Alibaba

by Duncan Clark

Alibaba is spending billions of dollars on investments, acquisitions, and marketing to shore up its mobile strategy, from investing in its YunOS,39 to buying stakes in Sina Weibo,40 the Twitter-like service, and Meizu, a smartphone manufacturer, to acquiring UCWeb, China’s leading mobile browser company,41 and AutoNavi, a leading online mapping company to boost Alibaba’s position in location-based services. Alibaba has already shifted a lot of its core business to mobile. Half of all purchases made on Alibaba’s websites are made on mobile devices. But Alipay, the leading online payment provider in China, is Alibaba’s most important asset in its rivalry with Tencent to tackle the next frontier: the mobile wallet.

  Control the wallet, the thinking goes, and you control the battlefield for a vast array of new opportunities beyond e-commerce, with financial services being the most lucrative. Alibaba’s runaway success with the Yu’e Bao (meaning “leftover treasure”) mutual fund is one example. But online banking is another. Alibaba is actively pushing MYbank. Tencent is responding with WeBank, which has already started to issue consumer loans42 within fifteen minutes to individuals over their mobile phones, in amounts ranging from twenty thousand to three hundred thousand yuan (from $3,100 to $31,000).

  Other fronts are also opening up in the Alibaba versus Tencent conflict, including proxy wars between firms backed by the two companies. In 2014, the contest over Uber-like ride-booking apps became what one analyst described as “the first battle in the world war of the Internet.” Alibaba backed a company called Kuaidi Dache43 while Tencent backed its rival, Didi Dache44 in a conflict that raged out of control with $300 million poured in to fund tips and marketing subsidies. The battle became so intense that Kuaidi even offered taxi drivers a free case of beer for referring fellow drivers. As the red ink flowed on both sides, a truce was called in early 2015 when the two transportation companies merged in a $6 billion transaction to form Didi Kuaidi, although they retained the two separate operating units. With a $16 billion valuation and $3 billion in new capital, the new entity took on Uber, which had thrown its lot in with Baidu.45 The “taxi wars” have even taken on international proportions, as Alibaba, Tencent, and Didi Kuadi have all invested in Lyft, Uber’s principal U.S.-based competitor.

  In 2015, Alibaba and Tencent also decided to combine two other proxies, Groupon-style companies Meituan and Dianping, in a $15 billion merger that some saw as also directed at Baidu and Nuomi, its proxy. Baidu also lacks a meaningful presence in payment, in contrast with the dominance of Alipay and Tenpay.

  Alibaba and Tencent are so powerful today that the talk of the “Big Three” (with Baidu) is beginning to shift to talk of a “Big Two.” But if the trend of Alibaba and Tencent combining forces to create dominant proxies continues, there is a risk that consumers would be alarmed if subsidies are withdrawn or fees increased for popular services like booking rides or ordering food, prompting intervention by the Chinese government to restrict their market power.

  No doubt mindful of the risks, since the SAIC incident, Alibaba appears to be trimming its sails ever closer to the prevailing government winds. In September 2015, Alibaba elevated its Beijing office to become its “second headquarters” along with Hangzhou. The symbolism of a powerful company in southern China announcing a new “coheadquarters” in Beijing is obvious, although the city is much more than just a political center—it is an essential business hub as well.46 There are also practical reasons for the move. Alibaba describes adding Beijing to Hangzhou as its “twin hub” a strategy to sharpen its edge in northern provinces in the face of increasing competition: By the end of 2015, JD.com had surpassed Tmall by some estimates to become the leading e-commerce player in Beijing.

  Upgrading its office in Beijing is important for recruitment, too. Already home to over nine thousand employees, Beijing has a deeper pool of prospective talent for the company to draw on. The capital is home to some of the country’s most prestigious universities and about one million students. In the competition for top talent, offering the ability to work in Beijing reduces the risk of losing candidates who prefer not to move to Hangzhou,47 which by comparison is a much smaller, provincial city.

