China's E-Commerce Giant
Just how dominant is Alibaba in China’s booming e-commerce market? The homegrown Amazon/EBay mashup accounted for more than three-quarters of the nation’s online retail sales in 2015, when the business done over its sites accounted for the equivalent of about 4 percent of China’s GDP. 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 the end of 2015, some 688 million Chinese were online — more than twice the population of any other country except India. As if that market wasn’t big enough, it’s also casting its eyes overseas and beyond e-commerce with investments in Hollywood movies, a soccer team and news media.
Alibaba's growth story has continued since its record $25 billion IPO in New York in 2014 — revenue jumped 33 percent to $15.9 billion in the 2016 financial year. China’s economic slowdown has dulled some of the shine (the shares have had a couple of spells below the IPO price of $68), as has a U.S. inquiry into the company's accounting practices, disclosed in Alibaba's latest annual report. Facing competition from the likes of Tencent and Baidu, Alibaba is investing heavily in reaching customers through smartphones and tablets, as well as cloud computing and virtual reality. It owns stakes in Southeast Asian e-commerce site Lazada and ride-sharing program Lyft, has its own mobile operating system and is leasing spectrum from state-owned phone companies to offer mobile voice and data packages. It also has a stake in a leading Chinese soccer team and bought Hong Kong's century-old South China Morning Post newspaper. At the same time, its customer bases has spread to countries as diverse as Brazil and Russia. A tussle with the Chinese government over charges of bribery and toleration of counterfeit goods, while quickly patched up, was a reminder of the risks of doing business in a one-party state. And the probe by the U.S. Securities and Exchange Commission has underlined concern over what one analyst called Alibaba's “unusual” accounting practices.
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 became the richest man in China and his estimated net worth has topped $30 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, advertising 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. Alibaba said in 2014 more than 22 percent of its 7 million stores were based in villages and towns. 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 $168 billion valuation placed on Alibaba when it went public speaks to the bullish view of its growth potential. Yet its sagging value in mid-2015 showed that some investors may be wary that Alibaba will suffer as China’s economic growth cools. Enthusiasm for Chinese Internet companies had waned broadly and some investors expressed reservations about Alibaba’s management in light of its proposed board and corporate structures. The U.S. accounting investigation is looking into consolidation practices, related party transactions and data reported from its Singles’ Day promotion. Singles’ Day is Alibaba’s biggest shopping day, attracting 91.2 billion yuan ($13.7 billion) of sales in a 24-hour period last year. 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. Alibaba is seeking to offset any slowdown in China by expanding more quickly overseas, including in the U.S. Ma has set a goal of deriving 50 percent of the company’s revenue from outside China. Currently, it gets about 8 percent.
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.com’s company page on Alibaba.
- McKinsey’s study of “China’s E-Tail Revolution.”
- A QuickTake looks at the controversial legal structure used by many Chinese Internet companies, including Alibaba, for their IPOs.
- A Bloomberg News article examines why Singles' Day is bigger than Cyber Monday.
- Bloomberg Visual Data has an historical timeline.
First published April 27, 2014
To contact the writer of this QuickTake:
Lulu Yilun Chen in Hong Kong at firstname.lastname@example.org
To contact the editor responsible for this QuickTake:
Grant Clark at email@example.com