A lot of Americans don’t know about Alibaba, the Chinese e-commerce giant which filed for a US IPO yesterday. But they will soon. Last year there was over $240 billion in sales on Alibaba, more than Amazon and eBay combined. On Black Friday of last year, Alibaba sold $5.75 billion in goods. That’s three times more money transacted in a single day than all of America spent on all US shopping sites combined across Thanksgiving and Black Friday. The public offering is expected to be one of the largest in history, valuing the company at $150 billion or more. With the money it collects from an IPO Alibaba has plans not just to dominate China, but to take on titans like Amazon with the launch of its own US marketplace.
More sales than Amazon and eBay combined
Alibaba is the brainchild of Jack Ma, an eccentric entrepreneur whose reputation in China is akin to a Steve Jobs or Jeff Bezos. He was rejected from college both at home and abroad more than a dozen times before finally securing a spot at a local university in his hometown of Hangzhou, where he studied English. During a trip to Seattle in 1995 he learned about the internet and returned home determined to build an online business. He created China Pages, a directory and portal that was one of the earliest websites in the country, but it was ahead of its time and not much of a success. Four years later he had left that company behind to start Alibaba out of his small apartment.
At first Alibaba’s business was a marketplace connecting American merchants with Chinese suppliers. It quickly expanded into retail with Taoboa, where 8 million small merchants now list their items. It then went upscale with Tmall, a shopping site where big brands such as Disney, Apple, and Nike host virtual shops for Chinese consumers. Like Amazon, Alibaba has a diverse array of other businesses. It is a shipping company, cloud-services provider, and payment processor. It has even begun experimenting with banking, making loans to the same small merchants who sell on its marketplace. The company has been growing at a phenomenal rate. According to its IPO filing with the SEC, Alibaba made over $6.5 billion dollars in revenue during the last nine months of 2013, nearly half of which was profit.
Alibaba's profit margins dwarf those at American e-commerce companies
American companies like eBay also had their eyes on China’s huge customer base and rapidly expanding middle class. In 2003 Meg Whitman led the charge with a $150 million purchase of the Chinese e-commerce company Each-net, an acquisition that gave eBay control of 85 percent of China’s online shopping activity. Alibaba had far fewer resources, but a much better grasp of the local market. By 2005 the companies were neck and neck. Whitman approached Ma about a possible partnership, but he decided to take a $1 billion investment from Yahoo instead. By 2006, Alibaba had passed eBay to become China’s biggest e-commerce company. That same year eBay bowed out of the Chinese market.
The biggest challenge for Alibaba as it looks to crack the US market will be trust. Alibaba has been criticized before for allowing shady merchants to promote defective or counterfeit goods on its sites. Unlike most e-commerce companies around the world, Alibaba does not allow search engines like Google to index its wares. So customers must go directly to its websites and search there. Alibaba lets merchants list for free on sites like Taobao, but it charges them a premium if they want their goods promoted in its search engine. This has led to criticisms that customers are being pushed inferior products, and in fact at one point the Office of the US Trade Representative labeled its sites as "notorious markets," a designation it has since removed.
Alibaba has struggled with fraud
In its IPO filing Alibaba writes about this issue, noting that, "The first risk Alibaba displays, which typically means its most important for investors, is the 'trusted status of our ecosystem' ... If we fail to balance the interests of all participants in our ecosystem, buyers, sellers and other participants may stop visiting our marketplaces, conduct fewer transactions or use alternative platforms…"
David Pakman, a tech investor with Venrock who lives in New York, has used Alibaba a few times in recent years. He said that trust was definitely an issue for him at first, but that in the end price won out. "I was looking for professional-grade theatrical lasers," says Pakman, to be part of a DJ setup. "I found them for sale in the US at very high prices and just assumed they were probably made in China. I searched Alibaba and found all of the exact same units direct from the manufacturers at 10 percent of the price on US sites." While the intention may not be to compete with US merchants, says Pakman, "they will be showing people exactly what the markup is when you shop at an American seller."
"The exact same units direct from the manufacturers at 10 percent of the price."For Amazon, which has built its business on being able to undercut the competition, the arrival of Alibaba, and its hordes of Chinese manufacturers willing to sell direct, is a frightening prospect. Alibaba already does business in Russia and Brazil and is working on an American marketplace it’s calling 11 Main. When he was battling the much larger eBay in China, Jack Ma famously said that "eBay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean we will lose, but if we fight in the river we will win." Alibaba proved it could defeat larger, more established Silicon Valley rivals on its home turf. Now it's venturing into the ocean to see if it can’t swim with the sharks after all.