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March 23, 2014 10:46 pm
Shopping in China can be a nightmare. First there are the hazards of simply leaving your home: the smog, the traffic and the crowds. Then you have two options: go to a modern shopping mall, where you can buy western branded goods, made in China, for twice what you would pay for them in the west; or you can try your luck at the markets, where sellers haggle aggressively, overcharging everyone they can – and you never know if what you are buying is real or fake.
What if someone could take this unpleasant experience and make it convenient and quick? Force monopolistic sellers to compete and make it harder for them to rip you off? Give consumers better information about the sellers they are buying from and the products they are buying? Push prices down and facilitate thousands of new small businesses in the process?
The venture has taken the nightmare of shopping in China and transformed it into a painless, virtual experience, where sellers compete with each other and are rated by shoppers for quality and delivery. Alibaba websites, Taobao and Tmall, are as cluttered and in-your-face as a downtown bazaar but with all of the convenience and little of the hassle – and they boast the lowest prices anywhere.
Wang Chun, head of ecommerce for Kudipets, which sells pet supplies on Tmall, Alibaba’s business-to-consumer site, says ecommerce would never have taken off in China if offline shopping were not so arduous. “It’s not like America here where everything is convenient and cheap,” he says. “The only place to shop conveniently in China is online.”
Alibaba, says Michael Clendenin, research analyst at RedTech Advisors, a business consultancy based in Shanghai, “is like an open-air flea market. They say, ‘we’ll bring in the shoppers, we’ll rent you [the] floor space, you are responsible for making the money.’
“What Jack Ma did is he transferred that whole model online. [Alibaba drives] traffic to the site and the merchants do the rest.”
Of course, it has not all been smooth sailing – Taobao, Alibaba’s consumer-to-consumer sales portal, which is similar to eBay, has had to crack down on sellers after it gained a reputation for selling counterfeit goods.
Alibaba also gets poor marks for transparency and corporate governance: Ma’s biggest red flag is his 2010 move to bring Alibaba’s $5bn online payments subsidiary, Alipay, under his personal control, without board approval, provoking a battle with other shareholders, including US internet giant Yahoo.
But it seems nothing can quell the hype surrounding Alibaba, which is set to increase this spring as the company plans what is expected to be one of the biggest ever initial public offerings which, according to a consensus among analysts, could value the company at more than $100bn.
It is a stunning valuation for a company that has risen from nowhere in recent years, faces hard questions about its corporate governance, publishes little information about itself and has few tangible assets.
Unlike Amazon, Alibaba has no inventory or logistics, and does not sell anything itself, aside from space on its servers and advertising for its search engine. “It is a pure platform,” says Clendenin. “Basically, it sells traffic.”
Alibaba has been successful largely because it has leapfrogged offline shopping. Chinese people have grown comfortably into ecommerce. Delivery companies run cheap, flawless same-day delivery, and sellers compete in price wars with razor-thin margins, sometimes seemingly content to lose money in exchange for market share. Taobao and Tmall boast 80 per cent and just over 50 per cent of their respective markets.
Small sellers are waking up to the possibilities of ecommerce in the world’s largest consumer market by population but where rocketing property prices have made shop ownership prohibitive.
Take the experience of Zhang Ming, a Beijing entrepreneur who three years ago was selling oil paintings from a stall in a shopping mall. He says he was paying 30 per cent of his revenues in rent. Today, his stall is closed and he sells exclusively on Taobao.
He says he has twice the sales and spends 16 per cent of his revenues on maintaining his Alibaba site. Prices are lower on Taobao because of all the competition. “The margins are lower, but you make your money with higher sales,” says Zhang.
Sellers pay for placement on Taobao, and everything from search rank to paid placement are up for auction. The biggest competition is for the “diamond”, a banner advert that shows up according to different keyword searches. Merchants can expect to pay a 6 per cent store fee and between 10 and 30 per cent of their revenues for advertising on Taobao and Tmall.
Presiding over all this is Ma, a character fond of outlandish performances and over-the-top company parties where he has appeared dressed as everything from Snow White to a member of the rock band Kiss. In 1999, he founded Alibaba with 17 friends in his flat. Today, it employs 16,000 people.
Born in the eastern Chinese city of Hangzhou in 1964, Ma Yun (Jack Ma’s Chinese name) was born into showbusiness. His parents earned their living as performers of pingtan, a traditional musical storytelling art. As a child, Ma was bad at maths but fascinated by English and decided early on that he would devote himself to learning the language, working for free as a tour guide in order to practise.
In 1994, he travelled to the US for the first time after founding his own translation company. There, he encountered the force that would change his life: the internet. At the time, China’s state media were not allowed even to mention its existence, but Ma was awestruck by the possibilities of a medium that could put China’s huge population in touch with one another.
Another fateful encounter came when Ma went to work for the Ministry of Foreign Trade and Economic Cooperation, where one day he was assigned to take a US visitor on a tour of the Great Wall. The visitor was Jerry Yang, co-founder of Yahoo.
The first competitor Alibaba saw off was eBay, which dominated China’s ecommerce market but faltered when it switched traffic to US servers, resulting in slow performance. Users ditched eBay in droves, leading Ma to quip: “Ebay may be a shark in the ocean, but I am a crocodile in the Yangtze. If we fight in the ocean, we lose, but if we fight in the river, we win.”
Taobao’s market share in the consumer-to-consumer section of ecommerce hovers between 80 and 90 per cent.
Thanks to Ma’s friendship with Yang, Yahoo paid $1bn for a 40 per cent stake in Alibaba and handed its China operations over to Ma to run. However, Ma soon began to complain he had sold too large a stake to Yahoo, and tried to convince the US company to sell part of it back.
Tension led in 2011 to Ma shifting ownership of the Alipay online payment business to a company he controlled personally, saying it was necessary to get around government restrictions. It also made the point to Yahoo that Ma could do what he pleased.
Faced with such hard-nosed tactics, which threatened to erode its investment, Yahoo finally agreed to sell half its shares for $7.1bn.
Competition is so fierce in China’s ecommerce market that the smallest missteps can have lasting consequences. Taobao has had to move quickly to address concerns about fraud by sellers after the site acquired a reputation for fake goods. The company has responded by getting tough with sellers and, as a result, some are exploring options with competing websites.
Ma has raised eyebrows for his uncritical support for repressive policies of the Chinese government. For example, Yahoo’s decision to hand over private email information to the Chinese authorities – made before Ma took over Yahoo China – had led to at least two Chinese journalists and democracy advocates being imprisoned for subversion.
“We create value for the shareholders and the shareholders do not want us to oppose the government and go bankrupt,” Ma said at the time. “Whatever [government officials] say, we will do it.”
In July 2013 Ma again caused controversy when, during an interview with the South China Morning Post, he reportedly labelled the 1989 massacre of protesters in Tiananmen Square as “the most correct decision” at the time. He later claimed that his comments had been taken out of context and there had been a “terrible misunderstanding”, though the newspaper stands by its reporting.
Ma is both Alibaba’s greatest genius and at times, it seems, its biggest liability. But for Alibaba’s investors, he is integral to its continued success. “Ma is a little crazy,” says Li Siyuan, who sells flowers on Taobao from his Beijing flat and has a book of Ma’s collected speeches on his bookshelf.
“But if it wasn’t for him I wouldn’t have my business.”
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