Opening Remarks

Alibaba's IPO May Herald the End of U.S. E-Commerce Dominance


CEO Ma

Photograph by ImagineChina/ZUMA Press

CEO Ma

In 1995, 31-year-old Jack Ma, a former English teacher from Hangzhou, China, who had recently started a translation company, took a trip to Seattle. A friend there showed Ma his personal computer and how to surf the Internet. Ma entered the search terms “Chinese” and “beer” and found nothing, suggesting that the future of global commerce could have been a lot different if there had been at least one early fan website for Tsingtao (168:HK).

When Ma returned to Hangzhou, a city of 2.4 million in eastern China, he started an online directory called China Pages. Launched at a time when few Chinese owned PCs, let alone had access to the Internet, Ma’s venture failed. Undeterred, he struck on an even bigger idea. In late 1998, Ma and 17 colleagues started a site meant to help small local companies sell their products online. They named it after Ali Baba, the poor woodcutter who discovers hidden treasure in The Arabian Nights folk tales.

The company Ma founded in his one-bedroom apartment has since grown into the largest e-commerce company in the world’s most populous country. This fall, Alibaba Group Holdings will go public on the New York Stock Exchange, and it could raise $20 billion, according to Bloomberg News, making it the largest stock offering in U.S. history. Ma, who’s worth an estimated $12.5 billion, owns 8.9 percent of the company. Aside from raising money, the IPO will send a message: China’s Web entrepreneurs are positioning themselves to compete in—and win—the race to build the first truly global online marketplace.

Alibaba is the corporate manifestation of China’s 500 million-strong middle class, which is rising up to assert its right to Western-style consumerism. A well-capitalized Alibaba, bent on expansion and with access to almost unlimited funds from the public market, could reorder the balance of power on the Internet. With its emphasis on brokering transactions into and out of China, it also promises to enable a new age of border-hopping commerce that bypasses middlemen and erodes the ability of governments to regulate trade. That’s likely to help Alibaba siphon consumers away from established U.S. sites such as Amazon and EBay. “This is the first time we’ve seen a sizable threat to American e-commerce dominance,” says Sam Hamadeh, the chief executive officer of PrivCo, a financial information website.

By the standards of U.S. e-commerce companies, Alibaba’s estimated $8 billion in revenue in 2013 seems a tad thin. (EBay (EBAY) brought in $16 billion in revenue last year; Amazon.com (AMZN), $75 billion.) The number is deceiving, though, because it represents only Alibaba’s commissions on sales and fees for its services. A better measure of Alibaba’s power is the volume of merchandise sold through its various properties: $248 billion in 2013. Amazon did about half that; EBay, a third. Or here’s another way to think about it: Last year, Alibaba facilitated the delivery of 5 billion packages from transactions on its retail websites, more than half of the total packages sent by delivery companies in China, according to its registration document with the Securities and Exchange Commission. By comparison, UPS (UPS) sent about 4.3 billion packages and documents last year.

With its multiple marketplaces and business models, and its hearty appetite for investing in seemingly unrelated businesses, Alibaba can be a challenging company to understand. Unlike Amazon and EBay, which created single online hubs and then opened regional versions around the world, Ma and his colleagues have succeeded by creating several different sites, each tailored for a different style of transaction—and each with the potential for massive global reach.

Alibaba.com, the company’s original marketplace, connects the sprawling base of Chinese manufacturers with small businesses across the globe. Companies such as cosmetics retailer 100% Pure, based in San Jose, use Alibaba.com to source key ingredients and packaging materials from wholesalers that list their wares on the site. “I have access to hundreds of suppliers at my fingertips,” says Susie Wang, 100% Pure’s co-founder. Without Alibaba, she’d likely be on a plane a few times a year, meeting with suppliers in China and Taiwan to haggle for fair terms. “If one is not reliable or not working well with us, I have the freedom to pick another and shop competitively for prices,” she says.

