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What are the weaknesses of Alibaba Group: The Rise of a Platform Giant?

What are the weaknesses of Alibaba Group: The Rise of a Platform Giant?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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What are the weaknesses of Alibaba Group: The Rise of a Platform Giant?

Alibaba Group: The Rise of a Platform Giant Alibaba, a company founded in 1999 to facilitate export transactions for small Chinese businesses, grew to become a platform ecosystem with astonishing reach. Many described Alibaba as being Amazon, Yelp, YouTube, and PayPal wrapped into one company. When the company went public in 2014 (its stock symbol is BABA), it raised US$25 billion, making it the largest IPO in history. For the fiscal year ending in March 2018, Alibaba posted revenues of over CNY 250 billion, or $US 36 billion, and in August 2018 it had a market cap of over $470 billion, making it the seventh highest valued company in the world. In terms of gross merchandise volume moved, Alibaba was larger financiers, logistics providers, information technology providers, and more. As put by Ming Zeng, chairman of the Academic Council of Alibaba Group, "Alibaba does what Amazon, eBay, PayPal, Google, FedEx, wholesalers, and a good portion of manufacturers do in the United States, with a healthy helping of financial services for garnish." Alibaba did not charge transaction fees or fees to list goods; instead, its business model relied on selling advertising. The free listing service attracted sellers in droves, and by 2001 it already had 450,000 users and had achieved profitability. Expanding Alibaba's Market Reach In 2002, eBay entered the Chinese market by purchasing a large stake in EachNet, a Chinese consumer-to consumer sales platform, and Ma sensed the threat eBay and EachNet posed. Much of Alibaba's business came from small firms that could just as easily use a consumer-oriented platform like EachNet, and if EachNet grew quickly, it might lure Alibaba users away. Furthermore, individual consumers were already placing orders on Alibaba when they wanted to buy goods in bulk, revealing the potential for a consumer market for Alibaba. Thus, in 2003, Alibaba created a subsidiary platform called than Amazon, Wal-Mart, and eBay combined. The History of Alibaba Alibaba was founded in 1999 by 18 friends led by Jack Ma. Ma's story is an inspiring, rags-to-riches tale. He was born in Hangzhou, China, in 1964 to a poor family. He was slight in build, and often got into fights with classmates. Ma struggled both to get into university and to find a job. As he told Charlie Rose in an interview in 2015: Taobao ("treasure hunt"), focused on consumer-to-consumer sales. Unlike eBay, Taobao did not charge fees, and because Chinese users were more comfortable with face-to-face transactions, it created Taobao WangWang, an instant messaging service that simulated face-to-face negotiations between buyers and sellers. The strategy was successful-by 2004, Alibaba controlled most of the consumer-to-consumer ecommerce market in China, and eBay announced its exit from the company. In 2004, Alibaba partnered with four of China's largest banks to create an e-payment system called Alipay. Though initially Alipay was designed just to work with Taobao and Tmall, soon the payment system evolved to be a complete mobile-payment service. Using a smartphone, Alipay users can make payments online and at bricks-and-mortar stores. They can also use it to make person- to-person money transfers, purchase bus and train tickets, hail taxis, and as digital identification for many public services. The company grew rapidly. By 2008, Alibaba's annual revenues were 3.9 billion yuan (or $US 562 million). Unfortunately, the free and open nature of Taobao was both a strength and a weakness. While sellers of any size could join easily, Taobao also began to have a reputation for having counterfeit products. To counter this, Alibaba launched a business-to consumer retail platform, Taobao Mall, later referred to simply as Tmall. Unlike Taobao, TMall screened sellers, and set standards for quality and reliability. It also collected annual fees and transaction fees from sellers. The combination of standards and fees effectively limited sellers to larger, more established players. This, in turn, gave consumers more confidence in the products and transaction process. “There's an examination for young people to go to university. I failed it three times. I failed a lot. So I applied to 30 different jobs and got rejected. I went for a job with the police; they said, "You're no good." I even went to KFC when it came to my city. Twenty four people went for the job. Twenty-three were accepted. I was the only guy [who wasn't)." ecomm Ma was also rejected by Harvard ten times. He ultimately accepted a job as an English teacher that paid $12 month. In 1995, Ma traveled to the United States for the first time, serving as an interpreter for a Chinese government trade delegation. There, on a lark, he did an online search for "beer" and "China." and was surprised to find that no Chinese beers came up. He decided at that moment to form a company called