Alibaba's Rise: Success & setbacks

In this March 17, 2014 photo, people walk past a company logo at the headquarters of Alibaba Group in Hangzhou, in eastern China’s Zhejiang province. Even before Alibaba went online, its founder talked about making the fledgling e-commerce company a global player. (AP Photo)
 
Even before Alibaba went online, its founder talked about making the fledgling e-commerce company a global player.
At Alibaba Group’s first staff meeting in 1999, a video shot by an employee shows Jack Ma rallying a workforce of 17 of his friends. They met in a cement-floored apartment in Hangzhou, a city southwest of Shanghai, at a time when few Chinese were online. Ma was an English teacher with no training in business or computers.
"Our competitors are not in China but in Silicon Valley," says Ma in the video, which is included in a documentary about the company, "Crocodile in the Yangtze," made by a former Alibaba vice president, Porter Erisman. "We can beat government agencies and big, famous companies because of our innovative spirit."
Such Silicon Valley-style bluster was new to China, but Ma delivered. Over the next 15 years, he helped propel Alibaba through technical and financial challenges and a battle with eBay Inc. to become the world’s biggest online bazaar. The company is now planning to list in the U.S. and analysts say its initial public offering this year may raise up to $20 billion.
Last year, 231 million customers spent $248 billion with merchants on Alibaba’s platforms, more than Amazon.com Inc. and eBay combined.
Along the way, Alibaba had to develop e-commerce infrastructure its Western counterparts took for granted. Few Chinese used credit cards, so it created Alipay, a payments system that helped online sales win acceptance by allowing wary customers to receive goods before releasing money to sellers. The company worked with shippers to improve their reliability and held trade shows to persuade entrepreneurs to go online.
"Alibaba really created the e-commerce market in China," said Edward Yu, president of research firm Analysys International.
Today, the company’s main platforms are its original business-to-business service Alibaba.com, consumer-to-consumer site Taobao and TMall for brands to sell to consumers.
Alibaba has expanded into personal finance, games, video and other services. In March, it was one of 10 companies picked by Beijing to set up China’s first privately financed banks since the 1949 communist revolution. It is dipping a toe abroad, with a $215 million investment in March in Tango, a California-based mobile message service, and plans to launch a U.S. e-commerce site.
Alibaba’s IPO paperwork says revenue, mostly fees from merchants, rose 57 percent in the final nine months of last year. Alibaba kept more than 43 cents of each dollar as net income.
In a Silicon Valley-style innovation, Alibaba cultivated a hardworking but playful corporate culture that was a novelty in China’s state-dominated economy. An annual employee talent show grew into Alifest, a raucous event held in a soccer stadium before an audience of thousands. Ma takes part by singing Chinese pop songs.
"Alibaba allowed people to shape their own destiny instead of working for a state-owned company or the government bureaucracy," said Erisman.
The early years were a roller-coaster of successes and setbacks. In 1999, Alibaba raised $5 million from investors including Goldman Sachs and then $20 million from Japan’s Softbank. Plans called for raising more through a stock market offering, but the Internet bubble burst in 2000 and interest in tech shares evaporated. "We suffered much more than any other Internet company," Ma told the BBC in 2001. The next year, Alibaba faced its biggest threat when eBay acquired EachNet, a company that had 80 percent of China’s small consumer e-commerce market.
Ma fought back by launching consumer site Taobao and Alipay. He promised Taobao would be free for three years, undercutting eBay’s fee-based model. In a guerrilla move to offset eBay’s bigger advertising budget, Alibaba employees posted thousands of messages on Internet bulletin boards directing users to Taobao.
In 2004, then-CEO Meg Whitman said eBay expected China to be its biggest market in 10 to 15 years. In 2006, eBay gave up and turned over its China operation to a local partner. Taobao has given tens of thousands of small Chinese entrepreneurs their first foothold in e-commerce, trading used furniture, hand-knitted sweaters and other goods.
In the northwestern city of Urumqi, Jin Junhui started a business on Taobao in 2005 selling dates and raisins for which the region is famous. Sales in 2008 hit 500,000 yuan ($80,000) and doubled the next year. "Taobao has changed my life," said Jin, 32. "Now I have two employees and more free time to do what I like."
Alibaba’s rise has been marked by Ma’s emphasis on the company’s long-term interests, even when that clashed with shareholders. That strained ties with Yahoo Inc., which provided much-needed cash when it paid $1 billion for 40 percent of Alibaba in 2005. The relationship soured in squabbles over strategy but Yahoo profited. Alibaba bought back half for $7.1 billion in 2011 and Yahoo stands to make billions more in the IPO.
Alibaba also faced criticism in 2011 when it spun off Alipay but failed to tell Yahoo and other shareholders immediately. Ma said the move was necessary because Beijing would only license an electronic payment service wholly owned by Chinese citizens. Ma stepped down as CEO in May 2013, but stayed on as executive chairman and also announced an overhaul to make Alibaba more responsive.
The changes come as Alibaba faces a challenge to its dominance amid upheaval in China’s Internet market, where users are shifting to going online via smartphone and tablet.
In e-commerce, Alibaba faces competition from Jingdong.com, which has one-tenth of its market share but a strong reputation for service. Jingdong.com received a $215 million investment in March from games portal Tencent Holdings Ltd., which also owns a stake in an operator of logistics centers.
"Two years ago, I think Alibaba was quite successful. It had no competitor," said Yu of Analysys International. "But today things are quite different. Tencent definitely is a formidable power to challenge Alibaba’s business."
 
