ATG Original: Alibaba – Meet China’s Online Giant (Parts 1 & 2)

ALIBABA—Part 1: MEET CHINA’S ONLINE GIANT

by Nancy K. Herther

In the story collection, One Thousand and One Nights, Ali Baba is a poor but honest woodcutter who stumbles upon a treasure store of stolen goods as he hears the thieves gain entrance to the treasure trove by using the magic words: “Open sesame.” These words open the cave revealing untold riches. Ali Baba takes only a single bag of gold coins in this story. However, in the real world of Alibaba Group Holding Ltd., the Chinese online juggernaut, potential competitors must be wondering what the company’s ultimate goal might be in their upcoming initial public offering (IPO) for listing on the New York Stock Exchange.

Alibaba IPO 1

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China’s internet giant Alibaba began a mere 15 years ago in Hangzhou, People’s Republic of China, as an online business-to-business portal to connect Chinese manufacturers with potential sales outlets across the globe. The Alibaba Group is still a privately-owned business today, but with the recent completion of their Securities & Exchange Commission (SEC) filing on May 8, 2014, Alibaba signaled its intent to file on the New York Stock Exchange. Their hope is to raise $1 billion (U.S.). Against the Grain sought to interview company representatives for this initial report, but under American securities law, the company is now in a “quiet period” during which any such public contact would be seen as a violation of the IPO process and a potential attempt to sway public opinion or investor interest.

The company had been considering other countries for the public launch, but decided on the U.S. to “make us a more global company and enhance the company’s transparency, as well as allow the company to continue to pursue our long-term vision and ideals.” The IPO is widely expected to be one of the largest initial public offerings in American history. The company also noted that, “should circumstances permit in the future, we will be constructive toward extending our public status in the China capital market in order to share our growth with the people of China.”

Currently, Alibaba has very little presence in the American marketplace, although for Europe and other parts of the world it represents a major sales channel for consumer and business-to-business sales. The sheer size of the Chinese markets, along with the stunning growth of Alibaba since 1999, makes the company—and their imminent IPO something that no one can ignore or underestimate in its potential or influence.

Alibaba’s growth has been nothing less than breathtaking… Over the past few years, Alibaba’s revenue growth has been nothing short of stunning.” —Analysis from PrivCo

Tony Haitao Cui, University of Minnesota marketing professor and noted China expert, explains that, “large new competitors such as Alibaba in the field will bring more competition to the current dominating online retailer Amazon, which will benefit consumers and small business for sure. However, it is also possible that Alibaba won’t be able to match the hype they have had in Asia easily, at least in the first several years or even slightly longer time. There are many reasons for the speculation. For instance, understanding the local culture and consumer behavior and successfully adapting to local market are harder than simply saying. The failures of both eBay’s and Amazon’s business in China are among many examples. Ironically, the competitor defeating eBay and Amazon in China was indeed Alibaba because the latter knows Chinese consumers better than eBay and Amazon, which helped Alibaba (and its subsidiary company taobao.com) tremendously in competing with its foreign competitors. Although Amazon did not have as good luck in China as in U.S., Alibaba may find it facing similar difficulties in U.S. as Amazon did in China. There could be other early barriers for Alibaba, such as fully understanding the law regulations and the ways to deal with them in U.S. (e.g., lobbying in U.S. vs. relying on Guanxi and direct cooperation with government in China) and possible nationalism backlash from American media and public as faced by Japanese companies in 1980s.”

Open Sesame

Alibaba, the name, comes from founder Jack Ma who reported this version of the company’s naming this way: alibaba logo“One day I was in San Francisco in a coffee shop, and I was thinking Alibaba is a good name. And then a waitress came, and I said do you know about Alibaba? And she said yes. I said what do you know about Alibaba, and she said ‘Open Sesame.’ And I said yes, this is the name! Then I went onto the street and found 30 people and asked them, ‘Do you know Alilbaba’? People from India, people from Germany, people from Tokyo and China… They all knew about Alibaba. Alibaba—open sesame. Alibaba — 40 thieves. Alibaba is not a thief. Alibaba is a kind, smart business person, and he helped the village. So…easy to spell, and global know. Alibaba opens sesame for small- to medium-sized companies.” The word baba, in Chinese, means Dad. The company also registered the name Alimama, which it now uses as an Alibaba marketing platform, gathering and manipulating all of the Big Data harvested from the company’s various online portals. Alimama has been described as a direct challenge to Google and is the largest open marketing platform in China today.

