Despite its transformative impact in China, Alibaba’s first 15 years largely went unnoticed in the West. That all changed with Alibaba Group’s massive IPO. As the West scrambled to understand Alibaba, commentators and analysts reached for an apt comparison. Was Alibaba’s business model the “Amazon of China,” “eBay of China,” “PayPal of China,” “Google of China,” or “all of the above”?
These comparisons might be helpful references, but ultimately they all fall short. That’s because, while Alibaba’s business model does incorporate some characteristics of its Western counterparts, it’s unique—and innovative in the truest sense of the word.
So what is Alibaba? How should we understand it? How might it grow? And what will be its future influence on global e-commerce? To understand this it is helpful to look closely at Alibaba’s core businesses.
Alibaba Group Today
The Alibaba Group today is a vast e-commerce conglomerate that connects buyers with sellers and enables them to do transactions across a wide range of products and services. It operates wholesale and retail marketplaces, which, together with Alibaba’s support services (which range from online payment to logistics), increasingly provides the infrastructure for China’s modern economy. More than just a collection of related e-commerce businesses, Alibaba has become an ecosystem in which the whole is far greater than the sum of its parts because of the synergies among its elements. Alibaba’s ecosystem is comprised of three main elements:
Wholesale Marketplaces
Alibaba China (1688.com)
Alibaba China (also known as 1688.com) is in many ways the hidden gem of Alibaba Group. I say hidden because it is so little known and understood outside China. Although it is one of the two original marketplaces Alibaba started in 1999, Alibaba China has gone largely unnoticed by Westerners, who rarely venture beyond Alibaba’s English website, Alibaba.com. Yet in China 1688.com is a massive phenomenon and integral to the Chinese economy.
Alibaba China is China’s largest wholesale marketplace for domestic trade, a community of millions of small- and medium-sized manufacturers and trading companies that buy and sell in wholesale volumes. Members use the site to post products, negotiate through live chat and messaging, and, increasingly, consummate their transactions through AliPay. If you must have a Western comparison, think “eBay of wholesale” for the China market. It’s largely a subscription-based service; members pay an annual fee to become a premium member with access to Alibaba China’s full range of services. It also makes money from pay-for-performance advertising whereby sellers can bid for ads to appear when certain keywords are searched on the site.
The business model is unique, with no clear parallel anywhere in the world (although in certain developing countries with large manufacturing bases and a fragmented wholesale network, there certainly should be).
By the time of Alibaba’s 2014 IPO, Alibaba China had more than 700,000 paying members and generated US$22.7 billion in transactions that were settled through AliPay—and that’s only a fraction of the total number of deals that originate on Alibaba China. But the numbers alone don’t tell the full story. Alibaba China is in many ways more than just a platform—it is a rich and vibrant community whose members regularly post advice on message boards and meet offline to deepen friendships and discuss business. China’s transformation to a market economy happened so quickly that Alibaba China stepped up to bring together business people in specialized industries—a role filled in the West by trade associations that have developed over decades.
Alibaba China’s importance in the larger Alibaba universe cannot be overstated. Wholesalers on Alibaba China provide much of the product sold by retailers on Taobao and by global exporters on Alibaba.com. Alibaba China’s deep links with Alibaba’s other marketplaces create incentives for participants to stay within the Alibaba ecosystem. Alibaba China also provides an attractive customer base for Alibaba’s financial services, as Alibaba ventures into microcredit, banking, and wealth management.
Alibaba International
Alibaba International (otherwise known as Alibaba.com) is the world’s largest wholesale marketplace for global trade, connecting importers and exporters in more than 240 countries and territories. This site is the first thing Westerners see when they click to Alibaba.com, and in many ways it is the flagship site of Alibaba Group. Because its core customers are wholesalers, rather than end consumers, Alibaba.com is not a household name outside China. But nearly everyone in the world has likely used a product sourced on Alibaba.com, which supplies the world’s wholesalers with products ranging from ball bearings to coffee mugs to iPhone cases.