 
Alibaba expands beyond e-commerce

Kelvin Chan
AP Business Writer
China’s Alibaba Group, which is readying for a big U.S. initial public offering, is known as an e-commerce titan but it’s been busily expanding into other rising industries. Here’s a closer look at those businesses, which include cloud computing, mobile messaging, and investments in online video, social media as well as bricks and mortar retail and delivery networks.

BUYING AND SELLING
Three retail e-commerce sites account for four-fifths of Alibaba’s revenue. Taobao, which means "digging for treasure," is a cross between eBay and Amazon for China. Sellers pay nothing to list on Taobao, but Alibaba charges for advertising services. Tmall, which in Chinese is known as Tian Mao, or Sky
Cat, is for brands selling directly to consumers while Juhuasuan is a group buying marketplace akin to Groupon. Last year these three sites had a combined 8 million sellers and 231 million buyers and handled 1.54 trillion yuan ($247 billion) worth of merchandise. Alibaba also operates three sites to connect manufacturers with buyers, which was its original mission. Alibaba.com is for sellers of industrial quantities of everything from underwear to cement to toilets and beyond. It has 117,000 paying members. AliExpress is for international consumers buying directly from Chinese wholesalers and suppliers while 1688.com, which has 690,000 members, is for the China market. Alibaba also bought a stake in U.S. online shopping site ShopRunner last year.

CLOUD
Alibaba Cloud Computing launched in 2009 and now has more than 980,000 customers. The service, similar to Amazon Web Services, uses Alibaba infrastructure to provide services to Taobao and Tmall sellers as well as clients ranging from Internet gaming startups to companies in the financial services, healthcare and digital entertainment industries. Users are charged a fee based on time and usage. Alibaba has also developed a mobile operating system, Aliyun OS, aimed at challenging Google’s Android, which it plans to integrate with its cloud services.

PAYMENTS
Alipay, launched in 2004, is China’s largest online third-party payment services provider, according to iResearch. It was also the source of one of Alibaba founder Jack Ma’s biggest boardroom controversies. Ma transferred ownership of Alipay, which runs PayPal style services, in 2011 to a company he controlled to comply with Chinese government regulations but Alibaba shareholder Yahoo complained it wasn’t fully informed. Alibaba said in its filing that "we continue to participate in some of the economic benefits of Alipay through contractual arrangements."

MOBILE AND SOCIAL
Alibaba has developed a smartphone messaging app, Laiwang, to compete with Tencent Holding’s WeChat, which is a wildly popular instant messaging service in China. To get the app off the ground when it launched in September, Ma encouraged employees to sign up 100 friends or relatives. The company also has stakes in several mobile Internet and social media companies, notably Weibo Corp., which operates a microblog site that is China’s version of Twitter. Other investments include Chinese mobile Web browser developer UCWeb Inc. and U.S. messaging company TangoMe Inc. It acquired Beijing-based digital mapmaker and navigation service firm AutoNavi Holdings Ltd. this year, giving it control of another service to attract mobile users.

DIGITAL MEDIA
Alibaba bought stakes this year in Internet TV site Youku Tudou Inc., TV and film producer ChinaVision Media Group Ltd. and cable TV firm Wasu Media Holding Co. The investments, combined with the launch last year of a smart TV set-top box, kickstart the company’s digital entertainment strategy at a time when China’s Internet companies are fiercely computing for smartphone, tablet and Web TV users — and their advertising revenue.

BRICKS AND MORTAR
Alibaba also has investments in a department store operator, a logistics network and a product ID and tracking systems company. In March it took a stake in an appliance maker and its logistics business to provide improved delivery and installation services for buyers.

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