“Contributors and beneficiaries of U.S. education systems such as authors, librarians, and students and readers would certainly benefit greatly from more intense competition between the near monopolist Amazon and its new (and more significant than before) competitor,” Cui observes. “Indeed, the presence of Alibaba and its subsidiary company Taobao does help Chinese consumers enjoy lower prices for books and other products they carry, and I do not see any difference in other markets including U.S. However, as stated above, there does exist a grace period for Amazon since it takes time for companies, even for a company as big as Alibaba, to establish successfully in a foreign market. In the long run, Amazon should and will be concerned with any new entries to the U.S. market, the biggest and most significant market in the world.”

Alibaba's Customer Homepage

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On the company’s website, the word Alibaba is described as “a provocation. All the best names are provocations: Virgin, Yahoo, Caterpillar, Fannie Mae, Gap, Banana Republic, Crossfire, Igor. To qualify as a provocation, a name must contain what most people would call “negative messages” for the goods and services the name is to represent. Fortunately, consumers process these negative messages positively. As long as the name maps to one of the positioning points of the brand, consumers never take its meaning literally, and the negative aspects of the name just give it greater depth.”

Building a Company to Last Three Centuries

Alibaba began in 1999 in former CEO and now Chairman Jack Ma’s small apartment with a group of 18 friends and family who became his partners in the venture. “From the outset,” Alibaba’s website explains, “the company’s founders shared a belief that the Internet would level the playing field by enabling small enterprises to leverage innovation and technology to grow and compete more effectively in the domestic and global economies….The Alibaba culture is about championing small businesses. We operate an ecosystem where all participants—consumers, merchants, third-party service providers and others—have an opportunity to prosper.”

The company espouses six values that guide the company and its leadership.

  • Customer First—The interests of our community of buyers and sellers must be our first priority.
  • Teamwork—We believe teamwork enables ordinary people to achieve extraordinary things.
  • Embrace Change—In this fast-changing world, we must be flexible, innovative and ready to adapt to new business conditions in order to survive.
  • Integrity—We expect our people to uphold the highest standards of honesty and to deliver on their commitments.
  • Passion—We expect our people to approach everything with fire in their belly and never give up on doing what they believe is right.
  • Commitment—Employees who demonstrate perseverance and excellence are richly rewarded.

“Our founders started our company to champion small businesses, in the belief that the Internet would level the playing field by enabling small enterprises to leverage innovation and technology to grow and compete more effectively in the domestic and global economies. Our decisions are guided by how they serve our mission over the long-term, not by the pursuit of short-term gains.” —Alibaba’s SEC filing

Nothing should be taken lightly as we encourage our people to “work happily, and live seriously.” An idealist, Ma believes that China needs companies that they can believe in, that value people and are in business for the long run. In that effort, in 2011, Ma stated his goals for Alibaba were to help establish ten million small businesses in China, create 100 million new jobs, and serve a billion new customers across the globe.

Ma is also a realist and the juggernaut that is Alibaba clearly has the potential to change the online retail market and distribution system in our increasingly global economy. The IPO itself is projected to be a stunning record setter. If the company does bring in $20-$30 billion U.S., that would make it the largest IPO in history. Facebook’s 2012 IPO raised just a tad bit over $16 billion. In 2008, VISA brought in $19 billion. General Motors, in 2010 raised $15.8 billion. Talk about deep pockets!

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How Global our World is Becoming!

