Take a big piece of Google and put it in a blender. Add a large slice of Amazon. Then mix in parts of eBay and PayPal with other payment resources. Sprinkle over online financing and cloud services, and finally stir in a private equity group. You’ve just made one of the world’s greatest internet companies, worth billions of dollars and by a few measures the biggest e-commerce giant in the world. It’s also one of the most valuable tech companies, with its New York Stock Exchange debut on September 19, 2014 for the biggest IPO in world history. After handling more e-commerce business than any other company last year by making $248 billion worth of transactions (more than eBay and Amazon combined), this tech giant’s net income in 2013 quadrupled the previous year. Its name is Alibaba, and if you haven’t already, you’ll hear much more about it in the next few years.
Previously an English teacher, Jack Ma founded Alibaba in his apartment in Hangzhou, China as a simple online listings service. The year was 1999, and the company started during a time when China wasn’t seen as a ripe place to build a technology company. Not many people had computers and even if there was internet access, it was limited and slow. Venture capital was rare and there were almost no public technology companies.
During the early stages of Alibaba, the country experienced a massive population migration from small towns into megacities like Shanghai, Beijing, and Shenzhen. Statistics indicate that 166 million of China’s 269 million rural migrant workers made this major urbanization move. To add perspective, the current population size of the United States is smaller than the entire population of migrant workers. The needs associated with that kind of thriving market change on a macro scale are hard to ignore, and Alibaba was able to ride those major waves very successfully.
Building and Growing
In retrospect, Ma also had good timing. He built Alibaba during the most growth-oriented, pro-capitalist, pro-market governing system in China’s history. That didn’t make it easy, but it made it possible to be privately owned. At that time, it was highly unusual to construct a technology company and there wasn’t widespread knowledge about how to do it. Searching for cofounders was harder and hiring employees that believed in this new entrepreneurial-minded business model was next to impossible. Another challenge they had to face was how to overcome the many collisions with Chinese regulators and government agencies along the way.
Alibaba also helped pave the way for modern business in China, which in turn opened the country to Western brands. Dell, HP, and Levis are examples of American retailers that gained new access to the Asian consumer market after creating online stores with Alibaba’s platform. A key factor of Alibaba’s expansion was this progression from its original offering of simply connecting businesses to each other, to one that allows companies to sell directly to the public (Tmall) as well as the public to sell to each other (Taobao). In about 15 years, this new way of buying and selling on the internet grew to dominate 80% of China’s online shopping market—and it’s still on a strong growth trajectory.
Sights on the US
Ma’s impact in China has not gone unnoticed in the US. His life was chronicled in the film ‘Crocodile in the Yangtze’, with director Porter Erisman comparing Ma to no less a figure than Apple’s late founder and CEO, Steve Jobs.
He said, “If Steve Jobs created the operating system for the smartphone, Jack Ma and his team created the operating system for commerce in China and the future. He’s someone who loves a challenge. He’s motivated by doing things that push China forward.”
The US isn’t an unfamiliar territory to Alibaba either. It has been aggressive in its US investments, including the $15M funding to New York-based retailer 1stdibs, the purchase of a $250M minority stake in messaging app Tango, and participation in a Series D funding for taxi app company Lyft. It has also partnered with the Amazon Prime competitor ShopRunner to bring US goods to the Chinese market, and has led a $50M round of funding for app search engine Quixey.
One aspect Alibaba had to address in the US regarded inauthentic products. It responded by cracking down on the millions of listings that carried intellectual property issues. The updated process now consists of adding a buyer and seller rating system and allowing buyers to receive refunds on unsatisfactory products.
Looking to the Future
With a market cap hovering between $160B and $290B, it’s undeniably already a financially formidable company powered by a unique business model of a blend, rather than an exact copy of any one US tech leader. The question is – what is the future of Alibaba now? The e-commerce market has increased by 120% each year since 2003 according to the MGI, with more people shopping online yearly – internet penetration is still quite low compared to the west. For Alibaba, this means strong opportunities for expansion.
On the other hand, Alibaba has a few challenges at home to overcome. For instance, along with the rest of the world’s movement to mobile, China had 600 million plus internet users subscribe to smartphones. The biggest companies vying for space in this mobile market are Baidu and Tencent (owner of the massively popular WeChat messaging app). So in order to compete, Alibaba invested billions of dollars in businesses both inside and outside of China that help rival these firms.
But Alibaba already has a history of winning. It had a big victory against eBay, who attempted to enter the Chinese company’s home turf in 2004. Ma responded to that by producing a competing consumer-to-consumer auction site, Taobao. Alibaba’s clever advertising and waived listing and transaction fees created tough competition for eBay, who then decided to withdraw from the China market in 2006.
There have been some very notable actions by Alibaba that illuminate its plans for the future. With fresh support from its recent public filing, reports of Alibaba expansion into Australia have surfaced. It will also receive more encouragement from the Chinese government as a number of “Taobao” villages pop up helping to lift parts of the economy. These small towns have flourished because the inhabitants use Alibaba to sell goods online, creating more jobs and wealth in those areas. Alibaba has also increased its interest in the entertainment industry by raising its investment stake in Huayi Brothers Media.
The company has a growing positive reputation for strong leadership and values. Its well-respected, highly-revered leader Jack Ma, who moved from the CEO role to Executive Chairman in early 2013, has led a company culture that prizes integrity and teamwork. For example, when a corruption scandal hit the business in 2012, he communicated a low tolerance for misconduct by showing a number of people out. When he stepped down as CEO, he wrote an encouraging message to the upcoming leadership in his announcement stating: “The next generation of Alibaba people are better equipped to manage an internet ecosystem like ours. I believe they understand the future better than I do.”
The success of Alibaba benefits China as a whole – it has succeeded in making the country, a place that had many internal barriers to trade, become a market where goods can be bought and sold with more confidence. This makes for huge strides in promoting the national and even international economy, more so than any state-owned enterprise.
The Alibaba story is a definitive example of this unique Chinese startup’s perfect storm that made it one of the greatest technology success stories to date. It’s an example of how entrepreneurship can thrive in even the most difficult conditions, places, and situations.
What do you think of Alibaba's unique story? How has Alibaba's unique tale served as an inspiration for you?