1

Does Alibaba’s Magic Work Outside China?

Jae C. Jung ***

Bloch School of Management
University of Missouri-Kansas City
5110 Cherry Street
Kansas City, MO 64110
Phone: (816) 235-5161
Fax: (816) 235-6505
Email: jungjc@umkc.edu

Majiri Ugboma
Bloch School of Management
University of Missouri-Kansas City
5110 Cherry Street
Kansas City, MO 64110
Phone: (913) 215-2970
Email: mau8t6@mail.umkc.edu

Alvin K. Liow
Bloch School of Management
University of Missouri-Kansas City
5110 Cherry Street
Kansas City, MO 64110
Phone: (913) 223-2192
Email: aklc68@mail.umkc.edu

*** Corresponding author

Published in TIBR in 2015

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Does Alibaba’s Magic Work Outside China?

Abstract

Alibaba was an established e-commerce giant in the Chinese online retail industry. In 2014, it

recorded the world’s largest Initial Public Offering (IPO) raising a total of $25 billion. Alibaba’s

ground-breaking IPO and continuous growth in China had raised speculation on its imminent and

potential expansions into other countries including the United States. On the other hand, Amazon

and eBay had been leaders in the e-commerce industry of the U.S., arguably the world. This case

seeks to weigh the potential success of Alibaba should it choose to expand outside its home

country, China, including the United States. This case also helps understand how the Chinese

business environment influenced the success of Alibaba, relative to other countries.

Keywords: China, the U.S., e-commerce, institutional voids

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“In the U.S., e-commerce is a dessert. In China, it’s a main course.”

– Jack Ma, Founder, Alibaba

Alibaba heated the world media for months before its stock debuted in the New York Stock

Exchange in 2014. Its initial public offering (IPO) was the world’s largest ever, raising a total of

$25 billion. Alibaba stock was originally priced at $68 per share, yet the price skyrocketed to

$93.89 on the first trading day. The Alibaba IPO made CEO Ma the richest man in China with a

net worth of $19.5 billion in 2014.1 Alibaba’s groundbreaking IPO and continuous growth in China

raised speculation on its imminent expansions in other countries including the United States.

However, the U.S., arguably the world, e-commerce market had been dominated by two giants,

Amazon and eBay, for decades. Many eyes were watching how Alibaba would affect the online

shopping industry in the world.

Rough Start of Alibaba

Mr. Jack Ma had always had a desire for growth and sought out endeavors bigger than himself. At

age 12, he volunteered daily to be a free tour guide in the city of Hangzhou. Though it took him a

40 minute bike ride from home, it helped him practice his English. That experience was like fuel

to his already burning flame for learning about the world. In 1979, he met a family from Australia

and developed a relationship with them, which gave him the opportunity to visit Australia in the

summer of 1985. Prior to his visit Ma believed China was the richest and happiest country in the

world. In his words, “when I arrived in Australia, I thought, ‘Oh, my God, everything is different

1
Flannery, R. (2014, October 28) China billionaires. Forbes. Retrieved from: http://www.forbes.com/china-
billionaires.
 4

from what I was told.’”2 The visit completely changed his mindset.

It was in 1995 when a friend showed Ma how the internet functioned in the U.S. His friend claimed

that just about anything was on the internet. Ma then went ahead to make his first online search

using the word “beer.” It was disappointing to Ma that no Chinese beers turned up in the search.

Following this experience, Ma decided to start an internet company in China.