The traditional story of Ali Baba and the 40 Thieves ends with Ali Baba as the only one knowing the secret of the treasure in the cave and how to access it. In reality, Alibaba isn’t the only foreign competitor with eyes on the developing internet marketplace and there is no magic formula or code that guarantees success. Amazon and other major internet powerhouses have little to fear at this time,” explains self-published author and PBS MediaShift writer Carla King to ATG. “Consumer book distribution today online is clearly dominated by Amazon. Add B&N, Apple, and Kobo with great online distribution for books published via traditional distribution and self-publishing services via aggregators like Smashwords, Amazon, Vook, BookBaby, IngramSpark who put books into the sales channel to reach online retailers. Alibaba is simply another channel and so that means books reach a larger audience.”

“It is important to remember exactly how strong the Amazon monopoly is,” The Wire‘s blogger Polly Mosendz tells ATG readers. “Alibaba is really facing an uphill battle—as of March 2014, Amazon’s share of new book unit purchases was 41 percent; they sold 65 percent of all new online book units (print and digital); their e-book share is 67 percent or the market; and they control 64 percent of sales of all printed books online. This is an astounding advantage, and because of it, their pricing is incredibly hard to beat. It also means that, to many shoppers, Amazon is the first thought after ‘I want a new book.’ This pushes their SEO—the Google result for ‘Best Selling Book’ lists Amazon before even Wikipedia for the topic. While I certainly believe Alibaba can make a major push in the book market, they are facing a true monarch with Amazon that they cannot immediately dethrone.”

amazon-184098_150“I don’t see anybody eclipsing Amazon as the World’s Largest Bookstore,” King believes. “Traditional publishing has had it coming for a long time now for resting on its laurels and not keeping up with business and technology innovations. We love to hate Amazon, but the fact is that they and Smashwords shook up the publishing world and both writers and readers are better off for it. Big Pub is now trying to get with the program, and are making huge mistakes, like outsourcing self-publishing arms of their companies with Author Solutions (acquired by Penguin in 2012), a company whose self-publishing service is an outrageously priced vanity press technology engine that takes advantage of authors’ naiveté with constant promises and outrageous up-selling with packages up and over $15,000, enticement of agent interest and movie deals. When traditional publishing companies outsource to them (HayHouse, Thomas-Nelson, Harlequin), it just tells me that traditional publishing needs a few more hard knocks before they come to their senses.”

“Today’s authors are gaining control,” King observes. “Especially the big names, but the mid-list is publishing back with independent publishing. Really, how many readers do you know go running out to buy the latest Hachette book? So what that Hachette offers 40% off all of their books to Walmart online customers? Readers run to buy the latest Stephen King, Margaret Atwood, Barbara Kingsolver. Not the latest Hachette, Random House, Penguin, Simon and Schuster, HarperCollins. I think that these companies forget that they exist to serve readers and the authors who keep them in business. I, for one, will continue to celebrate Amazon’s dominance and technology companies like Smashwords with their steady progress in serving both author and reader.”

Edward Tenner, noted historian of technology and culture, as well as a founding advisor of Smithsonian’s Lemelson Center, sees Alibaba as having a steep learning curve to enter bookselling and other markets now dominated by Amazon. “I doubt that even they would be able to build a U.S. warehouse distribution network for physical media that could compete with Amazon, he tells ATG. “Their model of bookselling in China seems to be working with independent booksellers rather than developing a massive inventory of their own—this is just from a quick search, and I emphasize I haven’t studied the question. While Amazon is huge in bookselling, books (electronic and physical) are now a small part of Amazon, only 7 percent. It’s interesting to me that they still care so much about it; that’s probably related to Jeff Bezos’ purchase of the Washington Post.”