China Pages, which would help Chinese companies build websites. China Pages would eventually merge into an unsuccessful joint venture with China Telecom. Ma next headed up an Internet company backed by the Chinese Ministry of Foreign Trade and Economic Cooperation in Beijing. Ma worried, however, that being connected to the government would keep him from capitalizing on the rapid change and opportunities created by the Internet. Ma thus persuaded his team at the ministry to return to Hangzhou with him. There they founded were lounded Alibaba. The company began as a business-to-business wholesale platform that enabled companies around the world to easily buy products from China. The platform was particularly useful for small to medium sized Chinese businesses that would normally not be able to easily tap the export market. Ma had the objective of democratizing business in China by helping small businesses overcome the advantages large businesses wielded. As he noted, "What we do is give small companies e-commerce ability by helping them source partners and information around the world." Unlike Amazon, Alibaba would not take ownership over inventory; instead it would provide access to all the resources that an online business would need to succeed. It would serve as a platform hub at the center of an ecosystem of interacting partners of all types: suppliers, buyers, advertisers, Deepening the Platform Strategy Transaction volume grew quickly, and the firm turned its focus from growing its user base to improving the efficiency of its logistics, finance, and data infrastructure, and providing additional services to members of its ecosystem (see Figure 1). In 2011, the company spent over US $4 billion on logistics and an integrated network of warehouses across
Transcribed Image Text:Alibaba Group: The Rise of a Platform Giant Alibaba, a company founded in 1999 to facilitate export transactions for small Chinese businesses, grew to become a platform ecosystem with astonishing reach. Many described Alibaba as being Amazon, Yelp, YouTube, and PayPal wrapped into one company. When the company went public in 2014 (its stock symbol is BABA), it raised US$25 billion, making it the largest IPO in history. For the fiscal year ending in March 2018, Alibaba posted revenues of over CNY 250 billion, or $US 36 billion, and in August 2018 it had a market cap of over $470 billion, making it the seventh highest valued company in the world. In terms of gross merchandise volume moved, Alibaba was larger financiers, logistics providers, information technology providers, and more. As put by Ming Zeng, chairman of the Academic Council of Alibaba Group, "Alibaba does what Amazon, eBay, PayPal, Google, FedEx, wholesalers, and a good portion of manufacturers do in the United States, with a healthy helping of financial services for garnish." Alibaba did not charge transaction fees or fees to list goods; instead, its business model relied on selling advertising. The free listing service attracted sellers in droves, and by 2001 it already had 450,000 users and had achieved profitability. Expanding Alibaba's Market Reach In 2002, eBay entered the Chinese market by purchasing a large stake in EachNet, a Chinese consumer-to consumer sales platform, and Ma sensed the threat eBay and EachNet posed. Much of Alibaba's business came from small firms that could just as easily use a consumer-oriented platform like EachNet, and if EachNet grew quickly, it might lure Alibaba users away. Furthermore, individual consumers were already placing orders on Alibaba when they wanted to buy goods in bulk, revealing the potential for a consumer market for Alibaba. Thus, in 2003, Alibaba created a subsidiary platform called than Amazon, Wal-Mart, and eBay combined. The History of Alibaba Alibaba was founded in 1999 by 18 friends led by Jack Ma. Ma's story is an inspiring, rags-to-riches tale. He was born in Hangzhou, China, in 1964 to a poor family. He was slight in build, and often got into fights with classmates. Ma struggled both to get into university and to find a job. As he told Charlie Rose in an interview in 2015: Taobao ("treasure hunt"), focused on consumer-to-consumer sales. Unlike eBay, Taobao did not charge fees, and because Chinese users were more comfortable with face-to-face transactions, it created Taobao WangWang, an instant messaging service that simulated face-to-face negotiations between buyers and sellers. The strategy was successful-by 2004, Alibaba controlled most of the consumer-to-consumer ecommerce market in China, and eBay announced its exit from the company. In 2004, Alibaba partnered with four of China's largest banks to create an e-payment system called Alipay. Though initially Alipay was designed just to work with Taobao and Tmall, soon the payment system evolved to be a complete mobile-payment service. Using a smartphone, Alipay users can make payments online and at bricks-and-mortar stores. They can also use it to make person- to-person money transfers, purchase bus and train tickets, hail taxis, and as digital identification for many public services. The company grew rapidly. By 2008, Alibaba's annual revenues were 3.9 billion yuan (or $US 562 million). Unfortunately, the