  Yet on Singles’ Day 2015, there were signs, too, that Alibaba is stepping up its efforts to cultivate government support. Hours before the launch of Singles’ Day, Alibaba reported that Chinese Premier Li Keqiang’s office had contacted Jack “congratulating and encouraging the creation and achievement of the 11/11 event.” As the day began inside the Water Cube, the upper-right section of the screen that was recording transactions on Tmall was reserved for a map and a data feed displaying the purchases in countries like Belarus and Kazakhstan, two of sixty-four countries and regions along the “One Belt, One Road” (OBOR48), also known as the “Belt and Road” initiative, a centerpiece of President Xi Jinping’s foreign and economic policy.

  Whatever the risks, Jack professes confidence in Alibaba’s future. While the government can play a role in stimulating exports and boosting investment in the economy, he stated, “Consumption is not done by government—it’s done by entrepreneurship and the market economy. So, we have a great opportunity. Now it’s our turn, not the government’s turn.”

  Alibaba is going all out to grab the opportunity available to the private sector. In recent years, Alibaba’s deal making has been so frenzied that one journalist friend in Beijing complained to me that he had little time to cover anyone else and had spent many an evening or weekend writing up the company’s latest conquest. Covering Alibaba is complicated because the deals often involve a web of relationships, including those linked to Jack’s own private equity fund, Yunfeng Capital.

  Yunfeng: Billionaire’s Boys Club

  Yunfeng is a private equity company in which Jack holds an approximate 40 percent stake and serves as a partner.49 Yunfeng50 was launched in 2010 by Jack and cofounder David Yu51 and others.52 It is a sort of “billionaire’s boys club,” something that the fund promotes as a core strength, calling itself the “only private equity fund launched by successful entrepreneurs and industry luminaries.” To those who criticize deal making between Alibaba and Yunfeng, Yunfeng is at pains to point out that Jack plays no role in the investment decisions of its various funds. Alibaba emphasizes that Jack will forgo any gains made from his involvement in Yunfeng.

  The fact that most of the billionaires involved in Yunfeng have roots in Zhejiang or Shanghai is instructive. Just like the “cluster cities” in Alibaba’s home turf, these entrepreneurs have a deep-seated tendency to club together. Now “investment clusters” are emerging in China’s New Economy, too, with Alibaba the most prominent of all. The company can make the case that when buying Yunfeng-invested companies53 Alibaba is investing in companies that Jack already knows, making the fund a form of advance due diligence.

  Yet each new deal struck between Alibaba and Yunfeng-related companies introduces further complexity,54 potentially obscuring the true nature of Alibaba’s relationships with the outside business world.

  Is this the way Alibaba will maintain its competitive edge and innovative capacity? If transactions between Alibaba and Yunfeng-invested companies are not carefully explained, and the valuations clearly justified, public investors in Alibaba might not be fully aware of the hidden risks involved. This concern, amid some indications of tension between Yunfeng and Alibaba’s in-house M&A team, appeared to have prompted Jack to relinquish his role as an executive55 in Yunfeng, maintaining only a passive interest as an investor56 in the fund.

  During its IPO road show Alibaba emphasized three central growth drivers for the future: cloud computing/Big Data; expansion into rural markets; and globalization/cross-border trade.

  Three Core Drivers

  Cloud computing is an obvious direction for Alibaba. Investors in Amazon value highly the “virtual” revenue streams of its Amazon Web Services business. Although for Alibaba cloud services represent only 3 percent of revenues today, it is investing over $1 billion to expand them. Alibaba also talks often about the shift
from the information technology era to a data technology era, “from IT to DT.” Alibaba looks to “DT” to help toward another favorite buzzword for the company: “C2B,” or “consumer-to-business.” This is the idea that DT, including Big Data, can help Chinese manufacturers improve communication throughout the supply chain to predict demand, potentially eliminating inventory. By exploiting the information flowing across Alibaba’s e-commerce, logistics, and finance businesses—for example predicting consumer trends and investment opportunities—the company hopes to leverage the “iron triangle” to even greater effect. Aliyun, Alibaba’s cloud computing business, operates data centers in Beijing, Hangzhou, Qingdao, Shenzhen, Hong Kong, and Silicon Valley as well as a newly established international hub in Singapore. The company plans, according to its president, Simon Hu, “to overtake Amazon in four years, whether in terms of customers, technology, or worldwide scale.”