Amazon has felt a lot of heat for their decision to prevent pre-orders from the publisher Hachette,” Mosendz explains; “however, this is simply how Amazon operates. They have employed this negotiation strategy in the past because it allows them to secure the lowest prices. While Alibaba can certainly disrupt the book sales market in terms of offering a very large number of titles, they may not see a similar volume due to Amazon’s very low prices. Additionally, Alibaba would need to hit pre-orders hard and target those sales to really make a difference. Right now, Amazon is instrumental to Best Seller lists and an unavoidable partner for publishers. I believe Amazon is not concerned, as they are continuing to negotiation as they always have, by pulling pre-orders and promotions from certain retailers until they get the price they want. I believe if they were genuinely concerned, they may change this tactic to get into the good graces of publishers and prevent them from setting up strong ties with Alibaba.”

“I believe that all innovation and competition is good for authors, the reading public and the publishing industry as a whole,”swlogo King concludes. “After all, technology is responsible for the resurgence of book buying in the general public with Kindles and Nooks and iPads and such that allow us to carry huge libraries with us wherever we go. Amazon and Smashwords entered the publishing world with technologies that allowed authors to easily bypass the traditional publishing gatekeepers, and other companies followed with their own aggregation systems to reach the online stores. “I’m quite sure that the book aggregators—Smashwords, Amazon, Vook, BookBaby, IngramSpark and others—will welcome Alibaba as another sales channel to serve their customers. Will traditional publishing reach out to them? They’d better!”

Mosendz cautions that, “we must not underestimate Amazon and we must understand the time it takes to build customer trust. Alibaba may be a giant in China, but they are not a familiar face to most Americans. They are not established in the U.S., so truly, they do not yet possess the size, profitability, or power to even be considered a potential Amazon butt-kicker. This should be revisited after 11 Main opens. They will have to win over Americans with reliability, low prices, customer service, and simply presence—a familiar face. Amazon’s logo is a smile, and recognized worldwide. They are an extremely formidable opponent, and Alibaba will have to work diligently and fire on all cylinders to grow large enough in the States that they can then try to knock off Amazon.

Tenner sees another challenge for Alibaba or other new entrants in the market: “The real question may be how Alibaba will change the intricate network of alliances and rivalries of U.S. and global electronics, software, retail, and media companies. I’ll leave scenarios to others. This is a bit like the international diplomatic system of 1914.” Of course, this led to World War I, the ‘war to end all wars;’ so watching events unfold over the coming months should be of interest to us all.

 

ALIBABAPart 2: THE IPO OPENS THE GLOBAL FINANCIAL MARKET

In its 15 years, Alibaba Group Holding Limited has grown massively in China yet making significant inroads in markets in Taiwan, India, Japan as well as Europe and the U.S. Their SEC F-1 form provides detailed information on the company’s growth and current subsidiaries, which include three highly successful online marketplaces:

  • Taobao Marketplace, China’s largest online shopping destination (by gross merchandise volume). Taobao, a consumer-to-consumer portal not unlike eBay, features nearly a billion products and is one of the 20 most-visited websites globally.
  • Tmall, China’s largest third-party platform for brands and retailers. Tmall, a newish business-to-consumer portal that is a bit like Amazon, helps global brands such as Disney and Levi’s reach China’s middle classes.
  • Juhuasuan, much like Groupon, is China’s most popular group-buying marketplace by size of monthly active users and provides “ timely deals on women’s and men’s apparel, homewares, mother and baby product, consumer electronic accessories, children’s toys and more.”
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These three marketplaces generated a combined GMV of RMB1,542 billion (US$248 billion) from 231 million active buyers and 8 million active sellers in the twelve months ended December 31, 2013. “A significant portion of our customers have begun transacting on our mobile platform, and we are focused on capturing this opportunity. In the three months ended December 31, 2013, mobile GMV accounted for 19.7% of our GMV, up from 7.4% in the same period in the previous year,” the company reported. These three Alibaba companies also accounted for 82.7% of Alibaba’s revenues in the nine months ended December 31, 2013.

Additionally, the company operates these three online marketplaces:

  • Alibaba.com is China’s largest global online wholesale marketplace in 2013 by revenue
  • 1688.com, Alibaba’s China wholesale marketplace
  • AliExpress, their global consumer marketplace, as well as provide cloud computing services.

