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September 12, 2014

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Home » Opinion » Chinese Views

Alibaba takes very Chinese path to market success

By Winter Nie | September 12, 2014, Friday | Print Edition

EDITOR’S note:

ALIBABA’S ongoing IPO road show in New York has been a great success. The following article briefly discusses how the Chinese e-commerce company, once an underdog in the global market, has catapulted itself to where it is today.

IT is not hard to understand why Alibaba’s fast-approaching IPO sparks excitement. While only a decade ago the Internet giant felt threatened by eBay’s vigorous entry into the China market, today Alibaba controls nearly 80 percent of all e-commerce in China.

The company handles a volume of online transactions that is more than three times the size of eBay’s gross merchandise volume. Alibaba is frequently compared to Amazon, except that Alibaba’s earnings are greater.

Founded by Jack Ma and a small group of associates in a Hongzhou apartment in 1999, Alibaba initially concentrated on linking Chinese manufacturers to global buyers. By 2003, Alibaba had 1.8 million registered users in 200 countries, and was handling US$7.3 billion in trade.

Yet the looming competitive threat on the horizon was eBay, which had just bought shares in a local Chinese online auction site, EachNet. In April 2003, Ma decided to challenge eBay’s EachNet directly by creating a new C2C site, Taobao, (“Treasure Hunt” in Chinese).

The original seven-employee start-up team had an average age of 25, and it spent ten-hour days studying eBay for weaknesses. Taobao went online on May 9, 2003. To differentiate itself from eBay’s EachNet, Taobao was free.

EBay’s strategy had been to go global and create a marketplace without borders. Taobao consciously remained local. Thanks to its Taobao subsidiary, Alibaba now controls an estimated 70 percent of the C2C market in China.

Ma has summed up the strategy, “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose, but if we fight in the river, we win.”

The next issue was how to make money. After a few unsuccessful attempts to charge fees for services, Alibaba settled on three business models: B2B, B2C and C2C. Taobao marketplace focused on charging fees for value-added service, and Taobao Mall, eventually renamed TMall, provided a B2C platform for name brands to sell directly to customers. The latter proved very successful. It turned out that manufacturers had been looking for a low-cost distribution platform, and Taobao Mall fit the bill perfectly.

Rise of middle class

The resulting formula has propelled Alibaba to near total dominance of China’s e-commerce market, with transactions adding up to nearly US$250 billion a year.

A smaller part of the organization, Alibaba Express, has even begun marketing successfully in the US. It is China’s e-commerce market, however, that interests investors.

A McKinsey report estimates that by 2020, about 75 percent of China’s urban population will be in the middle class, earning from US$9,000 to US$36,000 a year. Roughly 57 percent will be in the upper middle class. Meeting their consumer needs requires rapidly expanding China’s already badly stretched warehouse space and improving logistics.

Getting merchandise bought on Alibaba to customers accounts for a significant percentage of Chinese postal deliveries. Expanding warehouse space will cost an estimated US$2.5 billion over the next 15 years, but all that is only likely to further fuel the economic boom.

Despite the potential for enormous profit, investing in Alibaba’s IPO will still require a leap of faith in Jack Ma and the company’s tightly held management.

The decision to launch the IPO in New York was made in part because New York Stock Exchange rules allowed the company’s current management to remain firmly in control. The IPO is currently projected to bring in around US$20 billion, making it the biggest in US history, outdistancing Facebook.

In April, Alibaba valued itself at US$109 billion. Bloomberg recently estimated Alibaba’s true value at closer to US$168 billion. “I always knew that we had a future,” Ma told company staffers in a recent corporate internal video. “I just never thought that it would be this big.”

Chinese Views


 

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