Sci-Tech

Alibaba and the R155bn IPO

Alistair Fairweather

American corporations have dominated industries as internet access spread. But Alibaba has always done things in its own distinctly Chinese way.

Jack Ma and 17 other founders crammed themselves into a small apartment to unlock the hidden potential of the tens of millions of small Chinese businesses struggling to connect. (AFP)

As internet access spread across the globe, a handful of giant American corporations ended up dominating industries. Google in search, Amazon in online shopping and Facebook in social networking. The one market that has proved consistently immune to these titans is China. Now, one of China’s homegrown internet giants, Alibaba, is edging cautiously into the US.

The story of the founding of Alibaba sounds like it could come straight out of Silicon Valley. Jack Ma – a former teacher – and 17 other founders crammed themselves into a small apartment in Hangzhou, a large city in southern China. Their aim was to unlock the hidden potential of the tens of millions of small Chinese businesses struggling to connect with one another and the outside world. 

Now, 15 years later, Alibaba completely dominates ecommerce in China. Its services include a business-to-business marketplace (Alibaba.com), a business-to-consumer marketplace (Tmall) and a consumer-to-consumer marketplace that also caters for SME’s selling to consumers (Taobao). 

Together, Tmall and Taobao are estimated to have handled $250-billion in transactions in 2013. That makes the company bigger – at least in volume – than Amazon and eBay combined. Stock markets are aflutter over Alibaba’s initial private offering (IPO). The company has chosen to list in the US and could raise as much as $15-billion, making it similar in size to Facebook’s IPO. Some analysts think it could be even bigger.

Despite the superficial resemblance to a Silicon Valley start-up, Alibaba has always done things in its own, distinctly Chinese, way. For instance, when Taobao launched in 2003 Ma refused to charge fees on transactions, a practice assumed to be essential to sustainability of any customer to customer marketplace.

This prompted a minor war of words between Ma and Meg Whitman, then CEO of eBay. At the time, the US company controlled nearly three quarters of the Chinese market. Whitman scoffed “Free is not a business model. It speaks volumes about the strength of eBay’s business in China that Taobao is unable to charge for its products.” And yet, within five years, eBay had abandoned China. 

How Ma and his merry cohorts achieved this is now the stuff of Harvard case studies and global admiration. In a nutshell, Ma simply understood his market better and continually tweaked and adjusted the US models until they fit snugly into Chinese culture. 

His Alipay service, for instance, is more than just a PayPal clone. It holds the funds for any transaction in escrow to reduce the chances of any buyer being swindled by a counterfeiter or a fraudster. Funds are only released to the seller once the buyer has confirmed that they are happy. This feature, which seems ludicrously paranoid to Americans, is one of Taobao’s most powerful selling points.

Ma, famous for his pithy quotes, summed up this philosophy in 2005: “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.”

And yet, a decade later, that crocodile is lurking off the US shores. Alibaba has begun making strategic investments in a wide range of companies – everything from online shopping (Shoprunner.com) to car sharing (Lyft) to mobile messaging (Tango). In total, Alibaba has invested more than $700-million in US companies in just the last eight months. 

Add these investments to the IPO and you’d be hard-pressed not to draw conclusions about Ma’s intentions in the US. And its not entirely surprising that Ma is looking overseas for growth. His companies completely dominate the Chinese ecommerce market, but local giants like Tencent (instant messaging), Sina Weibo (microblogging) and Baidu (search) make expanding horizontally in his home market very difficult.

What remains to be seen is how US regulators and legislators will react to this new arrival. They haven’t exactly rolled out the welcome mat for other Chinese technology firms. Huawei, a leading manufacturer of telecommunications equipment, was repeatedly ejected from the US market and blocked from bidding on US-based contracts. US officials cited security concerns over Huawei’s alleged links to the Chinese military. Whether these concerns were valid or merely convenient is an open question.

But, even if the bureaucrats leave it alone, the crocodile won’t necessarily have an easy time when it finally slinks ashore. The depths of Ma’s guile in his own market is legendary, but US corporations are well motivated, well funded and they know their own markets extremely well. This isn’t so much “Godzilla vs New York” as “Godzilla vs King Kong”. So, fetch the popcorn. This is going to be interesting to watch.


Topics In This Section

Comments

blog comments powered by Disqus