From day one Alibaba set out to connect buyers and sellers from around the world, making it the first global Internet company to emerge from China. It’s often misunderstood as being a website that only connects Chinese manufacturers to international buyers. In truth, while Chinese exporters form the core of the revenue base, the marketplace’s sellers come from all around the world. So, for example, a buyer in France might order shoes from a manufacturer in India. A buyer in Kenya might purchase rugs from a seller in Pakistan. As of the date of the Alibaba Group IPO, Alibaba.com counted more than 120,000 paying members, with millions more who use the website’s free services.
Taobao (treasure hunt) is China’s largest consumer-to-consumer marketplace. At the time of Alibaba Group’s IPO, Alexa.com listed it as one of the ten most-visited websites in the world. Every day more than 100 million people visit Taobao to buy and sell just about every product or service imaginable, accounting for an estimated 80 percent of the online retail sales in China (along with its sister site, Tmall). Taobao has become a part of everyday life for the Chinese, who use it for everything from fashion to movie tickets to groceries from their local convenience store. And as Chinese consumers have increasingly adopted smartphones, Taobao’s mobile app has seen a huge volume of sales and purchases.
Although often compared to eBay, Taobao plays a much larger role in China’s economy than its American counterpart does in the US economy. Most items sold on Taobao are new items sold on a fixed-price basis, as opposed to eBay, which is largely known as an auction site for secondhand goods and collectibles. The difference owes to the early days of Taobao, when China’s retail environment consisted of millions of small- and medium-sized businesses and mom-and-pop shops, as well as large retail chains and department stores. Taobao effectively gave these small retailers a place to market their wares online while also improving upon the offline shopping experience by introducing features such as instant messaging and elaborate seller rating systems that allowed for convenience, communication, and trust building.
Taobao’s website reflects the local culture and shopping habits of Chinese consumers. Compared to the home pages of Western websites, Taobao’s looks busy, with flashing icons and animated cartoon characters promoting special deals. If clicking through eBay is like a walk down Main Street, USA, clicking through Taobao is like a walk down Shanghai’s busy Nanjing Lu, where sights and sounds bombard the shopper. To Western eyes Taobao’s home page might seem too cute or flashy, even distracting, but it is what Chinese users prefer and expect.
Taobao’s marketplace offers another important feature that sets it apart from many of its Western counterparts—shoppers are able to immediately click through to the seller and initiate a live chat. This is not surprising—the Chinese are accustomed to building a relationship with a seller before making a purchase, and in China’s shopping culture haggling and negotiation are standard. Whereas prices in an eBay auction start low and get bid up, prices on Taobao often start high and get haggled down. In fact, it’s hard to imagine e-commerce thriving in China without Taobao’s popular Wang Wang live chat feature.
The most important of Taobao’s features are those that allow online buyers and sellers to establish trust. Like eBay, Taobao allows buyers to rate the services of sellers after a transaction. Taobao’s ratings system tends to be much more extensive, allowing buyers to rate their sellers on many more variables. This reflects China’s lack of credit infrastructure and has led to Taobao’s filling the void often filled in North America by private companies and nonprofit organizations such as the Better Business Bureau. In conjunction with AliPay, Taobao has become the best source of rating and credit information for small businesses in China.
Taobao’s monetization model sets it apart from its Western counterparts’. Instead of taking a commission from each transaction, Taobao makes money by offering sellers ways to promote themselves, such as through premium storefronts, keyword advertisements, and other advertising opportunities. Because of its history as a largely free service, Taobao has introduced fees slowly over time, opting for a more conservative “take rate” on Taobao which captures less than 2.5 percent of a transaction’s value versus eBay’s take rate of 8.5 percent. But Taobao’s contribution to the Alibaba ecosystem is a powerful one, because it maintains a strong relationship with customers that can mean more money in Alibaba’s pocket through its other services, such as Tmall or AliPay.