Through Alipay, Alibaba offers payment and escrow services for buyers and sellers, “providing security, trust and convenience to our users.”

“We take a platform approach to shipping and delivery,” the company’s SEC filing reports, “by working with third-party logistics service providers through a central logistics information system operated by Zhejiang Cainiao Supply Chain Management Co., Ltd., or China Smart Logistics, our 48%-owned affiliate. Through our investment in UCWeb, we are able to leverage its expertise as a developer and operator of mobile web browsers to enhance our mobile offerings beyond e-commerce, such as general mobile search.”

“Our revenue is primarily generated from merchants through online marketing services (via Alimama, our proprietary online marketing platform), commissions on transactions and fees for online services,” the SEC filing continues. “We also generate revenues through fees from memberships, value-added services, and cloud computing services. In the nine months ended December 31, 2013, we generated revenue of RMB40.5 billion (U.S. $6.5 billion) and net income of RMB17.7 billion (U.S. $2.9 billion).”

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As recently noted in an article in The Economist, “By 2020 China’s e-commerce market is forecast to be bigger than the existing markets in America, Britain, Japan, Germany, and France combined. And although it is not about to challenge Amazon in America, Alibaba is expanding globally by capturing the spending of Chinese overseas and by moving into emerging economies.”

“Alibaba is doing a great job in two fields in China,” Tony Haitao Cui, University of Minnesota marketing professor and noted China expert, advises. “The first and its earliest business in China is being the world’s largest online B2B trading platform for small businesses. The second is in the C2C (consumer to consumer) business as Taobao and Tmall.com (both owned by Alibaba Group) are doing. Amazon is more successful and well known in B2C (business to consumer), although it does provide C2C like Amazon Marketplace and B2B services as well. Therefore, Alibaba will be competing in U.S. not only with Amazon but with C2C companies like eBay as well. As we know, Alibaba defeated both in China but that was partially because of the better understanding of Chinese consumers and society by Alibaba than its foreign rivals. Although Alibaba can certainly still learn from its successful experience in China, the leverage won’t be as large as many people expect, I think.”

Competition for eBay and Amazon?

Alibaba’s business model is much closer aligned to that of eBay rather than Amazon. Alibaba presents itself as a marketplace/platform for both buyers and seller, taking its revenue from retailed partners based on the number of views that are made to their sites. Amazon’s model is as an online retailer itself, investing in advertising, working out pricing deals for products and warehousing items it sells. Amazon’s success depends on volume, because profit margins can be very small (or nonexistent) in efforts to attract buyers. Their Prime subscription service and other business models require extensive marketing and customer interaction for growth. Alibaba, as a more traditional middleman is able to operate at a lower profile allowing buyers and sellers themselves to assert their needs and interests.

“Our mission is to make it easy to do business anywhere.” —Alibaba’s website

“I believe Amazon has done impressive work thus far, which is partially the product of them being one of the first to the online shopping market in the U.S., and partially the product of their trustworthiness and low prices,” The Wire‘s blogger Polly Mosendz tells ATG readers. “People trust Amazon, and Amazon has successfully managed to appear—though not always to actually be—the cheapest option on the market. While I believe Alibaba’s entry could certainly shake things up, I don’t believe they will automatically start off as a direct competitor to Amazon. They have a lot of growing to do to get to that scale in the United States, though their existing infrastructure will allow for that growth to be incredibly rapid. I believe they will initially be in competition with smaller online retailers.”

However, Alibaba seems to have more ideas up its sleeve. Alibaba’s 11 Main—“a new shopping destination that brings together a hand-selected collection of specialty shops and boutiques”—is a beta site from Alibaba intended, at this point, “as an invitation-only marketplace [that] carefully selects merchants, making some of the best and most differentiated boutiques available to shoppers.” This testbed may be a toe-in-the-water of direct interaction with users—something that Amazon must be watching very closely. Another interesting, recent development is Alibaba’s investment in ChinaVision—which brings its stake to 60% in this company that focuses on video content and digital entertainment.

