In the 1990s, with the cost of manufacturing in China rising due to increased government regulations and the nation’s evolution from an emerging nation to an established power, and the share of American manufacturing outsourced to China falling, a means to reach out to new American consumers was needed.
In this problem, Jack Ma, a former English and international trade teacher from Hangzhou, China, saw a unique opportunity.
Ma, who also made a living building American websites for Chinese companies, and 17 other initial investors in 1998 decided to create a service that would allow Western retailers and merchants to connect with Chinese manufacturers in an online marketplace similiar to Amazon.com or eBay.
That opportunity grew to be the Alibaba Group, the largest e-commerce company in the world. With annual sales exceeding that of eBay and Amazon combined and with valuations ranging between $55 billion to more than $120 billion, Alibaba is on pace to be the world’s first e-commerce company to accrue $1 trillion per year in sales.
With its wildly successful business-to-business transaction hub Alibaba.com, a consumer-to-consumer sales site (Taobao.com) that had total sales of $160 billion in 2012, an online payment service (Alipay) with $660 billion in transactions in 2012, and a growing array of additional businesses and services — including cloud computing, a service to introduce American brands to the Chinese middle-class and an investment service that allows users to invest in movie productions — Alibaba is on course to eventually exceed Apple as the world’s most valuable company.
Alibaba’s epic growth has forced many in the United States to pause for a moment, especially on March 16, when Ma announced that Alibaba intends to make an initial public offering in the U.S.
China rising
On Sept. 25, 2013, after Alibaba announced that talks with Hong Kong regulators broke down over the company’s desire to retain control over board nominations, the company announced that it would seek to be listed on the NYSE Euronext. The IPO — estimated to be potentially worth $15 billion — will be the largest offering since Facebook’s IPO.
With Chinese tech companies currently being bullish in the markets, many feel that the introduction of Alibaba to the American market may threaten or weaken American companies. For example, the stock values of investment holding company Tencent Holdings, the fourth-largest Internet company in the world, and web-services company Baidu have shown increases of 62 and 50 percent, respectively.
“Certainly, from a market perspective it’s a terrific time to be in the market for the Internet companies out of China,” said a source familiar with Alibaba’s plans. “We’ve all seen how Tencent, Baidu, etc, have traded and the global Internet stocks are doing great.”
Many that have studied the potential Alibaba IPO, however, do not feel that the initial offering means the company is prepared to take on eBay for control of the American market.
“I am not sure that the IPO means that Alibaba will start to operate in the U.S.,” Peter Cohen, adjunct lecturer of strategy and entrepreneurship at Babson College, told MintPress News. “My hunch is that Alibaba will continue to operate in China and is listing its shares in the U.S. because it believes that it will get the best valuation here.”
“I think the primary driver behind the U.S IPO is our regulations support different shareholder classes, which Hong Kong regulations do not,” agreed David Rekuc, the managing director of Ripen eCommerce, a custom solutions provider for e-commerce providers. “Their management wants to make sure they structure the company to maintain control instead of losing that control to investors.”
Ethics and mistakes
If Alibaba were to make a significant move into the American marketplace, hard questions about the company’s ethics would need to be answered. The company will also need to address concerns about its “Gold Supplier” membership.
As China’s consumer protection laws do not adequately assure the quality of the product purchased or the sanctity of the transaction, Alibaba found that many of its business-to-business consumers in the West were shying away from large procurement orders. To reassure customers, Alibaba created “Gold Supplier” membership to ensure the authenticity of suppliers. In order to qualify for this membership, a supplier must agree to and complete an authentication and verification process with a third-party security service provider.
In February 2011, it was discovered that Alibaba awarded more than 2,000 “Gold Supplier” memberships to companies that defrauded buyers. The company’s response — part corrective actions to help reassure customers, part damage control to help ensure the survival of the company’s business-to-business sector — helped to tarnish the company’s name and reputation. Since then, Ma has taken personally the push to restore confidence in his company.
This push has fallen flat at times. Starting in 2012, U.S. law enforcement posing as an American broker representing Iranian clients posted a call on Alibaba.com to purchase uranium. A year later, “Patrick Campbell,” a Nigerian smuggler travelling under a stolen passport and posing as a Sierra Leonean, took the bait and was arrested at John F. Kennedy International Airport in New York City with a sample of yellowcake uranium hidden in his shoes. He was charged with attempting to export drums of yellowcake uranium — 1,000 metric tons in total, disguised as chromite — to Bandar Abbas, Iran.
“The crocodile of the Yangzi”
Although Alibaba.com’s terms of use agreement explicitly prohibits the listing and selling of weapons, the fact that the uranium listing was allowed to remain active for more than a year and the fact a component of a weapon of mass destruction was sold from it have raised many questions regarding the security and integrity of the company.
But, for what Alibaba is now — a middle-man for Chinese suppliers and American buyers — many feel that the company is functional.
“Regarding the presence of Alibaba in America and what that means for domestic companies, I think it’s being received fairly well,” Rekuc told MintPress News. “For domestic retailers, Alibaba doesn’t pose an immediate threat to their market share in the States and they do provide the U.S. retailer with solutions to help them reach Chinese markets with their goods.
“Alibaba’s financial presence in the U.S certainly has some implications for the amount of speculative capital that’s available for U.S tech stocks, but I don’t think it’s going to play a big role in effecting domestic e-commerce markets.”
“eBay may be a shark in the ocean,” Ma once said of Alibaba’s strategy of cornering the Chinese e-commerce market before taking on the global giants, such as eBay, “but I am a crocodile in the Yangzi river. If we fight in the ocean, we lose; but if we fight in the river, we win.”