Tmall
In many ways small, scrappy entrepreneurs built e-commerce in China through their storefronts on Taobao. Students or small retailers had more incentive than a behemoth to take to the Internet, because it brought them to the attention of potential buyers from all over China. Although small retailers were quick to embrace and pioneer e-commerce, large brands and retailers were slow, because e-commerce initially represented such a small percentage of their overall sales.
However, once Taobao was established as China’s largest shopping destination, large brands and retailers began to pay attention. At the same time many consumers were receiving uneven levels of service from the small retailers on Taobao and wanted a way to go directly to a large retailer or brand owner. “Why buy a product from a small corner shop and risk the product’s being a refurbished or damaged one when you can buy directly from a large, reputable retailer?” they thought.
With this situation in mind Alibaba Group introduced Tmall.com, a marketplace that connects large brands and retailers directly with consumers. The site opened in April 2008 as a part of Taobao and became an independent platform in 2011. As of June 30, 2014, it featured 110,000 brands and described itself as “dedicated to providing a premium shopping experience for Chinese consumers in search of top-quality branded merchandise.” If Taobao is a flea market with scrappy entrepreneurs hawking their wares, Tmall is the shiny shopping mall with glossy storefronts and dedicated sales and customer service staff.
One of the main benefits of Tmall for Alibaba Group is monetization. Whereas the fiercely independent and cost-conscious sellers on Taobao are highly resistant to paying commissions, fees, or anything that might seem like a tax on their sales, the large brands and retailers on Tmall typically are more than happy to pay commissions of around 5 percent to Alibaba Group for each sale. To them a few percentage points is a small price to pay to reach hundreds of millions of consumers in an online environment that bypasses the expensive retail and logistics infrastructure to which they are accustomed in the offline world.
Tmall has become an important channel for foreign brands to establish a presence in China and reach customers in China’s interior, where their retail infrastructure has yet to be built out. Brands such as Gap, Levis, Adidas, and Ray Ban have stores in Tmall and often use their Tmall shops as a way to learn about local customers while exploring how to further grow their presence in the market.
Tmall gets credit for pioneering China’s November 11 Singles’ Day promotion, a shopping day when consumers receive discounts. On November 11, 2014, Tmall and Taobao generated $9.3 billion in sales. Alibaba Group has made “going global” a major theme for Tmall and is increasingly recruiting foreign brands to sell on the marketplace.
Juhuasuan
Before there was Groupon, there was Taobao’s Group Buy feature, which allowed groups of friends to negotiate for a volume discount from sellers. Group Buy reflected the social nature of commerce in China, combining China’s group-oriented culture with the Chinese habit of haggling to get better prices on goods.
The trend of leveraging the power of group purchases to reduce product prices became so strong on Taobao that in 2010 the company started Juhuasuan as a separate group-buying marketplace that offers products at discounted prices by aggregating demand from numerous consumers, often through flash sales. Despite competition from hundreds of similar sites that popped up as Groupon gained attention in the West, Juhuasuan emerged as China’s most popular online group-buying marketplace, largely as a result of the relationships that Alibaba Group had with its existing customers on Taobao and AliPay.
AliExpress
AliExpress is Alibaba’s first attempt to connect Chinese sellers directly with consumers in international markets. Begun in April 2010, it showcases a wide variety of products at wholesale prices from wholesalers and manufacturers in China. By June 30, 2014, it was generating annual sales of US$4.5 billion, catering largely to consumers in emerging markets such as Russia, Brazil, and Nigeria.
Support Services Provided by Ecosystem Participants
Ant Financial Services Group
In October 2014, Alibaba Group launched Ant Financial Services Group, putting AliPay and its many related financial and credit services under a new roof. The name “Ant” is meant to refer to the small and micro-sized businesses the company serves, filling a void neglected by China’s state-backed banks, which tend to serve China’s state-owned enterprises. Among Ant Financial Services, AliPay is the shining star, having grown to become the world’s largest third-party online payment provider, quickly approaching $1 trillion in annual transaction volumes. It offers both direct and escrow-based payments for buyers and sellers engaged in domestic China transactions as well as cross-border transactions. AliPay facilitates transactions with Alibaba Group marketplaces as well as transactions for third-party merchants and service providers. Users can set up payments for utilities, mobile phone charges, rent, tuition, fees, and peer-to-peer fund transfers.