free and open nature of Taobao was both a strength and a weakness. While sellers of any size could join easily, Taobao also began to have a reputation for having counterfeit products. To counter this, Alibaba launched a business-to consumer retail platform, Taobao Mall, later referred to simply as Tmall. Unlike Taobao, TMall screened sellers, and set standards for quality and reliability. It also collected annual fees and transaction fees from sellers. The combination of standards and fees effectively limited sellers to larger, more established players. This, in turn, gave consumers more confidence in the products and transaction process. “There's an examination for young people to go to university. I failed it three times. I failed a lot. So I applied to 30 different jobs and got rejected. I went for a job with the police; they said, "You're no good." I even went to KFC when it came to my city. Twenty four people went for the job. Twenty-three were accepted. I was the only guy [who wasn't)." ecomm Ma was also rejected by Harvard ten times. He ultimately accepted a job as an English teacher that paid $12 month. In 1995, Ma traveled to the United States for the first time, serving as an interpreter for a Chinese government trade delegation. There, on a lark, he did an online search for "beer" and "China." and was surprised to find that no Chinese beers came up. He decided at that moment to form a company called China Pages, which would help Chinese companies build websites. China Pages would eventually merge into an unsuccessful joint venture with China Telecom. Ma next headed up an Internet company backed by the Chinese Ministry of Foreign Trade and Economic Cooperation in Beijing. Ma worried, however, that being connected to the government would keep him from capitalizing on the rapid change and opportunities created by the Internet. Ma thus persuaded his team at the ministry to return to Hangzhou with him. There they founded were lounded Alibaba. The company began as a business-to-business wholesale platform that enabled companies around the world to easily buy products from China. The platform was particularly useful for small to medium sized Chinese businesses that would normally not be able to easily tap the export market. Ma had the objective of democratizing business in China by helping small businesses overcome the advantages large businesses wielded. As he noted, "What we do is give small companies e-commerce ability by helping them source partners and information around the world." Unlike Amazon, Alibaba would not take ownership over inventory; instead it would provide access to all the resources that an online business would need to succeed. It would serve as a platform hub at the center of an ecosystem of interacting partners of all types: suppliers, buyers, advertisers, Deepening the Platform Strategy Transaction volume grew quickly, and the firm turned its focus from growing its user base to improving the efficiency of its logistics, finance, and data infrastructure, and providing additional services to members of its ecosystem (see Figure 1). In 2011, the company spent over US $4 billion on logistics and an integrated network of warehouses across
China, and in 2013, Alibaba and a consortium of logistics companies formed Cainiao, a logistics network that links warehouses, distribution centers and delivery companies. Mirroring Alibaba's strategy for e-commerce, Cainiao owns no warehouses and employs no delivery personnel; instead, it just coordinates them efficiently, enabling participants to confidentially exchange information, provide real-time status on deliveries, and more. late 2017, Cainiao was coordinating over 57 million deliveries a day. Alibaba also engines that yield increasingly precise predictions about things like consumer preferences, inventory needs, and investment returns. In the same way that each Google search makes the Google search engine more accurate at gauging what a user is looking for, each transaction in Alibaba's rapidly growing ecosystem makes its platform smarter. In systems based on data and networks, size matters; the volume of data input into the system can create a self-reinforcing advantage. This raised important questions about the future of companies like Alibaba, Amazon, Tencent, and Google. Would these markets tend to become natural monopolies? Would they hold dangerous amounts of power over consumers? And would they ultimately try to unseat each other? Though these companies have largely avoided direct competition by dominating different parts of the world, each is becoming increasingly global. Analysts also noted that, although Alibaba's sales were only about one-fifth of Amazon's in 2017, Alibaba was far more profitable than Amazon, with Alibaba earning $9.7 billion in net income, over three times Amazon's $US 3 billion (see Figure 3 and financial statements in Exhibits 1 and 2). The financial ratios told a powerful story about Alibaba's strategy of owning the platform but not the products: Alibaba was significantly more profitable, and it enjoyed much higher returns on invested capital. By started two microfinance subsidiaries that would provide microloans to small sellers on Taobao and Alibaba.com. At