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 $2.8 billion in sales in the first quarter of 2015, a 45 percent increase from 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, as well as robots and drones. It owns stakes in messaging application TangoMe and ride-sharing program Lyft (now expanding to serve over 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) in 2015 — 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. The company is not bulletproof: China’s economic slowdown led it to miss earnings estimates in January 2015, and in May it replaced its CEO. A tussle with the Chinese government over charges of bribery and toleration of counterfeit goods, while quickly patched up, reminded some investors of the risks of doing business in a one-party state, even when the government has mostly been Alibaba’s biggest cheerleader — so far.
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.
The gigantic value the market placed on Alibaba when it went public speaks for the bullish view of its growth potential. Yet some investors may be wary that Alibaba will suffer as China’s economic growth cools. Enthusiasm for Chinese internet companies waned broadly in early 2015. Some investors have reservations about Alibaba’s management in light of its proposed board and corporate structures. Others worry about political risk, especially after the charges related to the selling 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
- Company profiles of Alibaba by the Economist and the Wall Street Journal; and Quartz untangles the many strands of Alibaba and compares it to companies elsewhere.
- The Financial Times’s “Person of the Year” profile of Jack Ma in 2013, and a New York Times profile from 2005, when Yahoo bought a stake in Alibaba.
- Quartz has a list of some of Alibaba’s major subsidiaries and their closest Western equivalents.
- Bloomberg BusinessWeek’s company page on Alibaba.
- McKinsey’s study of “China’s E-Tail Revolution.”
- An interactive calculator by Reuters lets you fiddle with the factors going into Alibaba’s valuation.
- A QuickTake looks at the controversial legal structure used by many Chinese Internet companies, including Alibaba, for their IPOs.
- Bloomberg Visual Data has an historical timeline.
First Published April 27, 2014
To contact the writers of this QuickTake:
Lulu Yilun Chen in Hong Kong at firstname.lastname@example.org
Aaron Clark in Tokyo at email@example.com