AliPay’s mobile service, AliPay Wallet, is increasingly replacing cash in China, supporting offline payments by allowing users to electronically transfer funds through advanced technologies including QR codes and sound wave payment. People are using AliPay Wallet at offline shops, restaurants, vending machines, taxis, and cinema chains. It is quickly becoming a routine part of life with such features as allowing a group of friends to split a bill equally at a restaurant through its Go Dutch feature.
China’s inefficient state-run banking system allowed Ant Financial (and its predecessor, Small and Micro Financial Services) to move into related areas more aggressively than have other payment systems, such as PayPal in the West. For example, when the company opened a money market fund, Yu’e Bao (leftover treasure), in June 2013, it quickly attracted 125 million users with interest rates that exceeded those at China’s traditional banks. Those users invested RMB570 billion in the fund. So while AliPay was launched as a payment system, it has evolved into a much larger and more diversified provider of financial services.
Alibaba Group describes Ant Financial as a “related company” because of its arm’s-length ownership structure, which was designed to comply with China’s heavily regulated financial industry. Through this complicated structure, Alibaba Group receives favorable terms for AliPay services while retaining an ownership stake and long-term claim to a portion of AliPay (and Ant Financial) profits.
Logistics
Logistics inefficiencies in China present both challenges and opportunities for e-commerce companies. While Western markets like the US are served by established national delivery services such as DHL, UPS, and FedEx, China’s logistics landscape is much more fragmented, with the market divided between several different players with varying levels of reliability and coverage. So it’s no surprise that China’s logistics providers have scrambled to catch up to the e-commerce boom, which saw more than 250 million packages shipped in the days after the 2014 Singles’ Day promotion.
To address the logistical challenges of keeping up with the demands of China’s fast-growing e-commerce market, Alibaba brought together the five major express delivery companies in China to set up a separate entity, China Smart Logistics Network, of which Alibaba owns 48 percent. The goal is to align and coordinate the logistics players to more seamlessly fulfill orders.
Alibaba’s approach differs from that of China’s leading online retailer, Jingdong.com, which has been building its own warehousing and distribution network, allowing it to control the customer experience from end to end. This has set up competition between Alibaba’s loosely allied network and the vertically integrated Jingdong. But perhaps the bigger race will be between the physical delivery infrastructure and the digital infrastructure, which is growing so quickly that it is straining China’s logistics system and risks creating a short-term bottleneck for the growth of e-commerce.
Media and Entertainment
As the son of a Pingtan performer, Jack Ma has a flair for the dramatic. So it’s not surprising that Alibaba is making an aggressive move into media and entertainment, investing in the video-sharing site Youku Tudou and establishing a film production company, Alibaba Pictures. To outside observers this may seem like a step away from Alibaba’s core strength. But in the context of China, the deal may make sense.
The way to think of Alibaba’s move into film and entertainment is this: If it is a product that can be bought and sold online, you can expect Alibaba will want to be there. And film and video are products that can be bought and sold online. E-commerce marketplaces traditionally have sold physical products. But increasingly they are becoming marketplaces for digital products, such as books, films, tickets, and virtual products used in video games. So it’s not surprising that Alibaba Group is interested in selling video products online through its digital platforms.
Alibaba’s more ambitious move is into the area of content production. To explain his move into film production, Jack told the South China Morning Post that in China “people’s wallets are bulging but their heads are empty.”1 It’s not an area entirely new to Jack, as he sits on the board of directors of Huayi Brothers Media Corporation, producers of the China blockbusters Cell Phone and A World without Thieves. Now that China has the world’s second-largest box office, behind the US, film has become a lucrative business providing real returns. Beyond that, Jack has a personal interest in bringing film into the lives of the Chinese. “E-commerce can affect people’s wallets. But film can affect people’s minds,” he once told me.
