or Go Deeper into China
It is hard not to be impressed with Alibaba. initial public offering earlier this month, the company that was founded 15 years ago in a modest apartment in southeastern China has officially minted the biggest IPO on record. With a market value of $220 billion, Alibaba is worth more than Facebook, Amazon or eBay. And now that it has a substantial war chest, what is next for the Chinese e commerce giant?
Co founder and executive chairman Jack Ma recently shared a bit of his grand vision. “We want to be bigger than Wal Mart,” he said in a September 19 interview on CNBC, the day Alibaba went public on the New York Stock Exchange, during which investor demand drove up the stock by 38%. “We hope in 15 years, they’ll say this is a company like Microsoft, like IBM, like Wal Mart. [Those companies] changed, shaped the world.”
Alibaba is well on its way, at least in China. As the largest e commerce company there, Alibaba counts 279 million annual active buyers who place 14.5 billion orders a year. Taobao and Tmall are the largest companies in their markets when measured by the value of all the goods they handle.
But now Ma and his leadership team have a tough task ahead: positioning the company for its next phase of growth. The strategic path chosen by the executive team is critical to shaping Alibaba’s future. Will the company continue to focus on developing its business in China for the next few years, or will it shift its attention to international expansion through acquisitions or partnerships? Ma himself is still pondering his strategy: “I’ve been thinking about the next five to 10 years, how I can make these shareholders happy,” he told CNBC. But he emphasized that pleasing shareholders will come after taking care of customers and employees, in that order. Securities and Exchange Commission on September 22 provides a clearer glimpse of Alibaba’s business plans. The company said it is seeking to increase market share in China by attracting new customers and motivating existing clients to purchase more products through loyalty programs, providing good customer service as well as using marketing and promotional campaigns. It also plans to expand its mobile presence by offering digital content and location based services, among others. Alibaba will continue to invest in data and cloud computing services to help its own business as well as its cadre of merchant customers. Internationally, the company said it would like to continue facilitating relationships between Chinese merchants and consumers with foreign buyers and cheap jerseys sellers.
As a public company, Alibaba will face pressure from investors who are betting on continued robust growth of its business. So far, Alibaba has not disappointed. In fiscal year 2014, which ended on March 31, revenues grew by 52% to RMB 52.5 billion from the prior year. From 2012 to 2013, revenues were up 72%. Profits have continued to soar as well, shooting up 175% in 2014 from the prior year and doubling from 2012 to 2013.
Marshall Meyer, Wharton emeritus professor of management, believes Alibaba will be better off focusing on China and surrounding Asian countries, where e commerce is not fully developed yet. In those markets, Alibaba’s more advanced platforms would have an advantage over local players, an edge it would not enjoy in more developed nations with entrenched competitors. “There could be enormous opportunity at the periphery of China,” he says. “Go deeper elsewhere in China. “E commerce is getting very, very popular in China. It’s amazing how fast it is growing not only in the big cities, but also in second and third tier cities.”
Shen says the dearth of retail stores and the limited product selection available at brick and mortar stores have motivated Chinese shoppers to go online. On the Internet, not only will they find a greater variety of products, but also goods tend to have lower prices. As consumers flock to these sites, entrepreneurs are springing up to cater to http://www.cheapjerseys11.com/ them. “Even farmers are selling their vegetables on this platform,” Shen says.
By Alibaba’s own reckoning, the Chinese e commerce market is largely untapped. According to its SEC filing, less than a quarter of China’s 1.35 billion people shop online, even though half of them are on the Internet. Overall, online shopping makes up only 8% of China’s total consumption. While China’s economy has cooled, it remains a growing market, and “that alone could propel [Alibaba] along,” Meyer notes.