Mosendz is taking a wait-and-see attitude on 11 Main: “11 Main, the first Alibaba online retailer in the U.S., is still working to build up a model that Amazon has already mastered: allowing users to easily list items and become digital shopkeepers. According to the 11 Main website, they require that vendors already have existing businesses that sell online in order to apply to be an 11 Main seller. Amazon has a two-prong selling model: professional and personal, allowing the average Joe to sell along side big-box retailers. This helps drive down costs for used products, and therefore keeps very low prices on Amazon overall. 11 Main also has an ‘invitation only’ system for shop openings, whereas Amazon allows a variety of products to be sold without prior approval or a vetting process.”

Another interesting move over the past few months is Alibaba’s offer to buy AutoNavi, a Chinese digital mapping firm. “The market for navigation and map applications and services has become increasingly challenging,” the company noted. This would beef up Alibaba’s position against Chinese competitors like Baidu Inc. and Tencent Holdings, but might also help to expand the company’s services into new areas as well as improving their logistics assets. They acquired Ttpod, a Chinese mobile music player startup, which is expected to “expand Alibaba’s presence in social music and mobile products,” and invested in a cloud service targeted for Chinese banks and securities firms that will strengthen and build on Alibaba’s Alipay third-party transaction system.

Kantar Worldpanel’s Chinese General Manager Jason Yu tells Against the Grain that Alibaba’s business-to-consumerTMall logo business (as represented by Taobao and Tmall) offers a “major weapon” in being commission-free, “eBay’s venture in China (Eachnet) eventually were outset as they cannot compete with Taobao for that. In the early days, aside from low price (which is offered by many millions of small enterprises), the shop also offer free delivery and wide range of merchandise that is not accessible to Chinese consumers as there is not many national retailers and distribution infrastructure was poor. I am sure this is not the case in the U.S. In the context of book/music distribution, Amazon deals with big publishers and while Alibaba is probably less good at. They are very good at the set up the market place/ecosystem for SMEs (small and medium enterprises). Therefore I am not entirely sure if Alibaba can beat Amazon in this case.”

“While Alibaba may certainly change the shop opening process as time progresses,” Mosendz points out, “this will pose a major hurdle to being a true Amazon competitor in the meantime. That being said, they are poised to expand and perfect this system rapidly. After that, it will be a matter of gaining customer trust and driving down costs. This, too, Amazon has cornered, as Jeff Bezos discussed at the recent launch of the Amazon Fire Phone. Trust is everything to Amazon, and they have had many years to cultivate it in the United States. Alibaba does not yet have that, so they will need to rely on extremely low prices. Amazon has massive negotiation power with major retailers, though their approach with companies like Hachette and Warner Bros. has recently come under fire. While their negotiation tactics may be harsh, they allow for the extremely low prices that keep Amazon customers coming back.”

Balancing Potential Riches and Significant Risk

Alibaba’s relationship with its largest investors—Yahoo! (22.6%) and Softbank (34.4%)—is yet another complexity. In November 2005, Yahoo! made a $1 billion investment in return for a 40% stake in Alibaba. In return, Yahoo! turned its Chinese operations over to Alibaba—which had the effect of making Alibaba, with the signing of the agreement, the largest online company in China. Ma hoped to merge the company’s three separate search engines under the new Yahoo! China brand with the goal of becoming the top search engine in the country. However, Google and Beijing-based Baidu.com were already in the top two positions and the alignment with Yahoo! has always been an issue. As Alibaba extends its reach into new, established markets, it will be interesting to see how relationships with their partners evolve.

“We are the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013, according to industry sources. We operate our ecosystem as a platform for third parties, and we do not engage in direct sales, compete with our merchants or hold inventory.” —Alibaba’s SEC filing

For investors willing to accept the risks of dealing with the “new frontier of Chinese internet business, Alibaba is extremely tempting. Speculators interested in short-term gain can hardly resist staggering growth such as this. The IPO is expected to raise anywhere from $15 – 26 billion U.S., and Piper Jaffray’s analyst Gene Munster recently reported that the Chinese e-commerce giant is worth $221 billion, including cash. Financial research company Sanford C. Bernstein has estimated Alibaba’s value at $230 billion. Numbers like these are mind numbing.

