Subject: Consumer Behavior

Case Study 2: Alibaba: The World's Largest E-tailer Is Not Amazon

There's a new king of e-commerce, and it dwarfs Amazon. Introducing Alibaba, the China-based behemoth that racked up $420 billion in revenues last year and is rapidly building an online empire that will include businesses ranging from a traditional online marketplace to online investment services. With annual sales that already place it much closer to Walmart ($487 billion) than to Amazon ($89 billion), Alibaba is growing so rapidly that by the end of the year it will comfortably pass Walmart to become the world's largest company. How is this Chinese upstart pulling off such a startling Internet feat? Let's start by taking a look at Alibaba's founder, Jack Ma.

Unlikely Beginnings

Jack Ma is an unlikely figure to be atop of one of the world's most powerful companies. Time and again, U.S. tech start-ups have emerged from California garages. However, perhaps none of those start-ups were founded by individuals as seemingly unprepared as Ma. Growing up in Shanghai, Ma did poorly in school. He failed the college entrance exam twice before getting in and completing a teaching degree. He learned to speak English by hanging out around tourists and listening to radio broadcasts. Ma was rejected for a number of jobsincluding being a manager for KFCbefore finally landing a job teaching English for $12 a month. But Ma was animated and energetic, and he had lofty goals and ambitions, a combination that earned him the nickname "Crazy Jack." During China's export boom in the 1990s, Ma started a translation company. On a business trip to the United States, he was exposed to the World Wide Web and was surprised to find almost no Chinese content. After a failed attempt at starting an Internet company in China, Ma corralled 17 friends in his apartment in 1999 and set out to build an online marketplace. Substituting vision and charisma for coding skills, Ma started Alibaba.com, only a few years after legendary e-commerce marketers Amazon and eBay got their starts.

Feeding the Masses

It's difficult to examine Alibaba without making comparisons to the more globally familiar online sellers. In fact, Alibaba is often referred to as the "Amazon of China." But it's the differences between Alibaba and the Amazons, eBays, Googles, Walmarts, Costcos, Sears, and thousands of other successful e-tailers that explain how the Chinese company has grown so big and will grow so much bigger in the future. For starters, consider the respective domestic markets. Amazon and the others got their starts in the United States, home to roughly 320 million people. This market serves up the most developed retail industry and the highest standard of living in the world. As the tech boom took off, numerous ambitious upstarts competed fiercely to transfer America's retail businesses into the quickly developing space. Tech-savvy U.S. consumers scrambled to convert some of their buying from brick-and-mortar stores to online purchases. Contrast this with China. With 1.3 billion people and the fastest-growing economy in the world, the Chinese market has tremendous power and potential. But perhaps more important. China's retail sector was still in the Dark Ages when Alibaba got its start. "E-commerce in the U.S. is like a dessert. It's just supplementary to your main business," Ma said recently. "In China, 6 because the infrastructure of [traditional retail] commerce is [so] bad, e-commerce becomes the main course." As many Chinese move from poverty to middle-class status, their exposure to buying online coincided with their exposure to any kind of buying. Relative to the U.S. market, there were relatively few competitors. The size and nature of China's market have Alibaba boasting of 300 million registered customers, a base that comfortably exceeds the size of the entire purchasing population of the United States. And Internet penetration in China is still only 47 percent, compared with the much more saturated 87 per-cent in the United States, providing enormous growth potential. In adapting traditional retail to an online environment, Amazon and the other U.S. e-tailers operate a "managed marketplace"they own their own distribution centers, sell a majority of their products directly, and even market their own brands, all characteristics that mimic traditional retail structures. This allows U.S. e-tailers to benefit from established distribution channels and to maintain a great deal of control over their operations. But it also requires massive investments in infrastructure and armies of employees, both of which result in waferthin profit margins. In fact, for two of the past four years, Amazon has lost money. For the other two years, the biggest profit it could muster was only I .3 percent of sales. Walmart's profit margin percentages for both online and offline sales are typically in the low single digits. But Alibaba does not own or operate massive distribution centers. It doesn't own the items sold on its sites. And it only employs about 25,000 people, a fraction of Amazon's 132,000 employees. Instead, Alibaba's open market platform simply connects buyers with sellers. That might sound like an eBay approach, but Ma insists that it is not. "Amazon and eBay are ecommerce companies, and Alibaba is not an e-commerce company," Ma said recently. "Alibaba helps others to do e-commerce. We do not sell things." While this gives Alibaba less control over the customer experience, Ma sleeps easier at night without the burden of obsessing over keeping prices low. As market forces work to set price points, Alibaba sits back and watches the cash pour in. Its profit margin over the past two years averaged almost 40 percent.

