Alibaba’s fairytale


Alibaba, the Asian retailing giant, went public today. The company raised a staggering 21.8 billion dollars and is now worth more than Amazon. The business-to-business wholesaler from Hangzhou has grown from a modest idea from a high school teacher to one of the five largest Internet companies in the world. How did the company manage to ever grow this big?

The first strategic success factor is the fact that Alibaba, in contrast to Amazon, doesn’t own any inventory. The online marketplace takes care of the selling of items, not the products themselves. This way, the company has no inventory risk neither any investment in costly warehouses. Neither does Alibaba have its own delivery trucks; it simply controls a whole network of delivery companies. This way the company manages to stay flexible, while growing fast.

Another factor is the integration of Alibaba in all areas of e-commerce. It has become a huge network of related businesses that handle complementary products and services. The businesses’ activities in transactions, sales, delivery, cloud computing and advertising serve each other as well. But it doesn’t stop there. The company has recently developed it’s own mobile operating system, offers trade financing to vendors and rumour has it they start offering consumer loans anytime soon. Whereas most Western online retailers have a clear focus and just one or two touch points with their customers, the Asian retailer appears to mingle into the (digital) lives of its customers as much as possible.

As the company has hit the stock market just now, it will be interesting to see where this move takes the company next. It surely made the owner, Jack Ma, a whole lot wealthier. You can buy stocks for around 93 dollar. Will you join Alibaba’s adventure into the Western world? And would you consider buying from the retail giant?

Sources

Del Rey, J. (2014, September 19). Alibaba Now Public As It Raises 21 Billion In Biggest Tech IPO. Retrieved September 19, 2014, from http://recode.net/2014/09/19/alibaba-will-ring-the-bell-at-nyse-this-morning-to-a-historic-ipo/

Wohlsen, M. (2014, September 19). Chinese Giant Alibaba Is Ready to Become the Next Google. Retrieved September 19, 2014, from http://www.wired.com/2014/09/chinese-giant-alibaba-ready-become-next-google/

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6 responses to “Alibaba’s fairytale”

  1. robinseetz says :

    It is very interesting to follow the news around Alibaba the last few days. You ask a couple of questions which I would like to comment on.

    First, I would like to note that your explanation about how the company grew this big is right. But is deserves some more context. According to the news this IPO will be a world record in the next thirty days! Around 48 million more shares will be sold. The world record of 22,1 billion will be broken. Analysts estimate that the company will raise between 25 and 29 billion dollars. In comparison, Facebook raised around 18 billion. With stocks worth around 93 dollar, the company is worth a staggering 231 billion. Alibaba is bigger than its competitors Amazon (150 billion) and eBay (67 billion) together. Indeed, the IPO of Alibaba is a fairytale for now.

    Second, I probably would consider to buy from this retail giant. It is a platform that contributes to our customer informedness. We know what is available in the marketplace, including the attributes and at which price.

    However, the third questions brings me to something I personally see as a downside. Alibaba stays a Chinese company with only a small group of owners. I think a company this big is conflicts to the Chinese political environment. For me this raises the question: does this fairytale has a happy end?

    To conclude, I would spend my money on the products, but I would not invest my money in the company.

    Source: NRC Weekend (2014) ‘De nieuwe rijken van Alibaba’ 20th September 2014, p. 7.

    • joostmartijndekok says :

      Thanks for your comment and providing more context on the case Robin.

      I agree on your comment that Alibaba contributes to customer informedness and personally I’m interested to see how the business and its many services grow in the Western world as it is now listed on the New York Stock Exchange.

  2. 419953mp says :

    Thanks for your interesting blog post Joost. I’ve been following the Alibaba IPO for a while now, but it’s hard to tell how the stock price will float after the IPO. I have used two of the Alibaba Group’s platforms, Taobao and Alibaba, quite often and they really does provide an excellent service. Taobao is great because of the immense volume of offerings; and Alibaba is the gateway to sourcing items for your business in Asia.

    Like you say, the Alibaba Group is present in nearly every part of the value chain for E-Commerce in China. They were able to do so because they were the first-mover in that market, and because the Chinese market was very restricted in the past. This way, they were able to establish themselves as the major player in that market.

    With access to capital and its immense revenue Alibaba can afford to buy out large competitors such as Ebay, which is actually quite scary. However, Alibaba is a giant in terms of revenue, but it is currently only a real player in its home market, China. Before Alibaba is able to expand its operations abroad they need to gather a lot of knowledge and skills about working in/selling to foreign (Western) markets.

    Nonetheless, the forecasts state that the Chinese E-Commerce market will grow by roughly 20% annually for the upcoming years (iResearch, 2014) so I do believe Alibaba will still be able to profit from growth in this market, and so should its stock price. But after the Chinese market matures, who will tell what will happen? Do you think Alibaba will be able to establish itself on a global scale, or always just remain the dominant player in China?

    References:
    iResearch. 2014-2017 China Internet Economy Forecast Report. (2014, March 25). Retrieved September 20, 2014, from http://www.iresearchchina.com/reports/5545.html

    • joostmartijndekok says :

      Great to hear you have personal experience with the company and its services.

      Indeed, the amount of capital the Alibaba Group has accumulated is impressive, to say the least. My bet is that the company puts this money into acquiring young, innovative (social) commerce business to get a better sense of how Western customers prefer to shop, now and in the future. In addition, it will focus on acquiring talent to further tailor its services to a whole new audience.

      Let’s keep up-to-date on how Alibaba progresses the next few weeks and feel free to comment if you find something newsworthy related to the company!

  3. 357312sz says :

    Thanks for your post sharing.

    When saying about that Alibaba’s expanding into western markets, Alibaba’s strength has been mainly on the desktop computers, and so far, even it is developing its mobile operating system, that kind of mobile solution is not as powerful as Tencent’s Weixin/WeChat. We can confidently expect Alibaba to plug this hole with some of the money it raised from the IPO by acquiring another company.

    Moreover, the most interesting battle to be fought is not between Alibaba and Google, but between Alibaba and Amazon. Especially when we are talking about the western world, when it comes to logistics, Amazon is ahead. I am quite curious to see if Alibaba can meaningfully challenge Amazon outside China (without the big market already)? Will it also try to enter the digital book market? Will it come out with digital book readers like Kindle? Will it be able to negotiate with major book publishers?

    These are the interesting challenges of Alibaba in my opinion.

    • joostmartijndekok says :

      Thanks for your comment and insights.

      As said in another comment, I agree that Alibaba most likely puts its new financial resources into good use, such as improve their mobile shopping experience.

      Amazon’s logistics strategy is impressive to say the least (drones delivering your products still sounds like something from the future), but I expect Alibaba to come with their own version of innovation in logistics. Perhaps they will enhance the same innovative methods of delivery in the future like Amazon, but not capitalize it and stay more agile. Let’s see what the future beholds!

      I just found a nice read on the Alibaba v. Amazon debates. The article explains that Alibaba is ‘NOT’ the Amazon from China. Have a look:

      http://liveindex.org/2014/09/16/alibaba-is-not-the-amazon-of-china/

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