Other Support Services
Beyond these core products and services, Alibaba owns and/or is invested in a wide variety of businesses. Its homegrown cloud computing arm, AliCloud, provides computing power and storage for app developers and merchants, while its AliMama division provides Big Data analytics for marketers. Alibaba Group also has been acquiring and investing in companies in a range of areas, from mobile web browsers to retail to microblogging. Through these aggressive investments and acquisitions Alibaba is hoping to expand its reach so that each of these related companies further enhances the links between, and network effects of, the ecosystem. But in some corners the company’s aggressive expansion has met resistance from analysts who argue it may be going too far, notably with its nearly $200 million investment in a Guangzhou football team, Evergrande.
Alibaba Group Tomorrow
By the time of its IPO Alibaba was 15 years old. For many companies this would be considered reaching the age of maturity. But compared with the company’s stated goal Alibaba is a mere teenager. Thinking that his original goal for Alibaba to last 80 years was too conservative, Jack later extended the goal to 102 years, noting that it would allow Alibaba’s life to span three centuries. If this ambitious goal is to be reached, then Alibaba still has more than 85 years left to go. If Alibaba does manage to live this long, how might it grow? And what might Alibaba become someday?
Alibaba’s stated vision is nothing less than to build “the future infrastructure of commerce,” serving its mission to “make it easy to do business anywhere.” It wants to build a place where people will meet, work, and even “live” online so that the company’s products and services become central to the everyday lives of its customers. Given these goals and Alibaba’s past history, here are some of the main trends we might expect to see Alibaba focusing on in the future.
Growth of Alibaba’s Core Businesses
When Alibaba Group went public, only about half of China’s population of 1.36 billion was online. And of those Internet users, only about half had shopped online. It’s amazing to think that with only about 25 percent of China’s population, or 302 million, shopping online, Alibaba’s consumer sales volumes already exceed those of Amazon and eBay combined. One can only imagine the scale if these growth trends continue as more of China’s population comes online and takes to Internet shopping. It’s reasonable to argue that China’s e-commerce industry is in many ways still in its infancy and we can expect that Alibaba will continue to focus on China as it grows its main businesses, Alibaba.com, Alibaba China, Taobao, Tmall, and AliPay.
While growing these core businesses, it will be important for the company to stay ahead of one major wave that is reshaping e-commerce in China—the shift from PCs to mobile shopping. Although its start on mobile was slower than its competitors’, Alibaba has managed to grow and build a leadership position in mobile commerce. Holding that position and monetizing mobile will be crucial.
Growth of Alibaba’s Ecosystem
We can expect Alibaba to continue to grow its ecosystem and plug in more related services, such as cloud computing, logistics, navigation, and mapping. Growing its ecosystem without diluting its core businesses will require the company to find a fine balance. If successful, Alibaba will create a universe held together by the common links between all its services. But in doing so, it needs to avoid overexpansion, which might weaken its main services while creating opportunities for more specialized competitors to chip away at Alibaba’s market share.
Expansion into New Industry Frontiers
Perhaps the least-appreciated areas of potential growth for Alibaba are in massive industries that are being deregulated in China. Two major opportunities come to mind: financial services and media.
Anyone who has lived in China can attest to the inefficiency of its banks. One need look no further than the typical bank lobby, where customers wait for as long as an hour in rows of chairs just to pay the rent. By definition any business that creates a waiting room full of chairs is not serving its customers well.
Alibaba’s rapid success with its Yu’e Bao money market fund showed the potential for e-commerce players in banking. It’s easy to imagine that Internet companies like Alibaba and its rival Tencent could quickly convert their e-commerce customers into clients for financial services, everything from banking, loans, and insurance to wealth management. The big question is how quickly China will deregulate its banks. A hopeful sign for Alibaba came in the fall of 2014, when it received approval from the China Banking Regulatory Commission to establish a privately owned bank.
Another industry ripe for Alibaba’s participation is media and entertainment. Like banking, China’s media have been dominated by the government since the Communist takeover in 1949. The result is bland state-created media content, which may satisfy government leaders but is not good at meeting the demands of audiences.