The company name, Alibaba, reflected Ma’s experience in San Francisco. Deep in thought at a

coffee shop, he asked a waitress, “What do you know about Alibaba?” Without giving much

thought to it she answered, “open sesame.” He walked out onto the street and asked passersby if

they knew the name Alibaba, and everyone, regardless of where they were from, had heard of it in

some way. “Yes” he said to himself, “this is the name!” The name Alibaba goes way back to a

story of a man who helped his village and had a secret door to a treasure trove that only opened

when he said “open sesame.” Ma decided to draw from this idea to start up his company. In Ma’s

words, “Alibaba opens sesame for small to medium sized businesses in China.”3

Alibaba’s start was like a roller coaster ride. In 1999, Ma gathered 18 other people in his apartment

and spoke to them about his vision. Two hours later, U.S. $60,000 was raised and Alibaba was

born. After accepting investment offers from a group of firms including Goldman and Sachs Group

in 1999, Alibaba was able to raise $5 million and $20 million from Softbank, the largest global

2
Fannin, R. (2008, January 1) How I did it: The unlikely rise of China’s internet tycoon. Inc. Retrieved from:
http://www.Inc.com.
3
Hahn, L. (2006, April 24) Jack Ma talk Asia transcript. CNN. Retrieved from:
http://www.cnn.com/2006/WORLD/asiapcf/04/24/talkasia.ma.script/index.html.
 5

investor in internet business at that time.4 However, with very little resources and no concrete plan,

the company ended up making some bad decisions such as rapid expansion. Alibaba had to lay off

many employees during the dot com bubble. With just enough money to survive for 18 months,

they developed a new webpage (Taobao) for Chinese exporters to meet U.S. buyers online. The

webpage was a game changer to Alibaba. In 2005, Yahoo invested $1 billion in Alibaba in

exchange for a 40% stake in the company.

Ma believed that small and medium enterprises (SMEs) would be the future of China, as such

Alibaba’s mission was set to help SMEs grow. Following a Business to Business (B2B) model,

Alibaba had focused on providing a free service where it connected buyers to suppliers. Suppliers

would list their products on the website, buyers would list their requests on a bulletin board, and

deals were struck via emails and offline messages.5

Alibaba’s Success in China

Alibaba had recorded a tremendous growth in China. Its ability to navigate the external

environment of China and to overcome the obstacles greatly contributed to its growth. Though the

e-commerce market in China was surging, the external environment posed serious challenges.

There were numerous government regulations related to internet access, encryption, domain name,

and content regulation. The underdeveloped transportation system of China imposed logistic

nightmares for Alibaba. Also, the Chinese economy was still largely cash-based and customers

had no confidence in using the card system or putting their card information online for purchases.

4
Galani, U. (2014, September 22) Valuing Softbank in Alibaba’s aftermath. The New York Time. Retrieved from:
http://www.dealbook.nytimes.com.
5
IBS Center of Management and Research. (2001) Case 5: Alibaba competing in China and beyond.
 6

Alibaba had to convince the consumers that their payment systems were secure and supported by

one of the most trusted banks in China.6

In 2014, Alibaba was already an established e-commerce giant and competitive force to reckon

with in China. They had local competitors in their earlier years, but they were able to beat out the

competition and became the industry leader. One of the reasons for their success was the lack of

quality competition in China.

In the year ending March 31, 2014, Alibaba recorded revenues of RMB 52.5 billion, approximately

$8.5 billion (Exhibit 1).7 Its websites had 279 million active buyers and 8.5 million active sellers

in the twelve months ended June 30, 2014. In 2013, through three of its retail marketplaces,

Taobao, Tmall and Juhuasuan, Alibaba generated RMB 1.8 trillion ($296 billion) of total sales. In

the third quarter of 2013, it acquired a market share of 46.6% on China’s Business-to-Business

(B2B) platform.8

Main Shopping Platforms of Alibaba

As of May 2015, Alibaba had nine related businesses and affiliates: Taobao, Tmall, Juhuasuan,

Aliexpress, 1688.com, Alimama.com, Aliyun.com, Ant Financial, and Caniyao.

