Taobao’s website reflects the local culture and shopping habits of Chinese consumers. Compared to the home pages of Western websites, Taobao’s looks busy, with flashing icons and animated cartoon characters promoting special deals. If clicking through eBay is like a walk down Main Street, USA, clicking through Taobao is like a walk down Shanghai’s busy Nanjing Lu, where sights and sounds bombard the shopper. To Western eyes Taobao’s home page might seem too cute or flashy, even distracting, but it is what Chinese users prefer and expect.
Taobao’s marketplace offers another important feature that sets it apart from many of its Western counterparts—shoppers are able to immediately click through to the seller and initiate a live chat. This is not surprising—the Chinese are accustomed to building a relationship with a seller before making a purchase, and in China’s shopping culture haggling and negotiation are standard. Whereas prices in an eBay auction start low and get bid up, prices on Taobao often start high and get haggled down. In fact, it’s hard to imagine e-commerce thriving in China without Taobao’s popular Wang Wang live chat feature.
The most important of Taobao’s features are those that allow online buyers and sellers to establish trust. Like eBay, Taobao allows buyers to rate the services of sellers after a transaction. Taobao’s ratings system tends to be much more extensive, allowing buyers to rate their sellers on many more variables. This reflects China’s lack of credit infrastructure and has led to Taobao’s filling the void often filled in North America by private companies and nonprofit organizations such as the Better Business Bureau. In conjunction with AliPay, Taobao has become the best source of rating and credit information for small businesses in China.
Taobao’s monetization model sets it apart from its Western counterparts’. Instead of taking a commission from each transaction, Taobao makes money by offering sellers ways to promote themselves, such as through premium storefronts, keyword advertisements, and other advertising opportunities. Because of its history as a largely free service, Taobao has introduced fees slowly over time, opting for a more conservative “take rate” on Taobao which captures less than 2.5 percent of a transaction’s value versus eBay’s take rate of 8.5 percent. But Taobao’s contribution to the Alibaba ecosystem is a powerful one, because it maintains a strong relationship with customers that can mean more money in Alibaba’s pocket through its other services, such as Tmall or AliPay.
Tmall
In many ways small, scrappy entrepreneurs built e-commerce in China through their storefronts on Taobao. Students or small retailers had more incentive than a behemoth to take to the Internet, because it brought them to the attention of potential buyers from all over China. Although small retailers were quick to embrace and pioneer e-commerce, large brands and retailers were slow, because e-commerce initially represented such a small percentage of their overall sales.
However, once Taobao was established as China’s largest shopping destination, large brands and retailers began to pay attention. At the same time many consumers were receiving uneven levels of service from the small retailers on Taobao and wanted a way to go directly to a large retailer or brand owner. “Why buy a product from a small corner shop and risk the product’s being a refurbished or damaged one when you can buy directly from a large, reputable retailer?” they thought.
With this situation in mind Alibaba Group introduced Tmall.com, a marketplace that connects large brands and retailers directly with consumers. The site opened in April 2008 as a part of Taobao and became an independent platform in 2011. As of June 30, 2014, it featured 110,000 brands and described itself as “dedicated to providing a premium shopping experience for Chinese consumers in search of top-quality branded merchandise.” If Taobao is a flea market with scrappy entrepreneurs hawking their wares, Tmall is the shiny shopping mall with glossy storefronts and dedicated sales and customer service staff.
One of the main benefits of Tmall for Alibaba Group is monetization. Whereas the fiercely independent and cost-conscious sellers on Taobao are highly resistant to paying commissions, fees, or anything that might seem like a tax on their sales, the large brands and retailers on Tmall typically are more than happy to pay commissions of around 5 percent to Alibaba Group for each sale. To them a few percentage points is a small price to pay to reach hundreds of millions of consumers in an online environment that bypasses the expensive retail and logistics infrastructure to which they are accustomed in the offline world.
Tmall has become an important channel for foreign brands to establish a presence in China and reach customers in China’s interior, where their retail infrastructure has yet to be built out. Brands such as Gap, Levis, Adidas, and Ray Ban have stores in Tmall and often use their Tmall shops as a way to learn about local customers while exploring how to further grow their presence in the market.
Tmall gets credit for pioneering China’s November 11 Singles’ Day promotion, a shopping day when consumers receive discounts. On November 11, 2014, Tmall and Taobao generated $9.3 billion in sales. Alibaba Group has made “going global” a major theme for Tmall and is increasingly recruiting foreign brands to sell on the marketplace.
Juhuasuan
Before there was Groupon, there was Taobao’s Group Buy feature, which allowed groups of friends to negotiate for a volume discount from sellers. Group Buy reflected the social nature of commerce in China, combining China’s group-oriented culture with the Chinese habit of haggling to get better prices on goods.
The trend of leveraging the power of group purchases to reduce product prices became so strong on Taobao that in 2010 the company started Juhuasuan as a separate group-buying marketplace that offers products at discounted prices by aggregating demand from numerous consumers, often through flash sales. Despite competition from hundreds of similar sites that popped up as Groupon gained attention in the West, Juhuasuan emerged as China’s most popular online group-buying marketplace, largely as a result of the relationships that Alibaba Group had with its existing customers on Taobao and AliPay.