Alibaba is global in a way that Amazon isn’t, because it facilitates so much business into and out of China

Taobao, which resembles a Mandarin-language street bazaar, opened in 2003 as Alibaba’s response to EBay, whose then-CEO Meg Whitman pledged to spend $200 million to invade the Chinese online retail market, in part by acquiring a local player called Eachnet. “EBay is a shark in the ocean; we are a crocodile in the Yangtze River,” Ma liked to say at the time. “If we fight in the ocean, we will lose, but if we fight in the river, we will win.” In other words, he’d tailor his sites to the unique contours of the Chinese market. Reasoning that Chinese sellers were already surviving on razor-thin margins, he didn’t charge listing fees, undermining EBay’s standard 15 percent cut. Alibaba decided to collect money only when sellers chose to advertise their products with banner ads and search ads, and later, when they used Alibaba’s payment tools. The strategy worked. Taobao’s sales exploded to become Alibaba’s largest business; EBay, humbled and complaining about Chinese protectionism, withdrew from the country in 2006.

The selection on Taobao can be dizzying, with plenty of everyday items like clothes, furniture, and packaged foods, as well as more unusual fare such as bamboo birdcages (166 yuan, or $27) and rental boyfriends to accompany you to a social event (500 yuan). Although most transactions on Taobao connect Chinese buyers and sellers, the site reaches audiences beyond the country, too. For example, after Beijing’s smog crisis of 2013, Thomas Talhelm, a Fulbright scholar studying in Beijing, started a company selling homemade air filter contraptions on the site for 200 yuan apiece. He’s since received a stream of orders from Singapore, Malaysia, South Korea, India, and Mongolia, which is all the more surprising since his startup didn’t pay for advertising. Internet users searching for smog protection simply found Talhelm’s devices on Taobao.

Tmall, a virtual shopping center Alibaba opened in 2008, gives thousands of international companies, including global brands such as Nike (NKE) and Apple (AAPL), easy access to Chinese buyers, in exchange for 5 percent of all sales. Listing on Tmall can transform a business. Dennis Zhang, the CEO of online shoe retailer Sneakerhead.com, based in El Cerrito, Calif., spent 13 years trying to push his annual revenue beyond $20 million. Over the past two years he did that and more, doubling his sales by opening a store on Tmall, without having to go through the conventional brokers traditionally required to import goods into China. Alibaba “has compressed the whole middle layer of retail,” he says, allowing him to pocket a bigger cut of his sales.

The thread linking all of these properties is Alipay, an online payment processor that isn’t listed among Alibaba’s assets in its corporate filing with the SEC but might be Ma’s greatest achievement. Serving as an escrow service and guaranteeing every transaction, Alipay creates trust in a country where people historically aren’t accustomed to doing business with anyone they don’t know.

Internally, Ma has fashioned his employees into something resembling a fighting force. A fan of the popular martial arts fantasy novels of Louis Cha Leung-yung, he asks his mostly young recruits to adopt a name from the books as their workplace identity and even to print it on their business cards. (Ma took his own company name, Feng Qingyang, from a kung fu guru in the books.) Hans Tung, a managing partner at GGV Capital, which has invested in Alibaba, says that in Ma’s system, “you lose your identity somewhat and become part of a larger, more powerful platform. It’s a religion, a band-of-brothers kind of thing.”

Former employees and partners say Alibaba has a top-down culture, with all decisions made by Ma, Executive Vice Chairman Joe Tsai, and 25 other co-founders and senior executives. (A unique stock structure, which gives the founders enhanced rights on board appointments, made it impossible for Alibaba to list on Hong Kong’s stock exchange, whose bylaws forbid such arrangements.) Employees are expected to move quickly when the bosses hand down edicts. “One of the top values that employees are asked to follow is to embrace change,” says documentary filmmaker Hao Wu, who worked at the company in 2007 and 2008. “Everyone is supposed to just focus on the new direction and execute.”

