Alibaha-China's Ecommerce Giant: Challengi ng Am azon?

T0DAY, ALIBABA GR0UP is the largest Chinese ecommerce

company. In the original Arabic tale of Ali Baba and the
Forty Thieves, Ali Baba, the poor woodcutter, opened
the cave with hidden treasure by calling out the magic
words "open sesame." Alibaba's founder selected the
name to open up opportunities for small Chinese man-
ufacturers to sell their goods around the world, with
the hope of finding treasures for Alibaba's users and
ffirtrilp
shareholders. Today, Alibaba is a family of ecommerce
businesses, which The Wall Street Journal described as
"comparable to eBay, Amazon, and paypal all rolled
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into one, with a stake in Twitter-like weibo thrown

in to boot."l The Alibaba Group comprises four pri-
Jack Ma, a Hangzhou, china, native, is the founder and executive
mary portals: Taobao, Tmall, Alibaba.com, and Aliyun chairman of Alibaba Group. Alibaba had the most successful initial
(now AliCloud). Hundreds of millions of users access public offering (lPO) ever (listed on NySE), surpassing a valuation
the sites, and millions of businesses rely on the por- of over $230 billion on its first day of trading september 19,2014.
By fall2017, Alibaba's market cap was some $497 billion, making
tals to connect them with potential buyers. Taobao is it one of the largest tech firms globally (and almost double its lpO
Alibaba's flagship online marketplace, a consumer-to- valuation).
consumer retail platform with 7 million sellers offering @Tomoh i ro Ohsu m i/Bloomberg/Getty mages
I

more than 800 million items.

Just like Ali Baba in the folk rale, Alibaba had humble
beginnings. In 1999, a former English teacher named year on Singles Day (IIl11), the biggest annual online
Jack Ma started the company with a team of 18 in his sales event in China, Alib
aba alone achieved close to
apartment in Hangzhou, a city some 100 miles southwest $18 billion in sales ,20 percent of the total!
of Shanghai. His timing couldn't have been better, as the Initially, Alibaba's website was a business-to-
internet was just beginning to take hold in China. Since business (B2B) platform where China's small and
then, China has experienced explosive growth in inter- medium-sized businesses could showcase their prod-
net users (see Exhibit MC20.1). By z0I7 , China's inter- ucts to buyers around the world. Alibaba was not the
net users had grown to more than 720 million. Alibaba first company to explore opportunities in introducing
rode this wave of exponential growth to major success. China's manufacturing to global demand, but it was
In comparison, the united States has some 296 million the first to do so online. In its first year of opera-
internet users (less than 40 percent of China's total). tion, Alibaba signed up new members at a rate of
The internet penetration rate, shown in the dotted I,200 per duy. By 2002, the young startup was
line in Exhibit MC20.1, follows a rypical S-shaped
growth function, indicating that internet usage in China
Frank T. Rothaermel prepared this MiniCase from public sources.
seems to be maturing. Nonetheless, given the still rela- He gratefully acknowledges the contribution of Ling yang on an earlier
tively low volume of online transactions in comparison version, and research assistance by Amey Sahasrabuddhe for this version.
This MiniCase is developed for the purpose of class discussion. It is not
to China's total commerce, significant growth in per intended to be used for any kind of endorsement, source of data, or depiction
capita spending online is expected. In 2016, China's of efficient or inefficient management. All opinions expressed, all errors
and omissions are entirely the author's. Revised and updated: September 30,
ecommerce totaled about $900 billion in sales. That 2017. @Frank T. Rothaermel.

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MINICASE 20 Alibaba-China's Ecommerce Giant: Challenging Amazon? i 517

EXHISIT MC?O.T (in percent),2000-2018E

I ,nina's lnternet Users (millions) and Internet Penetration Rate
Millions n lnternet Population .. . . .. Internet Penetration

700
50%

600
40%
500

400 30%

300
20%

200
10%
100

0 0%

.r.$ tre tr$ ,""t tr"t n$o n* t$

"*"t ""." ""$ "*$ "..t "$ "$ "$ "*" "$""*""
(data for years 2017e and 2018e are estimates)
SOURCE: Depiction of data from "China Internet Users," http://wwinternetlivestats.com/internet-users/china/

