The world’s greatest bazaar
IN 1999 Trudy Dai used to spend all night sending e-mails from her friend Jack Ma’s apartment, trying to answer queries from American customers without letting on that she was Chinese. Ms Dai was one of the first dozen employees of Alibaba, an online listings service Mr Ma, a teacher, had just started. It was already having some success connecting small Chinese manufacturers to potential customers, including the overseas ones Ms Dai was reassuring over e-mail. But the friends and students who made up the workforce were earning just 550 yuan (then $66) a month.
Mr Ma, though, already had big dreams. That year he said: “Americans are strong at hardware and systems, but on information and software, all of our brains are just as good…Yahoo’s stock will fall and eBay’s stock will rise. And maybe after eBay’s stock rises, Alibaba’s stock will rise.”
Since then, Alibaba has come to dominate internet retailing in China, which will soon be the biggest e-commerce market in the world. It has moved beyond its original remit of connecting businesses to each other to ventures that let companies sell directly to the public (Tmall) and enable members of the public to sell to each other (Taobao). Between them, Taobao and Tmall processed 1.1 trillion yuan ($170 billion) in transactions last year, more goods than passed through Amazon and eBay combined (see table 1).
The company that started in Mr Ma’s apartment now employs 24,000 workers at its headquarters in Hangzhou and elsewhere; Ms Dai is president of human resources. A few years ago Alibaba began to turn a profit; in the year to September 2012 it made $485m on revenues of $4.1 billion (see chart 2). Following a recent reorganisation it has 25 separate business units, and on May 10th it will have a new chief executive, Jonathan Lu; Mr Ma will stay on as executive chairman.
The rules of the market
In one respect things are as they were in 1999: Alibaba is privately owned. But this will not remain the case for long. The reorganisation into 25 business units is widely seen as preparation for an initial public offering (IPO) that would take most of them public. A deal with Yahoo, which once owned 40% of Alibaba, means that the IPO, if done soon, would allow Alibaba to buy back its shares and end the often stormy relationship. Asked about the IPO, Mr Ma says “We are ready.”
Analysts predict that the IPO will value the company somewhere between $55 billion and more than $120 billion. Tencent, a Chinese gaming and social-media firm now getting into e-commerce, has a market capitalisation of $62 billion, just shy of Facebook’s current valuation. Mark Natkin of Marbridge, a Beijing-based technology consultancy, thinks Alibaba could easily be worth more than Tencent, given that “there is so much room to grow its businesses in China”.
The top-end estimates would imply a remarkably high ratio of value to profits. But such a ratio might make sense to investors if they think that the company is investing in yet more growth to come. Amazon, in some ways a similar company, supports a market value of $117 billion with no profits to speak of. And Alibaba will provide an attractive platform for investors trying to profit from China’s booming internet economy.
There will be some caution. Part of Alibaba floated on the Hong Kong exchange in 2007, but the shares ended up being bought back by the company after losing much of their value. The experience with Facebook’s IPO suggests a certain wariness about internet stocks is wise. But many think it will be different with Alibaba this time. “This will be bigger than Facebook,” predicts Bill Bishop, a Beijing-based technology expert. Mr Ma seems to agree. Though he will say only that the IPO will be “very very big”, asked about Facebook he cannot help but smile and say “Our revenues and profits speak for themselves.” (In the last quarter of 2012 Facebook’s revenues were $1.6 billion.)
Gordon Orr, a senior partner at McKinsey, thinks a healthy IPO valuation could be just the beginning. He says that if Alibaba can sustain its leadership in its current market and expand strongly into finance, the management of the supply chain and other services, “it could become one of the world’s most valuable companies five years from now, with potentially more than $1 trillion of sales passing through its platforms each year.”
Those are sales through Alibaba, not by Alibaba. In America 76% of online retailing involves people buying from individual merchants, according to a new report by the McKinsey Global Institute (MGI), a think-tank. In China, in 2011, that figure was 10%. The other 90% was sold through marketplaces that simply allow buyers and sellers to find each other. Alibaba has grown so big because early on Mr Ma had two insights into what could make such marketplaces work.
The first was that many Chinese are tight-fisted. So Alibaba made all the basic services it offers free to both buyers and sellers. It earns money through online advertisements and extra services it offers clients, such as website design. With 6m vendors Taobao is a cluttered-up cyberspace. Many sellers think it worthwhile to pay for fancy storefronts and online advertisements to help them stand out.
The second is that many Chinese are reluctant to trust strangers. So Alibaba has provided tools to build trust. One is an independent verification service through which third parties vet the claims made by sellers; the sellers pay for the process. Another is the Alipay payments system. Unlike PayPal, used by many Western internet companies, Alipay takes money up front and puts it in an escrow account. Vendors can be sure that payments made through it will be honoured. Alipay—a source of much bad blood with Yahoo, which felt Mr Ma seized control of it illegitimately, something Alibaba strongly denies—has roughly half of China’s online-payments market. The vast majority of Alipay transactions are for deals made through Alibaba, but the firm says that use elsewhere is growing fast.
Alibaba also now has the advantages that come with dominating its domain. In the West, shoppers often search for items on Google, and then follow a link, possibly one in an ad, to a retailer’s website or to Amazon; the ads are what make Google its money. In China Taobao’s scale means it can afford to block the “spiders” that search engines like Google, or its local equivalent, Baidu, use to find out what is on a site. It can do this because shoppers more or less have to come to it anyway. This makes adverts on Taobao more valuable; it gets a fair whack of the revenue that would otherwise go to the search engines.
This is just one way that the marketplace model works better the bigger a firm gets. The more buyers come, the more sellers need to; the more sellers come, the more buyers want to. As a result, domestic and foreign rivals are having a hard time. This goes for purely online firms like DangDang (which resembles Amazon) and 360buy (in which Prince Alwaleed bin Talal of Saudi Arabia recently invested) and for high-street retailers fighting defensive battles online like Suning and Gome, two appliance giants.
The founders of 7gege.com (translated as seven princesses), a women’s several thousand dodgy operators peddling unauthorised or counterfeit goods, many sourced from within the company’s own supply chain.
“Taobao has not yet changed the culture of counterfeiting in China,” he concludes. If it is to become a global giant, it must do more to clean things up.
As well as an old problem to overcome, there is also a new one: the sharing of power at the top. Mr Ma is not leaving the firm; he is staying on as executive chairman. But his stepping aside as chief executive clearly changes things. Microsoft, to take the obvious example, was already a global giant and successful public firm when Bill Gates made a similar move. Few people outside China know Alibaba well, and what they know centres on its dynamic founder.
The change has been long planned inside the company, though. In a little discussed move three years ago Alibaba reorganised its top brass into a partnership structure. Mr Tsai says this was explicitly designed to ensure continuity at the top and a smooth transition from boss to boss. Pressed on whether such a cabal could continue to run things once the firm goes public, he immediately points to Goldman Sachs, an investment bank, as an example of a publicly traded company with a close-knit partnership structure. Edward Tse of Booz & Company, a consultancy, observes that such partnerships (his firm is one too) cannot rely on rules and top-down control to make quick decisions. Shared values are much more important.
Change China, change the world
Alibaba seems to take its culture seriously. Assessment on key values, which include integrity and teamwork, make up half of performance reviews, and Mr Ma spends a third of his time teaching such values—which, as one of China’s few revered entrepreneurs, he promotes far beyond the bounds of the company. He claims Alibaba is about improving people’s lives—going beyond Google’s “Don’t be evil” to “Do good”. When corruption was uncovered in the Alibaba.com busi
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