To those inside and outside the company, the thrust of that strategy is unmistakable: expansion in the West. In recent months, Ma has been on an American startup spending spree, investing $250 million in the ride-sharing service Lyft, leading a $170 million funding round for Fanatics, an online seller of sports memorabilia, and investing $50 million each in mobile search engine Quixey.com and mobile messaging app Tango, among many others. On July 31, Alibaba invested $120 million in Kabam, a maker of online strategy games; a day earlier, Bloomberg News reported that Alibaba was negotiating to back the social networking upstart Snapchat with an investment that would value the messaging app at $10 billion.

The deals allow Alibaba to develop ties with the U.S. technology industry and take direct aim at American consumers, who spend more money online than people anywhere in the world. In June, Alibaba opened a boutique website, 11 Main, offering “one of a kind” items in categories such as fashion, jewelry, and art. The site is invitation-only and hasn’t yet been rolled out to a wider audience. All these moves suggest that Alibaba intends to challenge Amazon and EBay on their own turf, most likely by giving American customers opportunities to buy things within mobile apps and games, as it does so successfully in China. “Alibaba is well known within Internet circles but much less so among Western consumers,” says David Rosenblatt, CEO of luxury goods retailer 1stDibs, another company Alibaba has backed. “I expect that to change after the IPO.”

For all his resources and ambition, Ma has some big challenges as he seeks growth outside China. Not only are most shoppers unfamiliar with Alibaba’s brand but they already have deep relationships with retail sites in their home countries. And, as companies such as telecommunications equipment provider Huawei Technologies have learned, a Chinese pedigree can make Western customers wary.

One could argue, though, that Alibaba is already global in a way that Amazon and EBay can’t be, because it facilitates such a large volume of sales into and out of China—what it calls “cross-border commerce” in its filing with the SEC. This fall, for example, Alibaba will put links to its Alipay service on the sites of big retailers that work with ShopRunner, a Philadelphia-area logistics company, in which Alibaba owns a 40 percent stake. ShopRunner has formed ties with thousands of Western retail brands, such as Neiman Marcus, Tommy Hilfiger, and Toys “R” Us, to enable two-day shipping for an annual fee, a service akin to Amazon Prime. The Alibaba links, visible only to Chinese shoppers, will allow them to receive expedited shipments from U.S. retailers. “Alibaba’s future is one where consumers everywhere can buy from retailers everywhere,” says Fiona Dias, the chief strategy officer of ShopRunner.

The promise of frictionless, cross-border commerce is tantalizing. Buyers will have an entire world of sellers from which to choose. Increased competition will depress and standardize prices around the world, so a company like Apple can no longer charge one price for the iPad in Europe and another in the U.S.

There are opportunities for sellers, too. A vendor of a seasonal product in one part of the world—say, snowboards—can sell locally in the winter and then find a market during the summer in the opposite hemisphere. And sellers in crowded local markets can seek out buyers elsewhere. For the last two years, Premium Australia Foods, a startup in Melbourne, has sold delicacies such as macadamia nuts, olive oil, honey, and raisins to Chinese shoppers using Tmall without establishing physical operations on the mainland. Sales have been brisk. “At the end of the day, it allows countries to make things they’re good at,” says Christopher Morley, the company’s e-commerce director. Or, put another way: Alibaba, with a base of unchallenged power in the Chinese market and its coffers soon to be enriched, is set to not only conquer the world but also make it a smaller place.

With Christina Larson
Stone_190
Stone is a senior writer for Bloomberg Businessweek in San Francisco. He is the author of The Everything Store: Jeff Bezos and the Age of Amazon (Little, Brown; October 2013). Follow him on Twitter @BradStone.

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Companies Mentioned

  • 168:HK
    (Tsingtao Brewery Co Ltd)
    • $52.4 HKD
    • -1.15
    • -2.19%
  • EBAY
    (eBay Inc)
    • $56.41 USD
    • 0.47
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