Jack Ma once described online shopping as a dessert in the United States, but the main course in China. That’s one of a set of key differences between developed-economy e-commerce and that of China, differences that escorted eBay out the Chinese door and kept Amazon as a minor player here, while the Alibaba Group has become the world’s largest retailer, the company with the largest IPO ever (US$25 billion in September 2014, though NTT DoCoMo’s 1998 IPO of $18.1 billion is about the same in current US dollar terms) and the nexus of around two-thirds of all parcels delivered in China. Writing for Harvard’s Working Knowledge in May 2014, Professors William Kirby and F Warren McFarlan assert that Alibaba “has done more for China’s small- and medium-sized enterprises than any government policy, ministry, or bank.”
A few years ago, Porter Erisman’s documentary Crocodile in the Yangtze gave us an intimate view of Ma’s rise from struggling school teacher to multi-billionaire, and the company’s rise from a dozen or so young people crowded into a single apartment, rank with the smell of instant ramen, to what Alibaba has become today. Clark’s Alibaba focuses less on the personal, more on the business environment that both hindered and helped the company’s leaders create their empire, and on the company itself. He traces the journey through some of the major milestones:
- Ma’s improbable yet now legendary (in China at least) founding of the company and equally legendary response to the SARS crisis (2002 – 2003)
- The battle with eBay via the founding of Taobao (Alibaba’s B2C/C2C platform), and concurrent billion-dollar deal with Yahoo!, from the time of the SARS crisis through 2006, when eBay effectively left China, tail between legs and a “few hundred million” poorer;
- Emergence as the e-commerce leader in the most important e-commerce market in the world.
Ma has long asserted that his business thrives because of its foundation on an “iron triangle”: e-commerce, logistics and payment. At the beginning of the 1990s, the decade of Alibaba’s founding, e-commerce didn’t exist, logistics were haphazard at best and payment was basically cash at the point of sale. And China’s retail environment of two decades ago featured a breathtaking inattention to customers, primarily because the sector was dominated by state-owned enterprises, which had little economic incentive to provide the constantly evolving range of choice and price performance available to those living in a Walmart or Carrefour culture. So Ma and others in the space had to build the e-commerce universe from a much lower starting point than the ones faced by, say, Amazon or Rakuten, in higher trust cultures with a stable credit card environment and reliable logistics.
Not only have Alibaba and its partners, and strong local competitors like JD, built the ecosystem required for successful on-line shopping, they’ve created an experience that in many ways far surpasses bricks-and-mortar shopping in China, still tied to some degree to the stodgy state-owned legacy. In smaller cities and towns, e-commerce has become not just an alternative to offline shopping, but in many cases a shopping opportunity not previously available, because these provincial areas previously had little retail bandwidth. A McKinsey report in 2013 suggested that more than half of all consumer purchases in Tier 3 and 4 cities were not substitutions for offline spend, but incremental.
Clark’s chapter on the battle between eBay and Alibaba is highly entertaining, at eBay’s expense. The Silicon Valley darling of Wall Street two decades ago came to China exhibiting a hubris commonly exhibited by foreign brands, and made some of the same missteps Walmart and McDonald’s had made: under-reliance on locally savvy management, assumption that a U.S. business model could be applied in China, etc.
At some points, the Alibaba leadership could hardly believe their good fortune, as when eBay migrated their digital operations from servers hosted in China to servers hosted in the US, despite the already-prevalent problems with access speed and bandwidth created by the Great Firewall. Another laughable effect: server maintenance in the US was scheduled for Thursday midnight on the west coast, which happened to make the site unavailable during part of the peak shopping time in China.
Clark describes one aspect of eBay’s woes that resonates in China. By 2004, some eBay managers in China saw the disaster coming, but knowing how important China was to CEO Whitman herself as well as to the company’s global strategy, they “made sure that everything looked great on PowerPoint and sounded smooth on conference calls … increasingly at odds with facts on the ground.” Such was the communications strategy adopted by provincial cadres during the beginning of what was called the Great Leap Forward in China (1958-1961), a strategy that exacerbated the state-enforced famine that killed somewhere around 30 million people.
The phrase “Crocodile in the Yangtze” is part of one of the many quips from the often quotable Ma, from that time when eBay was still a threat:
eBay is a shark in the ocean. We are a crocodile in the Yangtze. [Ma’s hometown Hangzhou, the headquarters of Alibaba, is within the massive Yangtze River delta.] If we fight in the ocean, we will lose. But if we fight in the river, we will win.
Ma’s strategy rather obviously proved the right one, as much so as then eBay CEO Whitman’s statement that “free is not a business model” proved spectacularly wrong.
As breathtaking as the ascent of Alibaba has been, one may wonder how long the party will last. Who or what looks promising, or risky, for the future? Ma has recognized that his iron triangle is missing a leg—mobile utility. Archrival Tencent’s WeChat has completely conquered the consumer environment with a one-stop user interface that includes payment. WeChat is now used by nearly one billion people—Alibaba tried to launch a competing product but were overwhelmed: they were too late to market.
Alibaba’s top B2C local competitor, JD.com (Tencent holds about a 20% share), follows the Amazon business model of holding inventory and owning much of its supply chain, while Alibaba is asset-light, with inventory held by sellers and logistics managed by third parties, though Alibaba took about a 20% stake in one of China’s top two offline consumer electronics retailers, Suning, in August 2015. The asset light model offers substantial financial benefit, especially in a no-profit environment, but Amazon seems to be doing reasonably well without it.
China’s e-commerce environment overall is facing some existential challenges. Research house Mintel suggests that online B2C growth was 109% in 2012, 48% in 2015, will be 33% in 2016 and about 14% in 2020, though base effects account for a fair portion of the decline. Declining growth rates become more daunting when no one is making profits, and profits don’t seem to be coming anytime soon, in part because of return rates. The Wall Street Journal reported in 2014 that return rates on China’s famous Single’s Day, 11 November (11-11: only ones, hence the implication of “single”), which has become China’s equivalent to Black Friday or Cyber Monday in the United States, ran to 25%, while returns in general were about 20%. So the e-commerce players may be assumed to be about 20% more in the red than their top-line numbers indicate.
The current e-commerce environment may therefore prove untenable for the longer term, with merchants forced to raise price or lower the curtain on their businesses, similar to the price crunch that’s likely coming to the ride-hailing sector, with the acquisition of Uber China by Didi, drawing a line under the former’s billion-dollar bloodletting. But at least one thing is certain: e-commerce has forever changed shopping in China, and with breathtaking speed. Clark’s book is a fine guide to how we’ve come so far, so fast.