Alibaba.com: Alibaba.com was the first business of Alibaba Group as the leading platform for

6
IBS Center of Management and Research. (2011) Case 5: Alibaba in 2011: Competing in China and beyond.
7
Alibaba Group. (2014) Annual revenue of Alibaba Group from 2010 to 2014. Statista. Retrieved from:
http://www.statista.com.
8
China Internet Watch. (2013, October 28) China B2B market update for Q3 2013. Retrieved from:
http://www.chinainternetwatch.com/4397/china-b2b-market-update-q3-2013.
 7

online Business-to-Business (B2B) trading platform. It served millions of buyers and suppliers in

the world. Through Alibaba.com, small businesses, typically manufacturers and distributors, could

sell their products to companies in other countries (Exhibit 2).9

Taobao: Launched in May 2003, Taobao was the largest online retail website in China, with

registered members exceeding 170 million in 2014. It was a platform where sellers and buyers

could find each other. It garnered a market share of 90% in the Consumer to Consumer (C2C)

market. Taobao Marketplace (www.taobao.com) served Chinese consumers looking for a wide

range of selections, value and convenience, featuring hundreds of millions of product and service

listings. Taobao made money mainly through advertisements purchased by merchants who used

the sites. The site was the host to about 7 million merchants. The large traffic of consumers

motivated merchants to advertise their goods to buyers visiting the site.10 In addition, the Taobao

Mobile App had been the most popular mobile e-commerce app in China since August 2012 in

terms of mobile monthly active users.11 Of all Alibaba’s businesses, Taobao had the largest market

penetration rate and generated the largest revenue.

Tmall: Tmall was initially called Taobao Shopping Center before it was renamed as Tmall.

Launched in 2008, Tmall.com, an independent Business to Consumer (B2C) retail site,

(www.tmall.com) was dedicated to providing a premium shopping experience for increasingly

sophisticated Chinese consumers in search of top-quality branded merchandise. Unlike Taobao,

Tmall was a more exclusive site with more stringent entry rules. Brands and authorized distributors

9
Alibaba Group. (2014) Our business. Retrieved from: http://www.alibabagroup.com/en/about/businesses.
10
Osawa, J. (2013, September 9) How does Alibaba make money? The Wall Street Journal. Retrieved from:
http://blogs.wsj.com.
11
Alibaba Group. (2014) Our business. Retrieved from: http://www.alibabagroup.com/en/about/businesses.
 8

paid deposits to open storefronts after going through a verification process. Tmall served as a third

party platform for brands and retailers. A large number of international brands, including Apple,

Nike, Gap, and Walt Disney, and Chinese brands established storefronts on Tmall.com. Tmall was

the largest brand and retail platform in China in terms of gross merchandise volume in 2013. 12 In

2012, Taobao and Tmall together surpassed $160 billion in transactions and accounted for the

majority of Alibaba’s revenue.13

Juhuasuan: Juhuasuan (www.juhuasuan.com) was a comprehensive group shopping platform.

Basically, Juhuasuan was a daily deals site that could be compared to the American site, Groupon.

It was the most popular online “group” buying marketplace in China based on monthly active users

in 2013. Launched in March 2010, the platform offered quality products at discounted prices by

aggregating demand from numerous consumers. Its flash sales made products available at

discounted prices for a limited period of time.14

Mobile Platforms: An increasing percentage of e-commerce transactions in China was beginning

to take place on mobile platforms, such as tablets and mobile phones. With the continuous

improvements in mobile technology, mobile phones and tablets offered more functions. Customers

could carry out most of their online activities using these devices. The years preceding 2014

presented a huge surge in the mobile platform for Alibaba as its customers began to transact more

on mobile platforms. The total value of merchandise sold through hand-held mobile devices, such

as smart phones and tablets, accounted for 32.8% of Alibaba’s total gross merchandise value by

12
Alibaba Group. (2014) Our business. Retrieved from: http://www.alibabagroup.com/en/about/businesses.
13
Osawa, J. (2013, September 9) How does Alibaba make money? The Wall Street Journal. Retrieved from:
http://blogs.wsj.com.
14
Alibaba Group. (2014) Our business. Retrieved from http://www.alibabagroup.com/en/about/businesses.
 9

the Q2 of 2014, which was more than twice the percentage it accounted for in 2013 (Exhibit 3).15

Recently, Alibaba extended its empire to online game business.

