Alibaba

China's E-Commerce Giant

Alibaba

Just how dominant is Alibaba in China’s booming e-commerce market? The homegrown Amazon/EBay mashup accounted for 54 percent of the country’s package deliveries in the 12 months that ended in June. On one holiday in late 2014, it logged $5.9 billion in transactions, and the business done over its sites accounted for the equivalent of almost 2 percent of China’s GDP in 2012. There are lots of  attention-grabbing Internet companies that hope to make money off of trend-hopping teens; Alibaba is  building an  empire on the spending power of Chinese farmers, laborers and white-collar workers. That could add up: By next year, more than 850 million Chinese are expected to be online — more than the population of any other country except India. As if that market wasn’t big enough, it’s also casting its eyes overseas.

The Situation

In September 2014, Alibaba raised $25 billion in the largest U.S. public offering ever, at a share price that valued the company at $168 billion. The company generated $3.7 billion in net income in the 12 months ended in March — nearly triple that of the year before. Alibaba, which faces competition from other Chinese companies like Tencent and Baidu, is investing heavily in reaching customers through smartphones and tablets. It owns stakes in messaging application TangoMe and ride-sharing program Lyft (now expanding to serve 60 U.S. cities), has its own mobile operating system and is leasing spectrum from state-owned phone companies to offer mobile voice and data packages. However fast Alibaba’s sales grow, e-commerce transactions in China are growing faster – the government projects that they will reach 18 trillion yuan ($2.9 trillion) next year — an 80 percent increase from 2013. At the same time, the company has gained significant numbers of customers in countries as diverse as Brazil and Russia, and has said it would be open to working with PayPal, a step that could facilitate its acceptance in the U.S.

Source: Bloomberg
Source: Bloomberg

The Background

Alibaba was founded in 1999 by former English teacher Jack Ma, who scraped together $80,000 from 80 investors to start an online marketplace for Chinese companies. He’s now the richest man in China, worth an estimated $22 billion. When Ma saw a need for an Internet search engine partner, he connected with Yahoo! Inc. co-founder Jerry Yang. Yahoo paid $1 billion for a 40 percent stake in Alibaba in 2005. Alibaba’s Taobao Marketplace, which links individual buyers and sellers, and Tmall.com, which connects retailers and consumers, offer everything from Alaska salmon to Boeing 747s. The company makes money from commissions on sales and through fees for memberships and other services. A large part of its growth has been fueled by mom-and-pop shops like those run by Liu Yuguo, a former farmer who has transformed his village in eastern China by taking its traditional yarn businesses online. More than 22 percent of Alibaba’s 7 million stores were based in villages and towns as of November, the company says. Alibaba aggressively defends its turf: When rival EBay made a foray into China in 2003, Alibaba countered by eliminating merchants’ fees on Taobao. Two years later, EBay closed its unprofitable China Web unit.

Source: China Internet Network Information Center
Source: China Internet Network Information Center

The Argument

The gigantic values analysts place on Alibaba speak for the bullish view of its growth potential. Yet some investors may be wary that Alibaba will suffer as China’s economic growth cools. The economy is forecast to expand 7.4 percent this year, which would be the slowest pace since 1990. Some investors have reservations about Alibaba’s management in light of its proposed board and corporate structures. Listing in the U.S. may bring more scrutiny for potential infringements of intellectual property, although Alibaba has made an effort to crack down on sellers of counterfeit goods.  And increasing competition on Taobao and Tmall is squeezing profit margins for merchants like yarn-seller Liu. If newcomers find it harder to make money on Alibaba’s platforms, the giant might start to grow more slowly.

The Reference Shelf

 

First Published April 27, 2014

To contact the writers of this QuickTake:

Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

Aaron Clark in Tokyo at aclark27@bloomberg.net

To contact the editors responsible for this QuickTake:

Michael Tighe at mtighe4@bloomberg.net

John O'Neil at joneil18@bloomberg.net