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What Is Alibaba?
What Is Alibaba?
Alibaba, China’s largest e-commerce company, is preparing to go public in New York. When it does, it could be one of the largest public offerings ever in the United States.
Credit By Reem Makhoul and Sofia Perpetua on Publish Date May 6, 2014
Credit Lang Lang/Reuters
When American tech upstarts float their companies on the stock market, they often sell investors on a familiar dream — “disrupting†an existing industry. It doesn’t matter if the industry is advertising, software, commerce or some other sector. The start-up will usually claim that its business is a great technological leap forward that will greatly lower costs and improve service for customers and leave rivals unable to respond. Therefore, buy some stock.
Alibaba’s I.P.O. filing breaks with that well-worn theme. Instead of promising to disrupt an existing market, the Chinese e-commerce giant wants to do something far more straightforward, but potentially far more lucrative — insert itself at the center of a new, already expanding market being forged by powerful economic and cultural forces far beyond the company’s control.
That new market is China itself, particularly its ascendant middle class and its growing appetite for spending rather than saving.
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Instead of disruption, Alibaba is betting on existing trends staying more or less the same: that China will continue to change into the world’s largest consumer gold mine, and Jack Ma, Alibaba’s charismatic co-founder and chairman, will continue to sit at the apex of the consumerist revolution.
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Credit Stuart Goldenberg
Alibaba’s long-term goal highlights the difference in scope between Chinese Internet firms and their American counterparts. You may think of Jeffrey P. Bezos, Amazon’s chief executive, as an ambitious man, but he is really only betting that in the future, Americans will shift some of the dollars they are already spending from offline stores into his online store. He isn’t betting that Americans will start spending twice as much on everything as they do now.
That is precisely Mr. Ma’s bet. And as investors weigh Alibaba’s stock offering, they will have to consider which approach — Amazon’s disruption or Alibaba’s going along with an existing trend — is better.
The numbers seem to be on Alibaba’s side. “Our business benefits from the rising spending power of Chinese consumers,†the firm says in its filing.
The crux of Alibaba’s pitch to investors is that Chinese customers will begin to act much more like American customers. Today, much of the Chinese population doesn’t spend very much money compared with their counterparts in the West. Only about a third of China’s gross domestic product is made up of consumer spending, significantly lower than the consumption rate of other countries. By comparison, about two-thirds of the United States’ economy is made up of consumer spending.
Mr. Ma is counting on these habits changing in his favor. Alibaba is betting that the Chinese will continually increase their spending and that a huge pool of new money will flood through China’s economy.
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Workers at the headquarters of Alibaba in Hangzhou, China. Alibaba hopes to tap China’s ascendant middle class. Credit Qilai Shen for The New York Times
Every economic metric suggests that is a very good bet. According to a recent report by McKinsey & Company, China’s middle class will continue to grow at a staggering pace well into the next decade. “The evolution of the middle class means that sophisticated and seasoned shoppers — those able and willing to pay a premium for quality and to consider discretionary goods and not just basic necessities — will soon emerge as the dominant force,†the report states.
The McKinsey researchers noted that in 2000, just 4 percent of urban Chinese households earned a middle-class wage. By 2022, the study predicted, more than 75 percent of urban households will have joined the ranks of the middle class, with income among that group twice as much as it is today. The growth of this vast new market is occurring across the country and many of these newly wealthy people are hooked on online shopping.
“You’re really seeing consumer behavior change in all kinds of ways in China,†said Kelland Willis, an analyst who studies global retail trends at the research firm Forrester.
While the growing middle class has resulted in a growing population that can afford to shop, Ms. Willis said that many newly wealthy Chinese had been initially wary of spending money in the new ways that the Internet allowed for. Alibaba’s genius has been in recognizing and constantly adapting to society’s evolving views about shopping. The company has been adept at finding the reasons that people might be suspicious about spending money, then looking for novel fixes.
“What you see them doing is trying to understand exactly what the Chinese consumer wants and then experimenting with technological solutions to address those problems,†she said.
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Graphic
A look back at the Internet revolution’s notable I.P.O.s, and how valuations have fared over the years.
That plan has worked phenomenally well so far. As the I.P.O. filing points out, Alibaba already commands a vast portion of the Chinese e-commerce market. Of the 302 million Internet shoppers in China, 231 million already shop at Alibaba’s properties. More than 76 percent of the total value of all mobile commerce in China flows through Alibaba.
What is more, offline retail in China is a far less developed part of the economy than in the United States. This means that unlike American e-commerce companies, Alibaba isn’t fighting against brick-and-mortar stores or even another online retailer. Instead, it is riding a bigger tide. As wealth grows, Alibaba is pushing to make shopping of all kinds a safer and more widely practiced part of Chinese life.
A big example is Alipay, the online payment system that Alibaba introduced in 2004. In the United States, online payment companies like PayPal were meant to replace older, more costly and slower ways of paying, like personal checks or money transfers. But in China, online payments weren’t really a replacement of an old way of doing business. For many people just entering the consumptive middle class, the whole idea of paying large sums in any way, whether offline or online, has always been risky. Fraud and trickery abounded and buyer protections weren’t an ingrained part of consumerism.
Thus, unlike PayPal, Alibaba didn’t just need to come up with a faster or more efficient way of paying. It needed to find a payment method that would allay people’s fears that paying for goods was a bad idea in the first place.
Its innovation was escrow. When a buyer purchases an item from a seller using Alipay, the firm holds the buyer’s money in an account. Only when the buyer informs Alipay that she has received her goods does the payment firm release the money to the seller.
This sounds like a simple, perhaps even obvious, idea. It’s hardly a technological breakthrough. But that’s exactly the point. The Chinese market didn’t need an extremely sophisticated way of paying for goods. It simply needed a way to pay for goods that wasn’t rife with fraud. Alipay satisfied that minimum requirement, adding a badly needed sense of buyer protection over the consumer market. It has become a juggernaut. According to Alibaba, the payment site now commands about half the market for electronic commerce in China.
Many of Alibaba’s other innovations have followed a similar pattern. To Americans, Alibaba’s breakthroughs may look comically backward compared with the technological wizardry being peddled by Amazon, Google, Facebook and Apple. There are no unmanned drones, robotic warehouses, self-driving cars or software-based assistants.
But as admirable as they may be, these American efforts at disruption are also far riskier than Alibaba’s simple plan to ride a cultural wave. Nobody knows if self-driving cars will pan out or if we will ever be O.K. with aerial drones delivering our toothpaste. But the idea of serving a gigantic new consumer market with a set of tools to make shopping easier and safer? That’s not disruptive. It’s obvious. And often, what is obvious wins.
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