Entrepreneurial Firms

Closing Case Emerging Markets: The Rise of AlibabaFounded in 1999 by a former English teacher Jack Ma, Alibaba has risen to become the largest e-commerce firm not only in China, but also in the world—the value of goods sold on its platforms (US$170 billion in 2013) are more than Amazon and eBay combined. Alibaba started as a business-to-business (B2B) portal connecting overseas buyers and small Chinese manufacturers. Inspired by eBay, Alibaba next launched Taobao, a consumer-to-consumer (C2C) portal that now features nearly a billion products and is the one of the 20 most-visited websites worldwide. Finally, with Tmall, Alibaba offers an Amazon-like business-to-consumer (B2C) portal that assists global brands such as Levi’s and Disney to reach the middle class in China.The rise of Alibaba has been breathtaking. As China becomes the largest e-commerce market (already bigger than the United States), Alibaba controls four-fifths of all e-commerce in China. In 2013, on Single’s Day (November 11, a marketing invention created to encourage singles to “be nice” to themselves), Alibaba sold more than US$5.7 billion. Preparing to initiate an initial public offering (IPO) in New York, Alibaba had been predicted by the Economist to have the potential “to be among the world’s most valuable companies.” On September 19, 2014, Alibaba’s initial public offering (IPO) on the New York Stock Exchange was indeed the world’s largest, raising US$25 billion.Behind the rise of Alibaba is a story of focus and innovation. “eBay may be a shark in the ocean,” Ma once said, “but I am a crocodile in the Yangtze River. If we fight in the ocean, I lose; but if we fight in the river, I win.” The Crocodile of Yangtze, as Ma became known, has largely focused on China to avoid head-on competition with eBays of the world elsewhere. In China, eBay has been forced to retreat. In a low-trust society such as China, where people generally shy away from buying from strangers online and where people hesitate to use credit cards, Alibaba has pioneered an Alipay system. This is a novel online-payments system that relies an escrow (releasing money to sellers only once their buyers are happy with the goods received). This not only facilitates transactions for Alibaba as well as its buyers and sellers, but also helps build trust at the societal level. Alifinance, Alibaba’s financing arm, has become a big microlender to small firms, which are typically underserved by China’s state-owned banks. Alifinance now plans to lend to individuals as well. Alibaba is also delivering insurance online. Perhaps its biggest treasure lies in its vast amount of data about the creditworthiness of millions of China’s middle class and of thousands of firms that do business via Alibaba—clearly a Big Data gold mine.From an institution-based standpoint, the fact that Alibaba as a privately owned firm can grow to such an enormous size is remarkable about the Chinese government’s tolerance of e-commerce. Ironically the US government placed Alibaba on the list of “notorious markets,” because counterfeits could be bought and sold on its websites. Alibaba has endeavored to remove fakes from its websites, and its recent removal from the US government’s list of “notorious markets” is indicative of its hard work. However, Western managers of genuine items on Tmall continue to complain that cheap fakes can still be found on Taobao. Evidently the fight is still on.Formidable as Alibaba is, it is not without challenges. Its business model grows on PC-based e-commerce. Recently, as China becomes the world’s largest market for smartphones, it is fast moving to mobile commerce—at a speed faster than any other major economy. The upshot? According to Alibaba’s own prospectus, “we face a number of challenges to successfully monetizing our mobile user traffic.” In other words, Alibaba is but one of several contenders. Until fairly recently, Alibaba and two other Internet giants in China largely minded their own business as the “three kingdoms,” referring to an historical era during which China was divided three ways. While Alibaba dominated e-commerce, Baidu was king of search engines and Tencent made a killing on online games. The truce among the “three kingdoms” seems to have ended with the arrival of mobile commerce, as all three rush to establish dominance in this new market frontier. Famous for elbowing out Google, Baidu is listed on NASDAQ and is Microsoft’s partner in China. In addition to online games, Tencent is more famous for its WeChat social messaging app, which is widely popular. There is no guarantee Alibaba will win in this contest.In addition to fighting it out in China, the Crocodile of the Yangtze has also been eyeing the wider global ocean. Some 12% of Alibaba’s sales are already overseas. Its most attractive overseas markets are likely to be low-trust, underbanked emerging economies in Asia, Africa, and Latin America. But sharks such as eBay and Amazon will not be easy to fight with. Looking forward, whether Alibaba deserves to be one of the world’s most valuable companies will depend on how it can defend its e-commerce dominance at home in the mobile era and how it can grow its business abroad.1. What are the characteristics of Alibaba’s growth, innovation, and financing strategies that are typical of successful entrepreneurial firms? What is unusual about Alibaba?2.Why has Alibaba become globally famous by focusing on its domestic market?3.Sometimes the IPO of widely successful firms flops—Facebook’s disappointing IPO comes to mind. Does Alibaba deserve to be one of the world’s mosvaluable companies?