  In rural markets, Alibaba hopes to unlock new tiers of consumers and merchants. China is home to more than 700 million rural residents, but only one-quarter are online. As Internet and mobile penetration increases, Alibaba is opening up kiosk-like service centers in rural areas, committing over $1.6 billion to the effort.

  The first pilot county project for Alibaba’s “Rural Taobao” initiative is Tonglu, the same county where Jack’s U.S. adventure began, and the birthplace of the country’s major private courier companies. Alibaba’s own research arm, AliResearch, predicts that rural online shopping will reach 460 billion yuan ($72 billion) by the end of 2016.

  Cracking this market is not easy, since it’s complicated by poor logistics and the lower levels of education of rural residents.

  Former Alibaba.com CEO David Wei believes that for the group to “go rural” is more critical than for it to “go global.” “If they don’t get into India, Alibaba is still Alibaba. But if they miss the countryside in China, home to six hundred to seven hundred million people, then another Alibaba could emerge.” Alibaba’s rival JD.com has launched its own rural initiative—“Wildfire of a Thousand Counties”—and its core products such as washing machines and refrigerators are among the most craved items by countryside dwellers.

  In any case, Alibaba has little choice but to “go rural.” China’s State Council has unveiled a major new initiative to promote e-commerce in the countryside—echoed by Premier Li Keqiang’s “Internet +” vision—and after the SAIC debacle, Alibaba can’t afford to be seen as unsupportive. In July 2015, Jack led a delegation of Alibaba executives to Yan’an in Shaanxi Province. This rural location has tremendous significance in China as it lies near the end of the route of the Long March,57 and served as a key base from 1936 to 1948 for the Communist Revolution. Jack’s delegation included over thirty senior Alibaba executives including Polo Shao (Shao Xiaofeng), a former criminal investigator who is senior vice president and director for the Office of the Chairman at Alibaba Group and is also believed to serve as secretary of the Communist Party committee of the company.

  In discussions with local Communist Party secretary and government officials, the delegation explored ways Alibaba could help promote economic development in the area, from establishing data centers to offering loans to local entrepreneurs to promoting the sale of locally grown apples. But Jack also used the visit to attend a lecture given by local Communist Party officials, after which he said that he just wanted to “come and take a look. The conditions were extremely hard in Yan’an at that time,” and that he was keen to learn how “the Communist Party could stick to revolution romanticism and revolution heroism under such conditions.”

  Such speeches are of little help in promoting the third of Alibaba’s core drivers, expanding in overseas markets. Yet in doing so Alibaba is also in step with the Chinese government’s call to “go global,” encouraging Chinese companies to go beyond simply exporting to extending their operations and influence overseas. This is nothing new for Alibaba, a company that started out with an international orientation in 1999. But with the success of Taobao starting a decade ago, Alibaba’s focus turned inward. In 2010, the profile of international markets started to increase again with the launch of AliExpress, connecting sellers in China with consumers overseas. At first Alibaba expected the United States to be AliExpress’s key market. But Alibaba discovered that America was a market with sophisticated players, both online and offline. After the early disappointments, then-Alibaba.com CEO David Wei instructed his team to look at countries with the lowest efficiency in their retail sector.

  Jack Magic comes to 10 Downing Street. Jack (left) regales a crowd, including British prime minister David Cameron (second from left) and the author at a reception at 10 Downing Street in London on October 19, 2015, shortly after Jack was named a member of the UK’s Business Advisory Group. 10 Downing Street

  Without AliExpress even opening offices there, but with Russian and Portuguese language capabilities added to the AliExpress website, Russia and Brazil became early success stories. Demand from Alibaba’s customers in Brazil at one point exceeded over three hundred thousand packages a day, before a slowing economy and the weakening real hit the company’s business there. Demand in Russia, especially for clothing and consumer electronics, was so strong that AliExpress reportedly even broke the Russian postal service, leading to the dismissal of its boss. Today Russia accounts for a fifth of AliExpress’s sales.

  In 2015, Alibaba appointed former top Goldman Sachs executive J. Michael Evans as its new president, charged with leading international development efforts. These include its growing presence in Western Europe, where Alibaba aims to entice brands to target Chinese consumers through its websites.58 At an event hosted in October 2015 by British prime minister David Cameron at 10 Downing Street in London, Jack was named as one of Cameron’s business advisers.