already profitable. By 2012, ALlbaba facilitated trans- Amazon's market cap was some $465 billion at the
actions in nearly every country around the world. same time.
Yet, Alibaba's market presence is still predomi-
nantly in China. In 2017, Alibaba employed around
Alihabn's ffiusln*ss Mmdef; errd tP{}
50,000 people, had $23 billion in revenues, and
Exclusively a trading platform for third-p arty ven- remained highly profitable, capturing more than
dors, Alibaba, unlike Amazon, does not hold or own 50 percent of its revenues as profits. In the same year,
any inventory. Alib aba' s main source of revenue is the Alibaba's Chinese marketplaces reported sales of
transaction fees, listing fees, and ad revenues it gener- some $550 billion.
ates from more than 10 million active sellers across In a survey of U.S. internet shoppers, almost 9 out
its marketplaces. This asset-light model means of 10 had never heard of Alibaba. Jack Ma, however,
the company has more room to push down prices intends to change this perception. After meeting with
on its platform by reducing transaction costs for President Donald J. Trump in early 2017, Ma prom-
its sellers. While both Alibaba and Amazon focus ised that Alibaba would help lead at least 1 million
on a cost-leadership strategy, its asset-light model small- and medium-sized businesses in the United
could thus turn out to be a competitive advant age States to its various online platforffis, as well as offer
for the Chinese firm. global logistics expertise to help sell these businesses'
On September 19, 2014, Alibaba went public on goods in China.
the New York Stock Exchange (NYSE). It had the
most successful initial public offering ever, surpass- Alilhahfr w$. [$.$. ffimmm$gr*rffi* ffitants
ing a stock market valuation of over $230 billion on its
first day of trading. By fall 2017, its market cap stood To grow its business in China, Alibaba followed a
at a record high of $437 billion, making it one of the sffategy of related diversification by opening the CZC
most valuable tech companies globally. In comparison, (consumer-to-consumer) website Taobao and later its
 5f 8i utt'tlcAsE 20 Alibaba-China's Ecommerce Giant: challenging Ama zon?

more popular BzC (business-to-consumer) website Tmall, E

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and a host of other services such as Alipay, Alisoft, and f

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cloud services. The other players in global ecommerce Market Share of B2C Colmpanies in China,2010
that were big during the 1990s, mainly the U.S. companies SOURCE: Depiction of data from Statista.com.
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eBay and Amazon, decided to enter china via acquisitions.

Started in 1995, eBay entered the chinese market
in 2003 by acquiring EachNer for $ 180 million. Each-
Net was started in Shanghai in 1999 by two Chinese
Amazon.cn
entrepreneurs who had MBA training in the United (0.e0%)
States. It was designed as an auctioning platform to
function very much like eBay. Early on, EachNet was
the dominant force in china's onltne C2c market with
close to 85 percent market share and 2 million users.
Even when Alibaba launched its c2c website Taobao,
completely free for sellers, the dominant position of
EachNet, which charged a listing and transaction fee,
did not erode. Problems mounted in 2004, however,
when eBay decided to shut down EachNet's home-
grown technology platform and move it to eBay's
global platform. As EachNet's Chinese users migrated
to the global platform, EachNet started losing mar-
ket share in China. Its web pages loaded more slowly
than those of its rivals because they now had to pass held an abysmal 1 percent market share in China (see
through the chinese government's (internet) firewall Exhibit MC20.2). In what appeared to be a surrender,
(censoring software and other controls). Moreover, Amazon set up an online store on Alibaba's Tmall!
eBay's website features and user experience made it
difticult for most of its chinese users to navigate.
Alibaba was quick to react to this lapse by eBay; it ffifum$$wffiffi#w $wr &$$fumfum ffim#mffi ffiwrw#nd
launched features designed for a native chinese audi- Looking ahead, Jack Ma and Alibab a are facing sev-
ence. The instant messaging application Aliwangwang eral internal and external challenges. Alibaba deliv-
and Alipay, the escrow management services to facili- ered slower than anticipated growth. The company
tate online transactions, were instant hits with both also reorganized its operation by folding its consumer
sellers and buyers. By 2005, Alibaba's Taobao had sites Taobao and Tmall into one business unit with
60 percent market share, while EachNet had fallen to group-buying site Juhuasuan. Alibaba also continues
a mere 30 percent (from 85 percent a few years prior). to heavily invest in expanding beyond the Chinese
By 2006, eBay decided to shut down EachNet. com- market to become a truly global player.
menting on Alibaba's competition with eBay, founder Alibaba invests heavily in cloud computing to
Ma noted, "eBay may be a shark in the ocean, but compete more effectively with Amazon's AwS, the
I am a crocodile in the Yangtze River. If we tight in the world's leader in cloud computing. Alibaba also spent
ocean, we lose, but if we fight in the river, we win.',2 almost $5 billion to buy a 20 percent stake in Suning,
Although Amazon is by far the leading ecommerce china's largest electronics retailer. This should allow
company in the United States (50 cents of every dol- Alibaba to compete more effectively with its domestic
lar spent online is spent there), its entry strategy into rival JD.com, which is especially strong in electronics.
China parallels eBay's attempts. Amazon also entered JD.com, china's number-two ecommerce company,
China via acquisition. It bought Joyo.com, then the larg- recently made waves by deploying drones for deliveries
est online bookstore in China, for $75 million. It soon of online purchases, especially in remote areas. JD.com
expanded Joyo.com (now Amazon.cn) product offer- also plans to deploy larger drones that can carry up ro
ings. However, local players in China quickly labeled I ton of payload in the near future, which it already
Amazon.cn as an expensive western choice in com- tested successfully. To keep JD.com at bay, Alibaba
parison to low-cost local alternatives. By 2016, Am azon is creating a retail presence throughout China-much
 MINICASE 20 Alibaba-China's Ecommerce Giant. Challenging Amazon? i 519

as Amazon is doing in the United States-to facilitate Apply a SWOT analysis to Alibaba. Use the results
pick up and return of merchandise. to make some recommendations to Alibaba's CEO.
Since Alibaba is still mainly focused on the Chinese
4. Apply the integration-responsiveness framework
market, facilitating ecommerce transactions to consum-
to determine:
ers, it was hit hard by China's slowing economy. More-
over, the Chinese government decided to devalue its B. Which global strategy position you would
currency (the yuan), which made international products recommend Alibaba to pursue when attempt-
such as Nike running shoes and Procter & Gamble con-
ing to create a stronger foothold in the United
sumer products such as Tide much more expensive for States. Explain why.

