Company CaseAlibaba: The World’s Largest E-tailer Is Not AmazonThere’s a new king of e-commerce and it dwarfs Amazon. Introducing Alibaba the China-based behemoth that sold more than $485 billion worth of goods and services last year and is rapidly building an online empire that will include businesses ranging from a traditional online marketplace to online investment services. As successful as Amazon has been its annual sales of $107 billion are but a fraction of what Alibaba pulled in. In fact with last year’s take Alibaba surpassed Walmart to become the largest company on the planet. How is this Chinese upstart pulling off such a startling internet and retailing feat? Let’s start by looking at Alibaba’s founder Jack Ma.Unlikely BeginningsJack Ma is an unlikely figure to be atop of one of the world’s most powerful companies. Time and again U.S. tech start-ups have emerged from California garages. However perhaps none of those start-ups were founded by individuals as seemingly unprepared as Ma. Growing up in Shanghai Ma did poorly in school. He failed the college entrance exam twice before getting in and completing a teaching degree. He learned to speak English by hanging out around tourists and listening to radio broadcasts. Ma was rejected for a number of jobs—including being a manager for KFC—before finally landing a job teaching English for $12 a month.But Ma was animated and energetic and he had lofty goals and ambitions a combination that earned him the nickname “Crazy Jack.” During China’s export boom in the 1990s Ma started a translation company. On a business trip to the United States he was exposed to the World Wide Web and was surprised to find almost no Chinese content. After a failed attempt at starting an internet company in China Ma corralled 17 friends in his apartment in 1999 and set out to build an online marketplace. Substituting vision and charisma for coding skills Ma started Alibaba.com only a few years after legendary e-commerce marketers Amazon and eBay got their starts.Feeding the MassesIt’s difficult to examine Alibaba without making comparisons to the more globally familiar online sellers. In fact Alibaba is often referred to as the “Amazon of China.” But it’s the differences between Alibaba and the Amazons eBays Googles Walmarts Costcos Sears and thousands of other successful e-tailers that explain how the Chinese company has grown so big and will grow so much bigger in the future.For starters consider the respective domestic markets. Amazon and the others got their starts in the United States home to roughly 320 million people. This market serves up the most developed retail industry and the highest standard of living in the world. As the tech boom took off numerous ambitious upstarts competed fiercely to transfer America’s retail businesses into the quickly developing space. Tech-savvy U.S. consumers scrambled to convert some of their buying from brick-and-mortar stores to online purchases.Contrast this with China. With 1.3 billion people and the fastest-growing economy in the world the Chinese market has tremendous power and potential. But perhaps more important China’s retail sector was still in the Dark Ages when Alibaba got its start. “E-commerce in the United States is like a dessert. It’s just supplementary to your main business ” Ma said recently. “In China because the infrastructure of [traditional retail] commerce is [so] bad e-commerce becomes the main course.”As many Chinese moved from poverty to middle-class status their exposure to buying online coincided with their exposure to any kind of buying. Relative to the U.S. market there were relatively few competitors. The size and nature of China’s market have Alibaba boasting more than 420 million active users a base that comfortably exceeds the size of the entire population of the United States. And internet penetration in China is still only 52 percent compared with the much more saturated 88 percent in the United States providing enormous growth potential.In adapting traditional retail to an online environment Amazon and the other U.S. e-tailers operate a “managed marketplace”—they own their own distribution centers sell a majority of their products directly and even market their own brands all characteristics that mimic traditional retail structures. This allows U.S. e-tailers to benefit from established distribution channels and to maintain a great deal of control over their operations. But it also requires massive investments in infrastructure and armies of employees both of which result in wafer-thin profit margins. In fact for two of the past four years Amazon has lost money. For the other two years the biggest profit it could muster was only 0.5 percent of sales. Walmart’s profit margin percentages for both online and offline sales are typically in the low single digits.But Alibaba does not own or operate massive distribution centers. It doesn’t own the items sold on its sites. And it only employs about 36 000 people a fraction of Amazon’s 230 000 employees. Instead Alibaba’s open market platform simply connects buyers with sellers. That might sound like an eBay approach but Ma insists that it is not. “Amazon and eBay are e-commerce companies and Alibaba is not an e-commerce company ” Ma said recently. “Alibaba helps others to do e-commerce. We do not sell things.” While this gives Alibaba less