Just how dominant is Alibaba in China’s booming e-commerce market? In 2012, the homegrown Amazon/EBay mashup accounted for 70 percent of the country’s package deliveries. On one day last year, it logged $5.75 billion in transactions, and the business done over its sites accounted for the equivalent of almost 2 percent of China’s GDP in 2012. (Wal-Mart‘s sales in 2013, by contrast, are equal to about 0.03 percent of the U.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 next year, more than 850 million Chinese are expected to be online — more than the population of any other country except India.
In March, Alibaba announced plans to go public, and settled on New York as the venue for its IPO after Hong Kong regulators refused to approve its proposed governance structure, which would allow its partners to nominate a majority of its board. It filed in May to sell what is expected to be about a 12 percent stake in what could be the largest U.S. public offering ever. The company generated $3.7 billion in net income in the 12 months ended in March — nearly triple that of the year before. Figures like that have led to estimates of its worth that have run as high as $198 billion. Alibaba, which faces competition from other Chinese companies like Tencent and Baidu, is investing heavily in reaching customers through smartphones and tablets. It owns stakes in messaging application TangoMe and ride-sharing program Lyft (now expanding to serve 60 U.S. cities), has its own mobile operating system and is leasing spectrum from state-owned phone companies to offer mobile voice and data packages. However fast Alibaba’s sales grow, e-commerce transactions in China are growing faster — the government projects that they will reach 18 trillion yuan ($2.9 trillion) next year — an 80 percent increase from 2013.
Alibaba was founded in 1999 by former English teacher Jack Ma, who scraped together $60,000 from 80 investors to start an online marketplace for Chinese companies. He’s now the richest man in China, worth an estimated $13 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. But 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. More than 22 percent of Alibaba’s 7 million stores were based in villages and towns as of November, the company says. Alibaba aggressively defends its turf: When rival EBay made a fory into China in 2003, Alibaba countered by eliminating merchants’ fees on Taobao. Two years later, EBay closed its unprofitable China Web unit.
The gigantic values analysts place on Alibaba speak for the bullish view of its growth potential. Yet some investors may be wary that Alibaba will suffer as China’s economic growth cools. The economy is forecast to expand 7.4 percent this year, which would be the slowest pace since 1990. Some investors have reservations about Alibaba’s management in light of its proposed board structure. Listing in the U.S. may bring more scrutiny for potential infringements of intellectual property, although Alibaba has made an effort to crack down on sellers of counterfeit goods. And increasing competition on Taobao and Tmall is squeezing profit margins for merchants like yarn-seller Liu. If newcomers find it harder to make money on Alibaba’s platforms, the giant might start to grow more slowly.
The Reference Shelf
- Company profiles of Alibaba by the Economist and the Wall Street Journal.
- 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 BusinessWeek’s company page on Alibaba.
- McKinsey’s study of “China’s E-Tail Revolution.”
- An interactive calculator by Reuters lets you fiddle with the factors going into Alibaba’s valuation.
(First published April 27, 2014)
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