“To be honest,” Cui advises, “Amazon has been doing a great job in U.S. in providing great services and value to its users. Although the initial incentives for Amazon to do so was not to defend its territories against competition from future foreign competitors like Alibaba but rather to compete with once dominant traditional brick and motor stores in order to survive in the market place, the competitive advantages they have accumulated will inevitably help Amazon defend its business from possible encroachment from Alibaba. It is thus really not an easy job for any new competitors, especially those from foreign markets like Alibaba, to successfully compete with Amazon in the U.S. market. There is definitely a chance, and probably a very good chance. But the route to success is also rough and not short.”

China itself offers Alibaba a ready market, cheap labor and, with a strong foothold in China, has established a solid presence in Asia—which represents 60% of the world’s population and the largest growth area for internet-based services and sales. However, many issues continue in the Chinese marketplace. The Chinese government has been moving to a more capitalistic economy, but it is hardly a free market—with the government controlling businesses, international trade issues, as well as the internet itself. China’s legal structure is also an issue. The country has not had a strong record of honoring international business or legal conventions—enforcing copyright, patents as well as making it easy to redress grievances against companies or the government itself. The country and Alibaba itself—continue to be frequently charged with selling knock-off copycat products and not adequately policing illegal trade

In June, the U.S.-China Economic & Security Review Commission, which monitors bilateral relations on behalf of Congress, published a report highlighting the legal risks of so-called variable interest entities (VIE), “Risks of China’s Internet Companies on U.S. Stock Exchanges,” which highlighted legal risks for potential investors in what they called variable interest entities.”

The problems and risks, the report pointed out is due to China’s highly restricted financial markets and their government’s requirement that internet companies be majority owned by Chinese nationals. The report also pointed out that U.S. investors are not adequately protected because rule of law in China is, as yet, underdeveloped.

The timing of this government report is noteworthy due to Alibaba’s imminent IPO. “If U.S. investors continue to buy into such Chinese VIE schemes and the system collapses,” the report concludes, “the scenario could be akin to the 2001-2011 Chinese reverse-merger debacle that cost U.S. investors an estimated $18 billion (US).” China clearly needs to address stress points in their market development in light of the global economy if they intend to be accepted as equal trade partners. Will this report or concern dampen the current Alibaba fever? Only time will tell.

 Some facts about the Chinese marketplace today

  • China has the world’s largest mobile Internet user base with 500 million users as of Dec. 31, 2013
  • China had the world’s largest Internet population with 618 million users as of Dec. 31, 2013
  • Online shopping, which represented 7.9% of total China consumption in 2013, is projected to grow at a compound annual growth rate, or CAGR, of 27.2% from 2013 to 2016
  • In 2013, the average active buyer on Alibaba’s China retail marketplaces placed 49 orders
  • The company’s operating profit and net income grew 114.4% and 85.4% from fiscal year 2012 to fiscal year 2013, respectively
  • Alibaba is the largest online and mobile commerce company in the world in terms of gross merchandise volume (GMV) in 2013. Their China retail marketplaces generated a combined GMV of RMB1,542 billion (U.S. $248 billion) from 231 million active buyers and 8 million active sellers in the twelve months ended Dec. 31, 2013
  • Alibaba’s total revenue increased by 56.6%, from RMB25,843 million in the nine months ended Dec. 31, 2012 to RMB40,473 million (U.S. $6,511 million) in the same period in 2013.

 

Nancy HertherNancy Herther writes articles on issues of new product development, company analysis/assessment, technology assessment and other areas of relevance to research/library/information sectors. Most published work is available online at the ATG website. Nancy received her MLS from the University of Minnesota with a minor in Adult and Continuing Education and now serves as the Librarian for American Studies, Anthropology, Asian American Studies and Sociology at the University of Minnesota library.

 

 

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