The Internet has created a much more open playing field for film and video content in China. While censorship still inhibits growth in certain areas of political content, China’s media have become much more market oriented as the Internet has grown. China’s youth are much more likely to spend their time watching Internet content in front of the computer than watching staid government-sponsored content in front of the TV with their parents. At the same time China’s huge box office makes films aimed at the domestic audience commercially viable.
As government control of media content continues to loosen, we can expect that Internet companies will take up the slack, providing content that is much more market driven. And as distribution moves from cable television to the computer, tablet, and streaming, e-commerce companies such as Alibaba are well positioned to monetize digital products in the same way they monetized physical products. Indeed, immediately after Alibaba’s IPO Jack Ma spent time in Hollywood meeting with executives and positioning Alibaba as a gateway to the China market. While it begins to distribute content made by others, Alibaba Pictures will be moving toward producing original content.
Geographic Expansion
Outsiders often overlook or forget that Alibaba has always been a global business, from the day it began in 1999. Because Alibaba’s domestic China retail business has so dominated recent headlines about the company, people often forget that, of all of China’s Internet companies, Alibaba has the greatest international presence. Alibaba Group already has nearly ten million users in the US, three million in India, two million in Brazil, and half a million in Germany. Thus the question is not whether Alibaba will go global but how Alibaba will continue to go global, especially in its consumer businesses.
As Alibaba headed toward its IPO in New York, a number of journalists asked me whether Alibaba would be “invading” the US and taking on eBay or Amazon directly. My opinion is that Alibaba has learned from the mistakes of its competitors. Just as eBay’s US models didn’t fit the China market, Taobao’s and Tmall’s model don’t fit the US market. It would be hard to imagine that Alibaba could parachute into the West and compete directly with its Western counterparts. More likely is that Alibaba will first focus on cross-border trade, helping Chinese companies sell abroad through AliExpress and foreign companies sell in China through Tmall. And it’s likely that Alibaba will use its growing war chest to make strategic investments in similar e-commerce businesses in other countries.
While I don’t expect Alibaba to pose a threat to Western e-commerce giants on their home turf in the near term, one tantalizing possibility should not be ruled out—that Alibaba might acquire one or more of the US giants, such as eBay. These businesses would be entirely complementary, with little overlap. Back in 2003, when reporters asked Jack if he would sell his company to eBay, he would often joke in response: “No, but we might consider buying them.” With eBay valued at over $30 billion at the time, and Taobao yet to earn any revenues, it seemed a preposterous claim. But not anymore.
Challenges
Retaining Customers within Its Ecosystem
Alibaba must continue to innovate and provide relevant and powerful services that encourage its buyers and sellers to stay within its ecosystem. Despite all the great opportunities before Alibaba today, Jack and his management team are well aware that the tech road is littered with failed companies who had their brief moment in the sun before they were overtaken by new technologies and entrepreneurs. Alibaba needs to look only as far as its major partner, Yahoo!, which saw Google and Facebook speed past it in search engine usage and social networking, opportunities that Yahoo! had been well positioned to grab for itself, if only the company had had the vision and foresight to do so. In my early days at Alibaba, Jack Ma often quoted Intel’s Andy Grove: “Only the paranoid survive.” In the tech world at any moment a new idea or gizmo or app can cause a massive industry shift that renders old business models instantly obsolete. Maintaining a healthy level of paranoia will be important for Alibaba’s senior management.
