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The largest technology stock offering in history is looming, but few in Silicon Valley seem to care.
The initial public offering expected soon in the United States by Alibaba Group Holding, China’s largest e-commerce company, could surpass the amount raised in the I.P.O. of Facebook. It would not even be surprising if it surpassed the combined amounts raised in the I.P.O.s of Facebook, Twitter, Google, Amazon, AOL and Yahoo. But unlike the flurry of attention that accompanies high-profile floats by American tech stars, Alibaba’s stock offering has barely registered among the valley’s tech set.
San Francisco’s artisanal toast bars have not been abuzz with commentary on Jack Ma, Alibaba’s chairman, and Palo Alto’s Tesla dealerships aren’t bracing for a surge in new buyers. In interviews, a few Silicon Valley investors said they didn’t expect the offering to be a big deal in the markets they follow, though they declined to speak on the record about their apathy.
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The issue isn’t that the valley is ignorant of the rise of Chinese Internet giants. It’s more that American tech firms have long been spurned and surprised by China’s tech market, and many here aren’t sure how to gauge the ambitions of the giants like Alibaba now bent on crossing the Pacific.
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Credit Stuart Goldenberg
“Chinese Internet companies and American Internet companies are eyeing each other’s markets, but they’re very disconnected from one another,†said Yan Anthea Zhang, a professor at the Jesse H. Jones Graduate School of Business at Rice University who closely studies businesses in China.
A decade ago, American tech companies saw an economically emergent China as the next great frontier, a place where new money and users would combine to form the world’s greatest market for their products.
But cultural, political and technological forces buffeted their dreams. While American firms largely failed to make headway in China, a raft of homegrown companies, Alibaba among them, took over vast swaths of the growing Chinese market.
There are now Chinese analogues to Amazon, Google, Facebook, Twitter, eBay and PayPal. American and Chinese firms operate across a vast gulf, each eyeing global domination — and each essentially pretending the other doesn’t exist.
Alibaba’s gigantic I.P.O. may signal a shift, the end of an era of mutually beneficial provincialism. “They are now going to try to fight more directly in each other’s territory,†Dr. Zhang said. “In both the United States and Chinese markets, we are going to see competition heating up.â€
Before we get to that fight, it’s worth examining how American web companies lost the Chinese market. In 2004, Meg Whitman, then the chief executive of eBay, predicted in an interview with CBS News that the company’s Chinese subsidiary, eBay EachNet, would soon become the auction site’s largest moneymaker.
At the time, American web companies were initiating a spree of investments and expansion plans in China. Yahoo invested $1 billion in Alibaba in 2005. Amazon purchased Joyo.com, a Chinese e-commerce firm, which was expected to be the vanguard for the retailer’s plans to dominate China.
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Jack Ma started Alibaba in 1999 with 17 other people. The company's expected initial public offering could surpass the amount raised in the I.P.O. of Facebook. Credit Peter Parks/Agence France-Presse — Getty Images
But many American tech efforts to expand in China proved fruitless, often because the American companies didn’t understand China.
For example, in its early years, eBay EachNet grew to command more than 70 percent of the Chinese e-commerce market for sales between consumers, as William P. Barnett, a professor at the Stanford Graduate Business School, writes in a fascinating case study on the Chinese e-commerce market.
Then in 2003, Jack Ma, of Alibaba, started a consumer-to-consumer site, Taobao, that quickly eroded eBay’s lead by relying on a simple, powerful advantage: Ma gave Taobao features that tapped into the nuances of the Chinese market: “EBay may be a shark in the ocean, but I am a crocodile in the Yangtze River,†Mr. Ma once told an interviewer. “If we fight in the ocean, we lose ― but if we fight in the river, we win.â€
Unlike EachNet (and the American eBay), Mr. Ma’s company did not charge sellers fees to list their merchandise. This appealed to struggling Chinese who were looking to start small side businesses without a huge investment. Taobao also incorporated tech features that resonated with local culture. An online chat baked into the site — again, not available on EachNet — gave users a sense of community that they reported lacking on eBay.
Taobao also let buyers and sellers bargain with one another, and its web design mimicked the departments of offline Chinese retailers, while eBay’s categories were lifted from its American site. And given its international operation in markets with strict laws around trademarks, eBay was also forced to remain wary of counterfeit merchandise appearing on its pages, a concern that Alibaba didn’t have to consider.
EBay EachNet’s market share began to plummet, and by around 2007, it was dead in the water. Amazon — with which Taobao and its sister site, TMall, also compete — has been similarly stalled in China; the American online retailer, through its Amazon.cn site, now accounts for less than 1 percent of China’s e-commerce market, according to some estimates.
Taobao has become one of the jewels of Alibaba’s empire, accounting for more than 70 percent of the Chinese market for consumer-to-consumer online sales. Altogether, Alibaba has been said to account for four-fifths of online purchases in China.
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Tmall.com is one of the e-commerce sites run by Alibaba.
But the problems of American tech firms in China go beyond culture. They have also suffered as a result of politics.
In 2010, after an attack by Chinese hackers on its corporate infrastructure, Google decided to remove its Chinese service. Though the company had acceded to the Chinese government’s demand to censor its site, the firm had long lagged behind the search engine Baidu in China. After Google’s withdrawal, Baidu became even larger.
The Google story — in which government interference creates a difficult business climate for American companies — is a common occurrence in China.
“The Chinese government does not want foreign Internet companies to have a big piece of that market,†said James McGregor, the chairman of the Greater China office of APCO Worldwide, a strategy consulting firm. “They want their own Facebooks, they want their own Twitters. It’s not an open market for foreign Internet companies.â€
Alibaba’s offering now raises the opposite question: Will Americans and the American government tolerate the rise of Chinese Internet firms on their soil? More than that, will Alibaba and other rising Chinese companies manage cultural differences any better than American firms did in China?
So far, Alibaba’s approach has been to go slow. The company lately began a string of investments in the United States, including in ShopRunner, an e-commerce company that offers a rival to Amazon’s Prime free-shipping service; and Lyft, a ride-sharing service. WeChat, a messaging application owned by the Chinese web king Tencent, began marketing its app more aggressively to American users this year.
At the same time, the battle for global Web domination has spread far beyond just home turfs. American and Chinese companies are now increasingly competing over emerging markets in Asia and Africa, where Internet infrastructure is just beginning to roll out, and which may prove to be the next great battleground for global Internet hegemony.
To ring in that fight, Tencent’s WeChat recently began airing an ad in South Africa featuring a Mark Zuckerberg impersonator weeping on a therapist’s couch over the customers he’s losing to WeChat. The doctor warns the Facebook founder to pipe down — or else he, too, will drop Facebook for the Chinese app.
Sure, it’s a gimmicky bit of marketing. But maybe the direct approach will finally get American tech giants to pay attention to their Chinese counterparts.
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