Along with above businesses, Aliexpress served consumers worldwide facilitating direct

purchases from wholesalers and manufacturers in China and 1688.com was dedicated to wholesale

trades. Alimama offered online marketing services, Aliyun was specialized in cloud computing

and data management, and Cainiao operated a logistics information platform. Ant Financial

Services supported financial needs of firms and consumers through Alipay, Alipay Wallet, Yu’e

Bao, Zhao Cai Bao, Ant Micro Loan and Sesame Credit.16

The U.S. E-Commerce Market and Top Players (Amazon and eBay)

As of 2015, the American e-commerce market was dominated by two giant firms: Amazon and

eBay. Over the years, these two companies had battled over market share and continued to improve

business models to meet the needs of the internet savvy American customers. These two companies

were similar in many ways, yet they were founded on different business models. At the beginning,

Amazon provided a variety of products at fixed, yet competitive prices, while also offering quick

delivery. In comparison, eBay focused on the dynamic pricing model of auctioning off a large

collection of products.

Over time, they became more similar, biting into each other’s primary business model in attempts

to gain more market share. In 1999, Amazon launched its own auction site to much acceptance

15
CIW Team. (2014, August 28) Alibaba profit nearly tripled to $2 billion in Q2 2014. China Internet Watch.
Retrieved from: www.chinainternetwatch.com.
16
Alibaba Group. (2014) Our business. Retrieved from http://www.alibabagroup.com/en/about/businesses.
 10

from the public. About a year later, eBay acquired a retail site, Halk.com, and introduced a fixed

price trading and a buy-it-now feature to its business model, creating more options for its

customers. Overall, it had been a constant battle between two companies as they alternated between

being the industry leader in the e-commerce industry and a close second.

eBay: Founded in 1995, eBay’s main business model involved providing consumer-to-consumer

(C2C) and business-to-business (B2B) sale services on the internet. eBay connected sellers to

buyers and generated revenue by charging the sellers fees and commissions payable on the

completion of a transaction. The sellers were charged an insertion fee, and the commission was a

percentage of the total sales. Years after its inception, most of its revenue came from the auctioning

of collectible products, such as automobiles, toys and sporting goods. In 2000, to keep up with its

number one competitor Amazon, eBay introduced fixed price trading. In 2001, it launched eBay

stores which allowed sellers to offer goods through fixed price storefronts.

eBay also expanded into the following countries: Canada, Argentina, Brazil, Mexico, Australia,

Japan, China, Korea, Hong Kong, Malaysia, India, Singapore, Taiwan, Belgium, Ireland, Russia,

Czech Republic, Spain, Denmark, Israel, Sweden, France, Italy, Switzerland, Germany,

Luxembourg, Turkey, Netherlands, Norway, Poland and the UK. In 2013, approximately 60% of

its transactions were from international (i.e., outside the U.S.), and approximately 17% were cross-

border17.

eBay sought to constantly improve customer experience by introducing a rating system called the

17
eBay. (2013) Annual report. Retrieved from: http://files.shareholder.com.
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feedback forum. The feedback forum allowed buyers and sellers to rate each other, helping reduce

fraudulent and dishonest listings. It also had a fraud protection program that reimbursed buyers in

cases of fraud. eBay had three segments: Marketplaces, which referred to the revenue earned from

the sale of goods available on eBay; Payments, which referred to revenues generated through

PayPal; and Enterprises, which comprised mainly of e-commerce and marketing solutions services

rendered following the acquisition of GSI in 2011. PayPal served as eBay’s online payment

platform. It enabled individuals and businesses to securely, easily and quickly send and receive

payments online and through a broad range of mobile devices in approximately 193 markets

worldwide and in 26 currencies, with $143 million active registered accounts as of 2013.18 PayPal,

one of the market leaders in secured online payment, generated $7.9 billion in 2014, up 19% year

over year.19 In 2014, Marketplace, PayPal, and Enterprise, generated approximately 50%, 44% and

6% of revenue, respectively.20, 21.