An early risk for Taobao was that it might educate the China market about e-commerce only to see retailers break away over time and create their own online retail presence, bypassing Taobao altogether. The introduction of Tmall helped make this less likely by giving sellers the option to create a deeper and much more customized brand experience for their users. Meanwhile services such as AliPay, whose customers have gone to considerable trouble to link their bank accounts to Alibaba’s infrastructure, encourage shoppers to stay within the Alibaba ecosystem. Still, some specialized retailers have done well enough to leave the Taobao and Tmall platform and create their own websites, selling directly to customers. Alibaba will have to use all its data, technology, and innovation to offer the best shopping experience in China for a diverse set of products and brands.
eBay’s withdrawal from the China market left several years’ worth of running room for Taobao to gain a foothold in the market. But as e-commerce went mainstream, it was only natural that homegrown competition emerged. The most prominent of these competitors is Jingdong.com, whose business-to-customer retail store went live in 2004 and ten years later had about 22 percent of the B2C e-commerce market in China. Unlike Alibaba’s marketplace model, whose only inventory is the bits and bytes in its servers, Jingdong is a large retailer modeled after Amazon.com. It has an inventory of products and delivers them through an extensive warehouse and distribution system. Following Amazon’s long-term investment strategy, Jingdong spent heavily on expanding its infrastructure, losing money as it grew to scale. By being able to control the customer experience from order to fulfillment, Jingdong is banking on providing a more reliable customer experience than users receive through Taobao or Tmall. It will be interesting to see whether Jingdong’s retail model or Alibaba’s marketplace model will triumph in the long run. For now investors are betting on Alibaba, but with a market cap of approximately $40 billion at the time of Alibaba Group’s IPO, Jingdong is a formidable force in China.
While Jingdong takes on Alibaba directly, others, most notably Tencent, are moving into Alibaba’s territory from the side. Like Alibaba, Tencent is a vast conglomerate of Internet businesses, from social networks and messaging to online gaming. Led by its steady and unassuming founder, Pony Ma, Tencent was valued at nearly $150 billion at the time of Alibaba’s IPO. Its popular WeChat mobile phone messaging and social networking platform dominates the China market and has allowed Tencent to move aggressively into e-commerce, forcing Alibaba to play catch-up on mobile. Tencent’s 15 percent stake in Jingdong brings Alibaba’s two biggest competitors together in an alliance that foreshadows the battle ahead.
These three major players constitute about 75 percent of the Chinese B2C e-commerce market, with the remaining 25 percent split between a number of players, none of which has more than 5 percent. Moving forward, the most likely scenario is that more e-commerce players will emerge to take a greater share of the market. But however it shakes out, the heavy investment and intense competition will grow e-commerce in China, to everyone’s benefit. And the biggest winners will be consumers, entrepreneurs, and brands. They will have a new and effective channel through which to reach the world’s largest market.
Government Regulation
When initiating China’s “reform and opening up” policy, Deng Xiaoping famously said, “When you open the door, some flies will come in.” The Chinese government opened the door to the Internet because of the economic benefits it can create—e-commerce is a natural fit with the government’s goals. But when the door to e-commerce opened, some flies did come in, in the form of political content and the ability of ordinary citizens to mobilize opposition that might challenge the Communist Party’s authority.
Outside China, many people seem to think that the government so controls the Internet that they are surprised that e-commerce could take off in China at all, let alone give rise to the world’s largest e-commerce company. But this perception misses a fundamental point: while the government strictly controls news, information, and communications—areas where flies are most likely to emerge—it was relatively hands-off in the more politically neutral area of e-commerce.
Looking back at the effect the Chinese government had on the development of Alibaba, I can safely say that at times the government created headwinds and at times it created tailwinds, but neither were strong enough to be a major factor in Alibaba’s success or failure. More important than any relationship with the government was the company’s relationship with customers. Building innovative products and services that fit the needs of entrepreneurs and their customers was what got Alibaba where it is at today. My strong conviction is that Alibaba succeeded despite the government, not because of it.
The IPO and Alibaba’s size are likely to change the dynamics of its relationship with the government. When it was much smaller, Alibaba was largely below the radar of the government. But with so much of the country’s GDP flowing through Alibaba’s services, the government can’t help but pay attention and probably will approach Alibaba with a giant bear hug in the future, if only to keep it close. Jack’s stated goal of “being in love with the government but not marrying it” will become harder and harder to maintain over time.
