In late 2013 or early 2014 China became the largest e-commerce venue in the world, and that is not likely to change any time soon. Alibaba is the largest e-commerce website in China by a long shot, so it stands to reason that Alibaba will continue to grow and prosper in the coming months and years. Alibaba Group was founded in 1999 to connect Chinese manufacturers with overseas buyers. It started out as a business to business portal. Since it’s launch the company has expanded into other areas of e-commerce. Today Alibaba Group owns business-to-business online web portals, online retail sales sites and online retail payment services, cloud computing services and shopping search engines.
The Alibaba Group was founded by Jack Ma Yun who only first used the internet in 1995, only four years before founding Alibaba. As a youth Ma rode his bike 45 minutes to the closest tourist hotel where he would lead tourist site seeing trips for free in order to learn the English language. After graduating college in China in 1988, he became a lecturer in English and International Trade at Hangzhou Dianzi University. In 1998 and 1999 Mr Ma headed an IT company established by the China International Electronic Commerce Center, which was under the aegis of the department of Foreign Trade and Economic Cooperation.
Alibaba Group primarily operates in the People’s Republic of China, but has branches elsewhere in Eastern and Southeastern Asia such as, Japan and Taiwan. Like Mr Ma, Alibaba benefits from operating in both English and Chinese. Originally the sales portal sold Western products to Chinese businesses. Since Chinese is a character-based language rather than an alphabet based language like western languages, Chinese requires a special keyboard for data entry, which offers Alibaba an advantage over most Western sales companies in addressing the Chinese marketplace.
Alibaba is the largest e-commerce site in China and in the world. In March 2013, The Economist magazine valued the company at between $55 billion to more than $120 billion. The Alibaba Group did over 1.6 trillion dollars worth of business last year (2013) and Alibaba’s online retail platform sold over $248 billion worth of merchandise. A privately held company of this stature is an interesting investment target, and will attract investment now that the Alibaba Group’s IPO is announced and scheduled for later in the summer. At this point the Securities and Exchange Commission is reviewing Alibaba’s offering materials. The opening price and number of shares to be offered in the IPO are not yet established.
Although Alibaba now does some business in overseas markets like Russia and Japan, in its IPO prospectus the company emphasizes their plan to concentrate on the Chinese market. It’s not surprising that they place emphasis on China because there they have a history of receiving higher profit margins than anywhere else. Also their tax rate is extremely low in China at about 10 percent. Alibaba Group has capitalized on the huge growth of the internet in China as well as China’s decades of prosperity.
Alibaba’s first venture began just months before China joined the World Trade Organization. That first endeavor, which connected foreign buyers with Chinese manufacturers was able to play a part in the explosive growth of Chinese manufacturing in the early years of the 21st century, but the business was all based on wholesale connections. In 2003 Alibaba opened its first retail site, Taobao.com, on which small businesses and individuals could buy and sell products throughout China. In those years a Chinese middle class was beginning to grow in the South China coastal regions and online shopping was a new convenient opportunity.
By 2008 the Alibaba group expanded yet again by introducing a new site, Tmall.com, which allowed both local and international brands to set up virtual storefronts to market directly to Chinese buyers. The success of these different digital e-commerce stores has lead Alibaba to continue to reach into more and more online niches. At this point Alibaba has a chat service, online cloud service, mobile phone service, an online payment system and a variety of other platforms. The company is a digitally based conglomerate. It is also the largest online company in China, bigger than Ten Cent and Baidu.
Because the Chinese financial system lacks regulation and regulation enforcement not all investors are convinced Alibaba is a safe investment. The IPO is touted as the most interesting internet IPO since Facebook, which launched two years ago. There is a reasonable chance Alibaba’s IPO will be bigger and more profitable than Facebook. Some investors are gaining an indirect route to the IPO by purchasing stock in Yahoo or the Japanese company Softbank. Yahoo holds a 22.5 percent stake in Alibaba, while Softbank holds a 34.4 percent share. Jack Ma, the founder is the largest individual investor in Alibaba, owning 8.9 percent of the company’s stock.
As a pioneer Chinese internet company, Alibaba is not developing new technology so much as it is leveraging technology developed in the West, in the Chinese and East Asian markets. This application of market based commerce in a communist country isn’t without problems. The lack of long-standing experience with wholesale and retail market supply systems has lead to claims of fraud and poor quality products on all of Alibaba’s sites. And, attempting to enter so many other digital areas of commerce has also become challenging when there are already competitors in those niches. Look for Alibaba’s IPO launch date in August or September.