AliExpress
AliExpress is Alibaba’s first attempt to connect Chinese sellers directly with consumers in international markets. Begun in April 2010, it showcases a wide variety of products at wholesale prices from wholesalers and manufacturers in China. By June 30, 2014, it was generating annual sales of US$4.5 billion, catering largely to consumers in emerging markets such as Russia, Brazil, and Nigeria.
Support Services Provided by Ecosystem Participants
Ant Financial Services Group
In October 2014, Alibaba Group launched Ant Financial Services Group, putting AliPay and its many related financial and credit services under a new roof. The name “Ant” is meant to refer to the small and micro-sized businesses the company serves, filling a void neglected by China’s state-backed banks, which tend to serve China’s state-owned enterprises. Among Ant Financial Services, AliPay is the shining star, having grown to become the world’s largest third-party online payment provider, quickly approaching $1 trillion in annual transaction volumes. It offers both direct and escrow-based payments for buyers and sellers engaged in domestic China transactions as well as cross-border transactions. AliPay facilitates transactions with Alibaba Group marketplaces as well as transactions for third-party merchants and service providers. Users can set up payments for utilities, mobile phone charges, rent, tuition, fees, and peer-to-peer fund transfers.
AliPay’s mobile service, AliPay Wallet, is increasingly replacing cash in China, supporting offline payments by allowing users to electronically transfer funds through advanced technologies including QR codes and sound wave payment. People are using AliPay Wallet at offline shops, restaurants, vending machines, taxis, and cinema chains. It is quickly becoming a routine part of life with such features as allowing a group of friends to split a bill equally at a restaurant through its Go Dutch feature.
China’s inefficient state-run banking system allowed An
t Financial (and its predecessor, Small and Micro Financial Services) to move into related areas more aggressively than have other payment systems, such as PayPal in the West. For example, when the company opened a money market fund, Yu’e Bao (leftover treasure), in June 2013, it quickly attracted 125 million users with interest rates that exceeded those at China’s traditional banks. Those users invested RMB570 billion in the fund. So while AliPay was launched as a payment system, it has evolved into a much larger and more diversified provider of financial services.
Alibaba Group describes Ant Financial as a “related company” because of its arm’s-length ownership structure, which was designed to comply with China’s heavily regulated financial industry. Through this complicated structure, Alibaba Group receives favorable terms for AliPay services while retaining an ownership stake and long-term claim to a portion of AliPay (and Ant Financial) profits.
Logistics
Logistics inefficiencies in China present both challenges and opportunities for e-commerce companies. While Western markets like the US are served by established national delivery services such as DHL, UPS, and FedEx, China’s logistics landscape is much more fragmented, with the market divided between several different players with varying levels of reliability and coverage. So it’s no surprise that China’s logistics providers have scrambled to catch up to the e-commerce boom, which saw more than 250 million packages shipped in the days after the 2014 Singles’ Day promotion.
To address the logistical challenges of keeping up with the demands of China’s fast-growing e-commerce market, Alibaba brought together the five major express delivery companies in China to set up a separate entity, China Smart Logistics Network, of which Alibaba owns 48 percent. The goal is to align and coordinate the logistics players to more seamlessly fulfill orders.
Alibaba’s approach differs from that of China’s leading online retailer, Jingdong.com, which has been building its own warehousing and distribution network, allowing it to control the customer experience from end to end. This has set up competition between Alibaba’s loosely allied network and the vertically integrated Jingdong. But perhaps the bigger race will be between the physical delivery infrastructure and the digital infrastructure, which is growing so quickly that it is straining China’s logistics system and risks creating a short-term bottleneck for the growth of e-commerce.
Media and Entertainment
As the son of a Pingtan performer, Jack Ma has a flair for the dramatic. So it’s not surprising that Alibaba is making an aggressive move into media and entertainment, investing in the video-sharing site Youku Tudou and establishing a film production company, Alibaba Pictures. To outside observers this may seem like a step away from Alibaba’s core strength. But in the context of China, the deal may make sense.
The way to think of Alibaba’s move into film and entertainment is this: If it is a product that can be bought and sold online, you can expect Alibaba will want to be there. And film and video are products that can be bought and sold online. E-commerce marketplaces traditionally have sold physical products. But increasingly they are becoming marketplaces for digital products, such as books, films, tickets, and virtual products used in video games. So it’s not surprising that Alibaba Group is interested in selling video products online through its digital platforms.
Alibaba’s more ambitious move is into the area of content production. To explain his move into film production, Jack told the South China Morning Post that in China “people’s wallets are bulging but their heads are empty.”1 It’s not an area entirely new to Jack, as he sits on the board of directors of Huayi Brothers Media Corporation, producers of the China blockbusters Cell Phone and A World without Thieves. Now that China has the world’s second-largest box office, behind the US, film has become a lucrative business providing real returns. Beyond that, Jack has a personal interest in bringing film into the lives of the Chinese. “E-commerce can affect people’s wallets. But film can affect people’s minds,” he once told me.