But to keep the online shopping market robust, an adequate infrastructure for the delivery of products must be in place, Meyer adds. “They’re in the business of moving goods to customers that’s where the problem comes,” because delivery can be spotty. But Shen points out that the growth of e commerce has propelled the development of the logistics infrastructure industry in China as well. “They have grown really, really fast,” she says. Delivery now can be quick and cheap. In its SEC filing, Alibaba said China has an “increasingly extensive and rapidly improving” logistics backbone. The company uses third party providers of logistics services to deliver its products and China Smart Logistics, a 48% owned affiliate.
Another Alibaba headache is dealing with the competition. While it is by far the largest player, commanding half of the market, smaller rivals have sprung up and are chipping away at its business. “The competition in China is actually very severe even though it’s a big market,” Shen notes. Competitors are differentiating themselves from Alibaba by specializing in certain goods. In contrast, most of Alibaba’s sites are general in nature; anyone can sell anything.
“The competition in China is actually very severe even though it’s a big market.” Shen
Wharton marketing professor David Hsu predicts that at some point, the Chinese e commerce market will become so crowded that it will be difficult for Alibaba to differentiate itself. But the company can stay ahead of its competitors by offering services that are new or needed by Chinese consumers. For instance, Alibaba can offer financial services to its customers as an extension of its core e commerce business.
While Alibaba has separated from Alipay, its payments platform, Hsu envisions a day when the company will offer insurance and other financial services to its business customers. Similar services might not be far behind.
When it considers branching out into other product lines, Alibaba should think more like Amazon than eBay, Hsu suggests. EBay has not strayed much from its auctions business, but Amazon parlayed its online bookselling operations into areas such as video, cloud services and consumer devices. According to Hsu, areas Alibaba could look into are health apps, smart watches and other connected devices. It could use the money from the IPO for research and development to drive innovation. “They have an opportunity to shape that vision,” he notes. “It will be great to see them break new ground here.”
As for the government possibly reining in Alibaba’s growth in the future, Shen points out that such political risks exist in any Chinese company. Alibaba is no different; it is regulated like any local firm. But she also believes that the Chinese government wants to support Alibaba because it brings in plenty of tax revenue, and its platforms create entrepreneurial jobs for scores of Chinese. In an interview with the news program “60 Minutes” that aired on September 28, Ma said Alibaba has a good relationship with the government. He added that the company brings stability to the country by creating entrepreneurial jobs. “If people have no jobs, the government will be in trouble,” he noted.
Still, Shen acknowledges that there is always an element of uncertainty when it comes to dealing with the Chinese government. Hsu points to the current mass protests in Hong Kong, noting that the world is watching to see how the Chinese government deals with civil disobedience sparked by Beijing’s decision to limit candidate choices in the 2017 election for Hong Kong’s next chief executive. through its actions. startups including ride sharing service Lyft, mobile messaging firm TangoMe and e commerce site ShopRunner. through these small steps,” says Kartik Hosanagar, Wharton professor of operations and information management. company or entering a partnership with one will go a long way towards helping Alibaba burnish its brand in the country. company and co branding it with Alibaba, or by slowly launching a viral grassroots campaign here,” says Wharton marketing professor Eric Bradlow. company but decides to compete instead, it will not be easy for the company to prevail. “It’s a big challenge,” Meyer notes. Amazon, in particular, will be a tough rival to beat because its razor thin margins ensure it will undercut the prices of everyone else. It also has a logistics infrastructure that works. “I wouldn’t go head to head with Amazon,” he says. Despite the widespread news coverage of its IPO, “a lot of people don’t know what Alibaba is,” Meyer notes. An Ipsos poll conducted for Thomson Reuters in the week leading up to the IPO shows that 88% of Americans had not heard of Alibaba. A week after the company went public, the number had fallen but remains at a high 76%.
According to Shen, Alibaba has to come up with a unique proposition to entice Americans to switch. It makes no sense for the company to become another Amazon if Amazon is already in the market, she notes. Wharton marketing professor John Zhang says that in light of the competition, it might make more sense for Alibaba to focus its efforts on the Chinese market. “I don’t see why it cannot continue to do well in China,” he notes. “Going abroad is a different proposition.”.