control over the customer experience Ma sleeps easier at night without the burden of obsessing over keeping prices low. As market forces work to set price points Alibaba sits back and watches the cash pour in. Its profit margin over the past three years averaged about 40 percent.A Little of EverythingThe continuous influx of cash has allowed Alibaba to invest in just about every kind of business imaginable. In its infancy Alibaba.com primarily matched Chinese exporters with businesses throughout the rest of the world. But the company quickly shifted focus catering to the growing purchasing power of its domestic market. Unlike its Western counterparts Alibaba developed and acquired different online sites and established major divisions. For example Taobao.com is a site that helps small businesses and private parties sell merchandise to customers. But unlike eBay’s commission structure Taobao sellers pay only for the advertised promotion. From a shopping standpoint Alibaba’s Tmall.com is more similar to Amazon pairing customers with big corporations including many global corporations such as Nike P&G Apple and even retailers like Costco.But Alibaba’s development has taken it down numerous other paths as well. And although it may seem that the surging Chinese conglomerate is simply playing copycat Ma’s vision plays out creatively in every case. For example Alipay is similar to PayPal. But starved for investment opportunities in an environment dominated by state-run banks Alipay customers have access to financial products that pay attractive returns. In the first year of making such options available Alipay customers tucked away $82 billion.In another example of “follow the Silicon Valley guru ” the soon-to-be-launched Tmall Box Office—or TBO—”aims to become [the equivalent] of Netflix in the U.S. ” including plans to run original content produced by Alibaba’s own Alibaba Pictures. But in an environment where TV viewers aren’t accustomed to the pay-to-watch model Alibaba is a true pioneer. And that pioneering effort extends to a crowdsourced film investment fund a model that threatens to upend traditional film financing in China by allowing regular folks to become producers with less risk.Alibaba has spent billions investing in start-up firms. Today the Alibaba Group spreads out over a constellation of services and technologies including music gaming blogs social networks event ticket sales shipping ridesharing wearables and smartphones. On well-known U.S. interests Alibaba has invested $200 million in Snapchat and $1 billion in Lyft and it recently bought up 5.6 percent of languishing Groupon. Apparently Mr. Ma sees something in the daily deals market that others don’t.As Alibaba’s list of businesses grows Ma’s vision and innovation seem unbounded. After all how many U.S. internet veterans can say they started their own holiday? Just seven years ago Ma enthusiastically launched Singles Day on November 11. What started as a sort of anti-Valentine’s Day for single people is now one of the biggest blockbuster sales holidays in the world. Last year it resulted in $14.3 billion in sales in a 24-hour period almost five times what fanatical U.S. residents spent on Cyber Monday across all ecommerce companies combined.With a goal of doubling its current revenues by 2020 one frontier looms large for Alibaba—global expansion. Although China’s biggest dot.com success certainly has global ambitions it has so far chosen to focus on the massive potential of its home market. That will change. “We plan to invest more in [the U.S. and U.K. markets] to get more traffic and…build brand awareness ” says Joe Yan director of international B2C at Alibaba’s export division. “Our biggest advantage is abundance—with 100 million products we have more options for customers who can buy our products cheaper and at high quality.” And while it remains to be seen how Alibaba will attack global markets one analyst recently predicted a future marriage down the road of Alibaba and eBay.At the same time U.S. companies such as Netflix and Amazon are exploring ways to expand their small presence in China. However although the massive markets on both sides of the pond represent opportunities too tempting to pass up only time will tell whether any of these U.S. companies can export the models they have applied so successfully in their home markets.As U.S. competitors try to counter Alibaba they will face one more big hurdle. The Chinese love Jack Ma. For their own part U.S. tech founders such as Bezos Zuckerberg Brin and Page and the late Steve Jobs are considered visionaries who have shaped the world’s digital ecosystem. But the Chinese revere Mr. Ma the man who turned a local underdog into a dominant giant with revenues bigger than Amazon Facebook Google and Apple combined. Those kinds of patriotic emotions will be tough to crack.Questions for Discussion17-18As a digital retailer how does Alibaba provide value to Chinese consumers? What sets of values are unique to the Chinese market?17-19Given that Alibaba does not own or distribute any of the merchandise exchanged on its sites describe what factors had to develop for the company to succeed.17-20Analyze Alibaba’s business model relative to all the different forms of digital and online marketing covered in this chapter.17-21Can Alibaba succeed in countries outside of China? Why or why not?