Other Support Services
Beyond these core products and services, Alibaba owns and/or is invested in a wide variety of businesses. Its homegrown cloud computing arm, AliCloud, provides computing power and storage for app developers and merchants, while its AliMama division provides Big Data analytics for marketers. Alibaba Group also has been acquiring and investing in companies in a range of areas, from mobile web browsers to retail to microblogging. Through these aggressive investments and acquisitions Alibaba is hoping to expand its reach so that each of these related companies further enhances the links between, and network effects of, the ecosystem. But in some corners the company’s aggressive expansion has met resistance from analysts who argue it may be going too far, notably with its nearly $200 million investment in a Guangzhou football team, Evergrande.
Alibaba Group Tomorrow
By the time of its IPO Alibaba was 15 years old. For many companies this would be considered reaching the age of maturity. But compared with the company’s stated goal Alibaba is a mere teenager. Thinking that his original goal for Alibaba to last 80 years was too conservative, Jack later extended the goal to 102 years, noting that it would allow Alibaba’s life to span three centuries. If this ambitious goal is to be reached, then Alibaba still has more than 85 years left to go. If Alibaba does manage to live this long, how might it grow? And what might Alibaba become someday?
Alibaba’s stated vision is nothing less than to build “the future infrastructure of commerce,” serving its mission to “make it easy to do business anywhere.” It wants to build a place where people will meet, work, and even “live” online so that the company’s products and services become central to the everyday lives of its customers. Given these goals and Alibaba’s past history, here are some of the main trends we might expect to see Alibaba focusing on in the future.
Growth of Alibaba’s Core Businesses
When Alibaba Group went public, only about half of China’s population of 1.36 billion was online. And of those Internet users, only about half had shopped online. It’s amazing to think that with only about 25 percent of China’s population, or 302 million, shopping online, Alibaba’s consumer sales volumes already exceed those of Amazon and eBay combined. One can only imagine the scale if these growth trends continue as more of China’s population comes online and takes to Internet shopping. It’s reasonable to argue that China’s e-commerce industry is in many ways still in its infancy and we can expect that Alibaba will continue to focus on China as it grows its main businesses, Alibaba.com, Alibaba China, Taobao, Tmall, and AliPay.
While growing these core businesses, it will be important for the company to stay ahead of one major wave that is reshaping e-commerce in China—the shift from PCs to mobile shopping. Although its start on mobile was slower than its competitors’, Alibaba has managed to grow and build a leadership position in mobile commerce. Holding that position and monetizing mobile will be crucial.
Growth of Alibaba’s Ecosystem
We can expect Alibaba to continue to grow its ecosystem and plug in more related services, such as cloud computing, logistics, navigation, and mapping. Growing its ecosystem without diluting its core businesses will require the company to find a fine balance. If successful, Alibaba will create a universe held together by the common links between all its services. But in doing so, it needs to avoid overexpansion, which might weaken its main services while creating opportunities for more specialized competitors to chip away at Alibaba’s market share.
Expansion into New Industry Frontiers
Perhaps the least-appreciated areas of potential growth for Alibaba are in massive industries that are being deregulated in China. Two major opportunities come to mind: financial services and media.
Anyone who has lived in China can attest to the inefficiency of its banks. One need look no further than the typical bank lobby, where customers wait for as long as an hour in rows of chai
rs just to pay the rent. By definition any business that creates a waiting room full of chairs is not serving its customers well.
Alibaba’s rapid success with its Yu’e Bao money market fund showed the potential for e-commerce players in banking. It’s easy to imagine that Internet companies like Alibaba and its rival Tencent could quickly convert their e-commerce customers into clients for financial services, everything from banking, loans, and insurance to wealth management. The big question is how quickly China will deregulate its banks. A hopeful sign for Alibaba came in the fall of 2014, when it received approval from the China Banking Regulatory Commission to establish a privately owned bank.
Another industry ripe for Alibaba’s participation is media and entertainment. Like banking, China’s media have been dominated by the government since the Communist takeover in 1949. The result is bland state-created media content, which may satisfy government leaders but is not good at meeting the demands of audiences.
The Internet has created a much more open playing field for film and video content in China. While censorship still inhibits growth in certain areas of political content, China’s media have become much more market oriented as the Internet has grown. China’s youth are much more likely to spend their time watching Internet content in front of the computer than watching staid government-sponsored content in front of the TV with their parents. At the same time China’s huge box office makes films aimed at the domestic audience commercially viable.
As government control of media content continues to loosen, we can expect that Internet companies will take up the slack, providing content that is much more market driven. And as distribution moves from cable television to the computer, tablet, and streaming, e-commerce companies such as Alibaba are well positioned to monetize digital products in the same way they monetized physical products. Indeed, immediately after Alibaba’s IPO Jack Ma spent time in Hollywood meeting with executives and positioning Alibaba as a gateway to the China market. While it begins to distribute content made by others, Alibaba Pictures will be moving toward producing original content.
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