Overall the government is likely to provide Alibaba with a tailwind as it moves ahead. As homegrown heroes, Jack and Alibaba are likely to be first in line for licenses in sensitive areas such as finance and media, despite the heavy presence of foreign investors in the company’s ownership structure. Alibaba’s insistence on leaving the company in the hands of its 27 partners should help allay any government fears that Alibaba could fall into the hands of “outside forces.”
But as Alibaba gets closer to the Chinese government, it will have to maintain a delicate balance with Western governments. Since his days as an English teacher, Jack has always considered one of his missions to be the creation of a bridge between China and the outside world. But in an era when China and Western governments are at odds on corporate espionage, government spying, and data privacy, being close to the Chinese government may mean that some of its global expansion efforts will meet a backlash from foreign governments or customers. Alibaba is an easy lightning rod for any and all criticism of China, and, whether he likes it or not, Jack Ma has become the face of China Inc.
The Legacy and Global Impact of Alibaba
To understand the impact that Alibaba has had in China, look no further than the one million shops based in rural areas that are active on Taobao and Tmall, selling anything from farm produce to furniture to crafts. Although e-commerce first took root in China’s cities among the urban middle class, it has since grown to become a national phenomenon, providing grassroots employment opportunities to drivers, couriers, and web designers deep in China’s hinterlands. Some of these mom-and-pop entrepreneurs have since graduated to building national brands.
By 2014 the trend had given rise to 20 “Taobao villages”—defined by Alibaba as villages where more than 10 percent of their households engage in e-commerce and total e-commerce transaction volume in the village exceeds RMB 10 million (about US$1.6 million) per year. The emergence of e-commerce in China’s countryside came at an important time, as rural jobs were becoming scarce and the country’s most talented and educated youth left the countryside for the cities. In fact e-commerce opportunities in their home villages have lured recent graduates back home to be part of the local e-commerce boom. More than any foreign aid or government initiative, e-commerce has leveled the playing field for entrepreneurs in remote regions, unleashed the entrepreneurial energy of China’s rural population, and helped lift entire villages out of poverty.
This trend, along with the emerging middle class, has shown that, although e-commerce was much slower to take off in China, once it finally took root, its impact was much more significant than in the US and Europe. As I noted earlier, while e-commerce proved an evolutionary development for commerce in the US, it proved revolutionary in China. Just as vast swaths of China leapfrogged directly to cell phones, skipping landlines altogether, China’s entire e-commerce ecosystem leapfrogged beyond the West, without first building a traditional and costly physical retail infrastructure.
The good news for other developing countries is that the e-commerce revolution in China’s emerging markets is not peculiar to China. Now that China has proven that e-commerce can thrive in developing countries, investors and entrepreneurs in other countries can learn from Alibaba’s example. Indeed, while traveling the world during 2014 to screen my documentary film, Crocodile in the Yangtze: The Alibaba Story, I noticed an interesting trend. No longer were e-commerce companies in emerging markets calling themselves the Amazon or eBay of their home country. Whether it’s the founders of Konga.com in Nigeria, Flipkart in India, or Tokopedia in Indonesia, the entrepreneurs I’ve encountered are now more likely to learn from—and compare themselves to—Alibaba.
If the last 20 years was the story of e-commerce in the West, the next 20 years will be the story of e-commerce in the East. Whereas China was once known as an Internet imitator, it is increasingly being rightfully recognized as an e-commerce innovator. China’s e-commerce pioneers have become an inspiration for e-commerce entrepreneurs around the world, and China has become an exciting laboratory for new ideas that will have a global impact on e-commerce.
Whether Alibaba succeeds or fails in the long run, Alibaba’s greatest contribution to e-commerce may ultimately be that it has developed a new business model that better fits the local conditions of developing markets. By demonstrating that the barriers to e-commerce in the developing world can be overcome, Alibaba has shown that e-commerce entrepreneurs can create a reliable ecosystem for commerce where governments and other institutions have failed. In the past China was best known for its export of cheap goods. But China’s most recent export—the Alibaba model—gives hope that the rest of the developing world may be about to enter its own golden era of e-commerce.