A Little of Everything

The continuous influx of cash has allowed Alibaba to invest in just about every kind of business imaginable. In its infancy, Alibaba.com primarily matched Chinese exporters with businesses throughout the rest of the world. But the company quickly shifted focus, catering to the growing purchase power of its domestic market. Unlike its Western counterparts, Alibaba developed and acquired different online sites and established major divisions. For example, Taobao.com is a site that helps small businesses and private parties sell merchandise to customers. But unlike eBay's commission structure, Taobao sellers pay only for the advertised promotion. From a shopping standpoint, Alibaba's Tmall.com is more similar to Amazon, pairing customers with big corporations, including many global corporations such as Nike, P&G, Apple, and even retailers like Costco. But Alibaba's development has taken it down numerous other paths as well. And although it may seem that the surging Chinese conglomerate is simply playing copycat, Ma's vision plays out creatively in every case. For example, Alipay is similar to PayPal. But starved for investment opportunities in an environment dominated by state-run banks, Alipay customers have access to financial products that pay attractive returns. In the first year of making such options available, Alipay customers tucked away $82 billion. In another example of "follow-the-Silicon-Valley-guru," the soon-to-be-launched Tmall Box Officeor TBO"aims to become [the equivalent] of Netflix in the U.S.," including plans to run original content produced by Alibaba's own Alibaba Pictures. But in an environment where TV viewers aren't accustomed to the pay-to-watch model, Alibaba is a true pioneer. And that pioneering effort extends to a crowd-sourced film investment fund, a model that threatens to upend traditional film financing in China by allowing regular folks to become producers with less risk. During the past six months alone, Alibaba has spent $8 billion investing in start-up firms. Today, the Alibaba Group spreads out over a constellation of services, including music, gaming, blogs, social networks (the company just dropped $200 million on Snapchat), event ticket sales, shipping, ridesharing, and smartphones. As Alibaba's list of businesses grows, Ma's vision and innovation seem unbounded. After all, how many U.S. Internet veterans can say they started their own holiday? Just six years ago, Ma enthusiastically launched Singles Day on November 11. What started as a sort of antiValentine's Day for single people is now one of the biggest blockbuster sales holidays in the world. Last year, it resulted in $9.3 billion in sales in a 24-hour period, almost double what fanatical U.S. residents spent during the five-day Thanksgiving shopping spree across all companies combined. As Alibaba continues to grow, one frontier looms largeglobal expansion. Although China's biggest dot.com success certainly has global ambitions, it has so far chosen to focus on the massive potential of its home market. That will certainly change. "We plan to invest more in [the U.S. and U.K. markets] to get more traffic and ... build brand awareness," says Joe Yan, director of international B2C at Alibaba's export division. "Our biggest advantage is abundance, with 100 million products, we have more options for customers who can buy our products cheaper and at high quality." And while it remains to be seen how Alibaba will attack global markets, one analyst recently predicted a future marriage down the road of Alibaba and eBay. At the same time, U.S. companies like Netflix and Amazon are exploring ways to expand their small presence in China. However, although the massive markets on both sides of the pond represent opportunities too tempting to pass up, only time will tell whether any of these successful U.S. companies can export the models they have applied so successfully in their home markets. As U.S. competitors try to counter Alibaba, they will face one more particularly big hurdle. The Chinese love Jack Ma. For their own part, U.S. tech founders such as Bezos, Zuckerberg, Brin and Page, and certainly the late Steve Jobs are considered visionaries who have shaped the world's digital ecosystem. But the Chinese revere Mr. Ma, the man who turned a local underdog into a dominant giant with revenues bigger than Amazon, Facebook, Google, and Apple combined. Those kinds of patriotic emotions will be tough to crack.

Question 1: Are consumers in China and other countries' online shopping behaviour becoming more similar? Justify your stance. (25 marks)

Question 2: Do you think Alibaba will be able to maintain competitive advantage based on the service offerings in the long run? Why or why not? (25 marks)