Liu, general manager of Tmall Import and Export, will replace Zhang Lei as Kaola chief executive.

A separate US$700 million investment gives Alibaba and its investment affiliate Yunfeng an undisclosed stake in the music streaming site NetEase Cloud Music. NetEase will remain the controlling shareholder.

Shi Jialong, head of China Internet equity research at Nomura, said Alibaba has been actively seeking to expand into sectors outside its core e-commerce business.

"Even if Internet surfers are not using Alibaba's own service, they would be contributing to its overall scale by visiting sites that are linked to Alibaba through tie-ups," he said.

Online shopping relies heavily on mobile Internet users. In China, their numbers rose almost 30 million in the first half, accounting for 99.1 percent of all Internet users, according to the China Internet Network Information Center.

However, overall user growth is slowing. Internet giants are competing to expand the time users spend on their sites to counter the slowdown.

Alibaba is seeking to offer rich content beyond merchandise on its existing platform, hoping that consumers will linger longer and find more to spend their money on.

Kaola was launched by NetEase in 2015. Its product range covers apparel, maternity and infant care, household appliances and 9,000 brands from 80 countries.

It sells top brands such as Gucci, Shiseido and Burberry, and is one of the biggest e-commerce sites focused on selling imported goods in China, alongside Alibaba’s Tmall Global and JD.com’s JD Worldwide.

The new consolidation will allow Tmall to fend off competition from the likes of Pinduoduo and JD.

Facing strong challenges from rivals, Kaola’s annual growth dropped to about 43 percent in the fourth quarter of 2018, compared with more than 100 percent growth in earlier years.

Cao Lei, a director at private consultancy E-commerce Research Center said, "Investment in Kaola has been dragging down NetEase's overall performance because initial investment in sourcing and logistics networks costs so much. It needs to grow in size to become profitable.”

Kaola held a 27.7 percent market share in China cross-border e-commerce in the first half of 2019, and Alibaba’s Tmall Global marketplace held a 25.1 percent share, according to research company iiMedia Research Group.

Retail goods imported through China’s cross-border trading policy rose 24 percent to 45.7 billion yuan (US$6.5 billion) in the first half, China customs data shows.

Mint Jiang, a Shanghai resident who frequently buys maternity and infant products from Kaola, said she likes the site’s simple, straightforward format, allowing her to find what she needs quickly.

"It saves me the trouble of having to go to a supermarket, and delivery is generally on time," she said.

Tmall's imported-goods arm sources its own merchandise from overseas and stores the products in its own warehouses to dispatch to domestic buyers. It has also welcomed authenticated third-party vendors to expand their product offerings online.

Market watchers said Alibaba might not gain significant income from its tie-up with Kaola, but the deal will help strengthen Alibaba's dominant position and fend off competitors.

Kaola's logistics network could complement Tmall's existing operations, helping it achieve its goal of importing goods valued at 200 billion yuan within five years.

NetEase, according to analysts, is likely to focus on gaming and other core businesses.

"It's a very reasonable move for NetEase as overall e-commerce market growth slows,” said independent analyst Hao Zhiwei, “The future development of Kaola requires even larger amounts of capital to keep users, and receiving a cash injection from Alibaba may do that."

What remains unclear is how smaller players in the online retailing segment, like JD Worldwide, VIPShop and Amazon China, will fare. It will take a while for Kaola's revenue to hit the bottom line for Alibaba. This year’s revenues, estimated at 15.7 billion yuan, barely equal 2 percent of Alibaba's projected full-year revenue.

However, in the digital world, everything moves quickly, and it's too early to predict with any accuracy how the market landscape may be reshaped.

“A larger scale would benefit a cross-border e-commerce platform, giving it more negotiating power for a wider variety of import products and stronger logistics and warehouse capacity,” said Rebecca Wong, a partner in PwC China Tax and Business Advisory.

She suggested that more players in online retailing might be seeking new alliances or business partners to stay in the game.

Smaller players tend to thrive in niche markets, with more specialized products that are harder to find on mass marketing sites.

"Although the overall market growth will slow down, there’s still large unmet demand as China is encouraging import to boost consumption,” Wong said.

Part-time English tutor Anna Ying said she buys makeup and skincare products from overseas websites every two or three months. The choices on domestic sites are too limited, she explained.

Only pre-approved products can be sold through cross-border retail sites. China is expanding the product list, which currently covers more than 1,300 types of products, ranging from frozen foods to vitamin supplements.

Albert Shen, co-founder and chief executive of smaller, Shanghai-based shopping site Bieyang, said overseas producers still face hurdles getting their products into China and raising their profile with domestic buyers. Initial investment for setting up an online storefront and supply chain is a major concern for companies that sell on a smaller scale.

Consumers can place orders on Bieyang's site for direct orders at overseas websites. The goods are delivered through couriers directly to consumers.

Shoppers generally welcome the site's lower prices for overseas brands and its wider selection, compared with domestic websites. However, delivery can take two or three weeks because of longer customs procedures.