Alibaba: world's top ecommerce company, but what does it do?
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alibaba-logoAlibaba may not be as famous as Google or Facebook in Australia, but Hornet and companies like us who source from China know it well. Its main English language site is a yellow pages equivalent for Chinese companies wanting to promote their goods to overseas buyers. In one way, it’s competition for Hornet. From another perspective, it’s a source of customers. We’ve had more than one client who initially tried to source product themselves using Alibaba, then came unstuck. More about that later.

What does Alibaba actually do?

One thing the media coverage of the IPO highlights is that the part of Alibaba we at Hornet tend to focus on is actually not its core business. It’s Alibaba’s dominance of Chinese domestic e-commerce which is attracting investors.

  • Tmall, where companies sell direct to consumers, has over 50% of the Chinese B2C market.
  • Taobao, the Chinese equivalent of eBay, has 90% market share.
  • These two Alibaba companies processed a total of 1.1 trillion yuan in 2012. That’s US$ 170 billion – more than Amazon and eBay combined. 2013 was even bigger, with a 66% surge in revenue in the last quarter.
  • Alibaba’s record day on November 11 2013 saw transactions totalling more than $5.7 billion. By comparison, the total US spend for ‘Cyber Monday’ was just US$ 2.3 billion.

Alibaba has other significant interests too:

  • Alipay is an online payment service. A key feature is that funds can be held in escrow until the buyer has received the goods and is happy with them.
  • eTao offers comparison shopping and shopping searches for the Chinese domestic market.
  • Aliexpress is a more international online retail site for small sellers.
  • Yuebao, an online financial product where Alibaba has a controlling interest, raised 400 billion yuan (US$ 72 billion) in around 8 months.

Other interesting points about the Alibaba IPO

  • Alibaba is choosing to list in the US rather than in China or Hong Kong. It appears the company did not like the listing policies required in Hong Kong.
  • Yahoo currently owns 24% of Alibaba, but must sell at least 40% of that shareholding as part of the IPO.
  • Alibaba has been buying up stock in other companies across many industries. They include cable TV, web browsers, social media, mobile shopping and logistics. (Up to 60% of parcels delivered in China were bought on an Alibaba site.)

The Alibaba group has come a long way since it began as an e-directory for China sourcing in 1999.

What about the original Alibaba business?

So what’s happened to the original Alibaba China sourcing site? It’s still there. It’s just not the main focus of the Alibaba Group. The last time it made major news was in 2011, when the ‘Gold Supplier’ scandal broke.

To explain this further, ‘Gold Suppliers’ on Alibaba are meant to be verified by the company, so that purchasers can be more confident dealing with them. However, in 2011 Alibaba’s corporate office admitted that over 2000 approved ‘Gold Suppliers’ had gone on to defraud customers. There were also indications that Alibaba employees granted Gold Supplier status without performing verifications as required. Corrective action was taken, including the dismissal of staff, but trust in the Alibaba system was damaged. There is continuing debate about Alibaba supplier verification and whether it means anything in practice. Hornet encourage you to form your own opinion, but suggest you make yourself aware of key points of the program. Firstly, it is funded by suppliers paying to be assessed and verified. Secondly, the onsite check is largely a verification that the business exists, has licences and operates, rather than a full audit of processes and quality.

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However the Alibaba IPO turns out, it’s further proof of the size and importance of China’s economy in world trade.
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[Update October 2014]

Alibaba’s IPO on September 19, 2014 raised US$25billion.

That smashed Visa’s US record of US$19.7 billion in 2008.

It’s also a new world record, way ahead of the US$22billion raised by the Agricultural Bank of China when it debuted on the Hong Kob Stock Exchange in 2010.

The question is, what will Alibaba do next?  There’s talk it might acquire some Silicon Valley players in an attempt to go global, but no definitive action yet.  The biggest outcome of the IPO so far seems to be $5billion in cash for the struggling Yahoo, after it sold most of its shares in Alibaba.

One thing this record IPO does show is how intertwined the world economy is, with China’s largest company listing in the US rather than in China or Hong Kong.

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