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Wish IPO prospectus reveals heavy risks tied to e-retailer’s reliance on China

Wish IPO prospectus reveals heavy risks tied to e-retailer’s reliance on China
While filing its IPO prospectus with regulators, the e-commerce marketplace Wish also gave investors enough reason to be sceptical because of the company’s overreliance on China.
A variety of discounted products, ranging from cheap home-wares and apparel to electronics and toys is offered by Wish which was founded in 2010 as an online marketplace. The target customer segment of the company is the low- to middle-income consumers since the app offers a slew of products for just a few dollars which are more affordable compared to what such consumers can find on other e-commerce sites such as Amazon.
The reason behind the company being able to offer products at such low prices is partly because it sources most of the products from sellers based in China. The company was valued at $11.2 billion at the last round of investment. No break up of proportion of the more than 500,000 sellers that belong to China is provided by the company. However according to estimates of Marketplace Pulse made previously, about 94 per cent of the sellers on the company’s platform are from China while sellers from the United States, the United Kingdom Canada and India make up the rest 6 per cent.
“We initially grew our platform focusing on merchants in China, the world’s largest exporter of goods for the last decade, due to these merchants’ strength in selling quality products at competitive prices,” the prospectus says.
There are also of China-based sellers for Amazon and Walmart and the proportion is growing. However other firms are not as dependent on Chinese seller as Wish. A number of risks tied to its concentration in China were spelled out in Wish’s prospectus.
The initial outbreak of Covid-19, which resulted in “severe manufacturing and supply disruptions”, resulted in a drop of 8 per cent in the marketplace revenue of the company in the first quarter compared to the previous year. However the revenues picked up later and a 67 per cent growth in revenues was notched up by the company in the second quarter. In the third quarter, growth slowed down to 33 per cent partly because of the continued “disruption in the global logistics network.”
Going forward, the revenues and bottom line of the company could also take a hit because of changes in postal subsidies in the US. An agreement between the US Postal Service and China Post, the official postal service of China has for long been beneficial for Wish. Under that agreement packages weighing 4.4 pounds or less could be shipped at a cheaper rate to the US compared to what the cost of sending them between states in the US.
But that subsidy was brought to an end in July by the Universal Postal Union, an agency of the United Nations, and therefore higher rates were set for all inbound mail from China. This could force the Chinese sellers on Wish to raise the price of their products in order to make up for the increase in transportation costs which would undermine the most important selling point of the company.
“Further escalation of trade tensions between the United States and its trading partners, especially China, could result in long-term changes to global trade, including retaliatory trade restrictions that restrict the international flow of products,” the prospectus says. “Any alterations to our business strategy or operations made in order to adapt to or comply with any such changes would be time-consuming and expensive, and certain of our competitors may be better suited to withstand or react to these changes.”

Christopher J. Mitchell

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