banks in China, the minimum loan amount was typically about 6 million RMB (about $1 million), which was well above the needs of a typical small business. Furthermore, most small businesses lacked the credit history and documentation of their business performance needed to apply for such loans. This meant that tens of millions of small businesses in China were struggling to gain access to the capital they needed to grow their businesses. Alibaba realized it already had real-time accurate data on the performance of millions of small businesses on its platform, and it could use that data to create a credit assessment program. Alibaba was able to not only provide microloans to businesses, but also performed all steps of its loan process online, making it fast and convenient. In the seven years since launching its microloan programs, now merged under the name Ant Financial Services, Alibaba has loaned more than 87 billion RMB ($13.4 billion) to nearly three million small and medium-sized enterprises, with an average loan size of 8,000 RMB (about $1,200). As described by Ming Zeng: Ant can easily process loans as small as several hundred RMB (around $50) in a few minutes. THE FUTURE Alibaba's early growth had been primarily driven by the enormous underserved population of Chinese consumers and small businesses, but in 2017 Jack Ma made it clear that it was time for Alibaba to have a bigger presence in the United States and Europe. While many pressed Ma to use Taobao and Tmall to sell to U.S. consumers, Ma demonstrated his political savvy by turning the equation around and focusing on helping U.S. businesses reach the Chinese market. In a meeting with U.S. President Donald Trump in 2017, Ma promised to sign up one million U.S. small businesses to Taobao and Tmall to sell to Chinese consumers over the next five years and predicted that each small business would likely hire at least one new employee as a result of increased sales, hence providing one million new jobs in the United States. Trump was delighted by the promise, and declared to a roomful of press, "Jack and I are going to do some great things."13 However, on September 10, 2018, Jack Ma's 54th birthday, he stunned the world by announcing that he would be retiring as Alibaba's chairman in exactly one year. Ma was now China's richest man, with a net worth of $40 billion, and was determined to now focus his efforts on education and philanthropy. As he wrote in his letter to customers, employees and shareholders, "I still have lots of dreams to pursue. Those who know me know that I do not like to sit idle. I plan on continuing my role as the founding partner in the Alibaba Partnership and contribute to the work of the partnership. I also want to return to education, which excites me with so much blessing because this is what I love to do. The world is big, and I am still young, so I want to try new things- because what if new dreams can be Can How is this possible? When faced with potential borrowers, lending institutions need answer only three basic questions: Should we lend to them, how much should we lend, and at what interest rate? Once sellers on our platforms gave us authorization to analyze their data, we were well positioned to answer those questions. Our algorithms can look at transaction data to assess how well a business is doing, how competitive its offerings are in the market, whether its partners have high credit ratings, and so on. Alipay was brought under the umbrella of the Ant Financial Services group, and by 2018, Alipay had grown to become the second-largest mobile payment system in the world, with roughly 500 million users in 2018, second to Chinese rival Tencent's WeChat Pay (see Figure 2) In 2016, Alibaba introduced an Al-powered chatbot, Ali Xiaomi ("Ali Assistant") that can handle both spoken and written customer queries on Taobao and TmallI. Ali Xiaomi can handle a wide range of customer requests, including product returns, making product suggestions, and answering questions about delivery status. The chatbot uses machine learning to continuously improve its ability to diagnose and fix customer issues, enabling it to handle increasingly complex problems over time. Automating customer service improves the efficiency of both Alibaba and its merchants. As noted by Ming Zeng, "Previously, most large sellers on our platform would hire temp workers to handle consume consumer inquiries during big events. Not anymore. During Alibaba's biggest sales day in 2017, the chatbot handled more than 95% of customer questions, responding to some 3.5 i million consumers." Alibaba also created a spinoff company, Aliyun that offered cloud- based services to Chinese ecommerce vendors, banks, game developers, and others. Aliyun developed its own cloud-based smartphone operating system, Aliyun OS, which enabled sellers to manage their online storefronts using a smartphone. The cornerstone of Alibaba's advantage was data. All transactions handled by Alibaba, Taobao, Tmall, Alipay, Cainiao, and Aliyun generate data, and that data, in turn, is fed into algorithmic realized?! hich The one thing I can promise everyone is this: Alibaba was never about Jack Ma, but Jack Ma will forever belong to Alibaba.