  Alibaba announced it was upgrading its office in the city to become its European headquarters, headed by Amee Chande, a former Walmart executive. Alibaba is also opening a network of “business embassies” in France, Germany, and Italy. Paris is headed by Sébastien Badault, formerly of Amazon and Google; Milan is headed by Rodrigo Cipriani Foresio, who previously worked at Buon Italia, an online food store; and Munich is headed by Terry von Bibra, a former executive with leading German retailer Karstadt. Alibaba’s growing presence in Europe brings it closer to the headquarters of many of the brands most coveted by Chinese consumers. Any success stories it can generate—bringing European brands to the fast-growing consumer market in China—will no doubt also be an opportunity to strengthen its hand with its most vociferous critics, like Kering, the parent company of Yves Saint Laurent and Gucci.

  The United States is also a key market for Alibaba’s overseas efforts, mostly as the focus of its international investments. Alibaba has poured hundreds of millions of dollars into high-profile companies such as Lyft, Snapchat, Zulily, and a range of smaller players.59 But these investments are more focused on absorbing new technologies or know-how to be deployed in China than they are a concerted effort to break into the U.S. market. The one Alibaba effort that did explicitly target the U.S. market, 11Main.com, was a conspicuous failure.60 Speculation by some analysts that Alibaba would make a bold move in America, including an acquisition of eBay or Yahoo, has so far proved off the mark. Instead Alibaba’s emphasis remains firmly on developing cross-border trade.

  Alibaba has been actively ramping up its own presence in the States, setting up a string of four offices along the length of the West Coast: an office just off Market Street in San Francisco, which houses Alibaba’s international corporate communications team, headed by former PepsiCo executive Jim Wilkinson;61 a new Alibaba Group office in San Mateo, California, where Michael Evans is based; an office in Pasadena, California, which serves as the U.S. home of Alibaba Pictures; and a small presence in downtown Seattle, just one block away from the U.S. Bank building, where Jack first logged on to the Internet back in 1995. In 2016 Alibaba is rolling out new offices in New York City, bringer it closer to U.S. brands, retailers, and
advertisers, as well as in Washington, D.C., beefing up its lobbying and communications capacity, headed by Eric Pelletier, former GE executive and White House staff member.62

  Despite its growing physical presence in the country, during a visit to New York and Chicago in the summer of 2015, Jack dismissed talk of any “Alibaba invasion” of America. He said he was often asked, “‘When are you coming to invade America? When are you going to compete with Amazon? When are you going to compete with eBay?’ Well, I would say, we show great respect for eBay and Amazon, but I think the opportunity and the strategy for us is helping small business in America go to China, sell their products to China.”

  On that same trip to the United States, Jack also discussed the strain of running a public company. He complained that his life after the IPO was more difficult than before, and that “[i]f I had another life, I would keep my company private.” Some in the audience in New York expressed surprise that Jack would voice regrets about listing so soon after Alibaba’s blockbuster IPO. But this contrarian stance is vintage Jack.

  From Philosopher to Philanthropist

  Jack already has a reputation as China’s philosopher CEO, and increasingly he is seen as a philanthropist and environmentalist, too. Six months ahead of the 2014 IPO, Jack and Joe together pledged 2 percent of Alibaba Group—from their personal holdings—to create a new Alibaba philanthropic trust.63 The pledge was made in the form of stock options with an exercise price of $25 (some $43 below the initial offering price), creating overnight what became one of the largest philanthropic organizations in China. Jack also committed to endow the trust with more of his personal fortune in the future.64

  The trust will focus primarily on China’s environment and health care—two issues about which Jack has become increasingly vocal in recent years. China’s rapid industrialization and urbanization have wrought havoc on the country’s environment and people’s health. At a conference for entrepreneurs in 2013,65 Jack delivered a call to arms, his message distilled in an article later published by the Harvard Business Review: “Cancer—a rare word in conversation thirty years ago—is now an everyday topic.” Jack often talks of the growing incidence of cancer among his employees, friends, and their families,66 including in his Q&A session with President Obama. “Without a healthy environment on this earth, no matter how much money you make, no matter how wonderful you are, you will have a bad disaster.”