Chinese consumers. This, in turn, is hurting Alibaba's b. Which global strategy positions you would
sales. Moreover, some of Alibaba's domestic rivals, recommend U.S. ecommerce companies such
including JD.com, Tencent, Baidu, and WeChat, are as eBay, Amazon, and others to pursue when
getting much stronger, especially on mobile platforms. competing in China. Explain why.
with its instant messaging app and mobile payment
options, WeChat (owned by Tencent), in particular, is Endnotes
outperforming Alibaba on mobile platforms. WeChat 1. "China changes won't face Alibaba," The Wall Street Journal,
has aspirations to morph into a global mobile platform. July 5, 2013.
with 1 billion users worldwide, it is one of the most 2. As quoted in: "standing up to a giant," Forbes, April 25,2005.
popular mobile apps in China and also globally.
Sources: A detailed and in-depth overview of Alibaba, its genesis and
offering and facilitating the sales of counterfeit prod- growth, is the insightful book by clark, D. (2016), Alibaba: The House
ucts is another big problem for Alibaba. Being an open That Jack Ma Built (Ecco: New York). other sources: Purnell, N. (2016,
Nov. 18), "Jeff Bezos invests billions to make Amazon a top e-commerce
online marketplace, it allows anyone to use its platform. player in India," The Wall Street Journal; Baskin, B., and L. Lin (2017,
The continued problem of counterfeits has led to Alibaba's May 23), "Chinese online retailer JD.com is developing heavy-duty delivery
drones," The wall Street Journal; "China's internet giants go global,"
being put on the United States Trade Representative The Economist, April 20,2017; Knutson, R., and L. Stevens (2017,Jan. 9),
(usrR) blacklist of notorious marketplaces (again), 'Alibaba's Jack Ma: China-U.S. relationship should be 'more friendly,"' i .'=tli
The wall street Journal; Tan, H. (20r6,Dec.21),, "uS puts Alibaba's Taobao
because the company has failed to keep counterfeiting
website back in its list of 'notorious marketplaces,"' CNBC: Dou, E. (2016,
and piracy levels in check. Alibaba is also in the middle Nov. 11), "swinging singles day: Alibaba holiday drives shoppers in China," ".
The Wall Street Journal; Osawa, J., and E. Dou (2015,June 23), 'Alibaba
of an investigation by the U.S. Securities and Exchange stumbles in U.S. marke!" The Wall Street Journnl;"Ahibaba Group FY 2016-17
Commission about its accounting practices. As Alibaba results," http //www. alibabagroup. com/en/news/pres s_pdf/p 1 705 1 8.
:

pdf; company overview, news on Alibaba.com; Chu, K., and G. Wong

looks to expand its services outside of ecommerce and (2015, Aug. 17), 'Alibaba faces fresh threat from rivals," The Wall Street
China, Jack Ma needs to gear up to face new challenges. Journal; wong, G., and c. Dulaney (2015, Aug. 2), "Reality hits Alibaba's
results," The wall street Journal; "Clicks to bricks," The Economisr, August
15,2015; Mishkin, S. (2014, Oct.29) 'Amazon's ventures in China are
Br$ct $stOil gur$TtoH$ raising concerns at home," The Financial rimes; Demos, T., and J. osawa
(2014, Sept. 19), 'Alibaba debut makes a splash," The wall Street Journal;
'Alibaba: The world's greatestbazaar," The Economist, March 23,2013:
t. Why did eBay lose out to Alibaba in China? Whar
"E-commerce in China: The Alibaba phenomenon," The Economist,
lessons can be learned for non-Chinese internet March 23,2013; "Microsoft considered building e-commerce market," Fox
(technology) companies ? Business, June 2013; "Yahoo's Marissa Mayer hits one-year mark," The
wall street Journal, July 15,2013; "Yahoo's ad struggles persist," The
t" How was Alibaba able to become the most suc- Wall Street Journol, April 16,2013; "How Taobao bested eBay in China,"
Financial Times, March 12,2012: "How eBay failed in China," Forbes,
cessful ecommerce company in China? Think September 12,2010; "How eBay lost the china market," Global Times,
about standards, network effects, and the crossins- August 10,2009; "E-commerce with Chinese characteristtcs," The
Economisr, November 15, 2007; and "The Jack who would be king,"
the-chasm framework to inform your reasoning. The Economist, August 24,2000.