Transcribed Image Text:China, and in 2013, Alibaba and a consortium of logistics companies formed Cainiao, a logistics network that links warehouses, distribution centers and delivery companies. Mirroring Alibaba's strategy for e-commerce, Cainiao owns no warehouses and employs no delivery personnel; instead, it just coordinates them efficiently, enabling participants to confidentially exchange information, provide real-time status on deliveries, and more. late 2017, Cainiao was coordinating over 57 million deliveries a day. Alibaba also engines that yield increasingly precise predictions about things like consumer preferences, inventory needs, and investment returns. In the same way that each Google search makes the Google search engine more accurate at gauging what a user is looking for, each transaction in Alibaba's rapidly growing ecosystem makes its platform smarter. In systems based on data and networks, size matters; the volume of data input into the system can create a self-reinforcing advantage. This raised important questions about the future of companies like Alibaba, Amazon, Tencent, and Google. Would these markets tend to become natural monopolies? Would they hold dangerous amounts of power over consumers? And would they ultimately try to unseat each other? Though these companies have largely avoided direct competition by dominating different parts of the world, each is becoming increasingly global. Analysts also noted that, although Alibaba's sales were only about one-fifth of Amazon's in 2017, Alibaba was far more profitable than Amazon, with Alibaba earning $9.7 billion in net income, over three times Amazon's $US 3 billion (see Figure 3 and financial statements in Exhibits 1 and 2). The financial ratios told a powerful story about Alibaba's strategy of owning the platform but not the products: Alibaba was significantly more profitable, and it enjoyed much higher returns on invested capital. By started two microfinance subsidiaries that would provide microloans to small sellers on Taobao and Alibaba.com. At banks in China, the minimum loan amount was typically about 6 million RMB (about $1 million), which was well above the needs of a typical small business. Furthermore, most small businesses lacked the credit history and documentation of their business performance needed to apply for such loans. This meant that tens of millions of small businesses in China were struggling to gain access to the capital they needed to grow their businesses. Alibaba realized it already had real-time accurate data on the performance of millions of small businesses on its platform, and it could use that data to create a credit assessment program. Alibaba was able to not only provide microloans to businesses, but also performed all steps of its loan process online, making it fast and convenient. In the seven years since launching its microloan programs, now merged under the name Ant Financial Services, Alibaba has loaned more than 87 billion RMB ($13.4 billion) to nearly three million small and medium-sized enterprises, with an average loan size of 8,000 RMB (about $1,200). As described by Ming Zeng: Ant can easily process loans as small as several hundred RMB (around $50) in a few minutes. THE FUTURE Alibaba's early growth had been primarily driven by the enormous underserved population of Chinese consumers and small businesses, but in 2017 Jack Ma made it clear that it was time for Alibaba to have a bigger presence in the United States and Europe. While many pressed Ma to use Taobao and Tmall to sell to U.S. consumers, Ma demonstrated his political savvy by turning the equation around and focusing on helping U.S. businesses reach the Chinese market. In a meeting with U.S. President Donald Trump in 2017, Ma promised to sign up one million U.S. small businesses to Taobao and Tmall to sell to Chinese consumers over the next five years and predicted that each small business would likely hire at least one new employee as a result of increased sales, hence providing one million new jobs in the United States. Trump was delighted by the promise, and declared to a roomful of press, "Jack and I are going to do some great things."13 However, on September 10, 2018, Jack Ma's 54th birthday, he stunned the world by announcing that he would be retiring as Alibaba's chairman in exactly one year. Ma was now China's richest man, with a net worth of $40 billion, and was determined to now focus his efforts on education and philanthropy. As he wrote in his letter to customers, employees and shareholders, "I still have lots of dreams to pursue. Those who know me know that I do not like to sit idle. I plan on continuing my role as the founding partner in the Alibaba Partnership and contribute to the work of the partnership. I also want to return to education, which excites me with so much blessing because this is what I love to do. The world is big, and I am still young, so I want to try new things- because what if new dreams can be Can How is this possible? When faced with potential borrowers, lending institutions need answer only three basic questions: Should we lend to them, how much should we lend, and at what interest rate? Once sellers on our platforms gave us authorization to analyze their data, we were well positioned to answer those questions. Our algorithms can look at transaction data to assess how well a business is doing, how competitive its offerings are in the market, whether its partners have high credit ratings, and so on. Alipay was brought under the umbrella of the Ant Financial Services group, and by 2018, Alipay had grown to become the second-largest mobile payment system in the world, with roughly 500 million users in 2018, second to Chinese rival Tencent's WeChat Pay (see Figure 2) In 2016, Alibaba introduced an Al-powered chatbot, Ali Xiaomi ("Ali Assistant") that can handle both spoken and written customer queries on Taobao and TmallI. Ali Xiaomi can handle a wide range of customer requests, including product returns, making product suggestions, and answering questions about delivery status. The chatbot uses machine learning to continuously improve its ability to diagnose and fix customer issues, enabling it to handle increasingly complex problems over time. Automating customer service improves the efficiency of both Alibaba and its merchants. As noted by Ming Zeng, "Previously, most large sellers on our platform would hire temp workers to handle consume consumer inquiries during big events. Not anymore. During Alibaba's biggest sales day in 2017, the chatbot handled more than 95% of customer questions, responding to some 3.5 i million consumers." Alibaba also created a spinoff company, Aliyun that offered cloud- based services to Chinese ecommerce vendors, banks, game developers, and others. Aliyun developed its own cloud-based smartphone operating system, Aliyun OS, which enabled sellers to manage their online storefronts using a smartphone. The cornerstone of Alibaba's advantage was data. All transactions handled by Alibaba, Taobao, Tmall, Alipay, Cainiao, and Aliyun generate data, and that data, in turn, is fed into algorithmic realized?! hich The one thing I can promise everyone is this: Alibaba was never about Jack Ma, but Jack Ma will forever belong to Alibaba.
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