Amazon: Amazon was founded in 1994, a year before eBay, starting off as an online bookstore.

In 1994, Amazon made available 1 million books on its website and doubled the coverage within

a few years. Its main competitor was Barnes and Noble, a brick and mortar book retail company.

Over time it grew its business model to include a variety of product offerings. Amazon’s business

model could be divided into two forms: online retail and internet services. Its online retailing

provided a huge variety of products to customers at a competitive price being very customer-

centric. As of 2015, its offerings expanded into music, video, toys, electronics and many other

products. It was offering one of the earth’s largest collection of products available for sale on the

18
ebay. (2013) Annual report. Retrieved from: http://files.shareholder.com.
19
PayPal. Retrieved from: https://www.paypal-media.com/about.
20
Banerjae, S. (2014, July 17) eBay’s PayPal drives Q2 earnings shares up. Retrieved from: http://www.zacks.com.
21
Statista. The statistical portal. Retrieved from: http://www.statista.com/markets/413/e-commerce.
 12

website. It also served as a channel for other retailers to sell their products through its website, of

which it received a commission from the final sales. Its internet services, where it provided on-

demand movies and music, was also connected to its online retailing. Its Amazon Prime initiative

gave customers a chance to subscribe for two-day free-shipping and have access to online video

streaming and an online library called Kindle, all for an annual fee of $99.

Amazon operated nine international websites tailored to serve customers around the world. It also

had 10 AmazonWeb Services regions around the world, including the East Coast of the U.S., two

on the West Coast, Europe, Singapore, Tokyo, Sydney, Brazil, China, and a government-only

region called GovCloud. Amazon was, however, been weary of international expansions due to

vulnerabilities like exchange rate fluctuations.

Amazon was known for always reinventing its business model and finding new ways to create

customer value and increase overall company profit. Its dynamic customer online shopping

experience continued to raise industry standards. For example, in 2013 Amazon unveiled plans to

use flying drones to deliver packages within 30 minutes of purchase. Amazon logged second fiscal

quarter revenues of $19.34 billion in 2014, up from $15.70 billion from the same period in 2013.22

Amazon’s success had been driven by its ability to offer both effectiveness and responsiveness to

customers through offering both low prices and quick delivery.

The U.S. vs. China

The U.S. (the home country of Amazon and eBay) and China (the home of Alibaba) were two

22
Craige, V. (2014, October 13) Branding or revenue boost: What’s motivating Amazon’s move? FOX Business.
Retrieved from: http://www.foxbusiness.com.
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largest economies in the world. Yet, their external factors were drastically different.

Economic: The U.S. was the leading economy in the world in 2015. It spearheaded capitalism,

offering extensive private economic freedom with relatively minor government interference. It

boasted off well-established infrastructures and industries. Though it was hurt by the 2008

economic recession, the U.S. economy had recovered and continued to grow. The per capital

income of the U.S. had risen to almost $50,000 in 2011 following a decline in 2009 (Exhibit 4).

China used to be described as a growing economy in the 1990s and 2000s, but in 2015 it was the

number two economic power in the world. Once a centrally planned economy, it had shifted toward

a market-oriented economy making rapid economic and social development since the 1990s.

China’s per capita income reached $6,807 in 2013.23 Despite this, China continued to face many

challenges. The most prominent challenges were income inequality and environmental pollution.

The gap between China’s rich and poor continued to widen, one of the highest in the world.24 The

continued rise in income inequality was partly attributed to longstanding government

developmental policies that favored urban residents and developed regions over rural and less-

developed areas. The inequality in China was not a result of stagnant or declining incomes among

poor groups, but of more rapid growth in incomes of rich groups. Income from private property

was a newly emerging and potentially long-term source of inequality.25 In 2014, more than 80

23
World Bank. GDP per capita (current U.S.$) Retrieved from: http://www.ehow.com/how_8567930_cite-world-
bank.html.
24
Roberts, D. (2014, April 30) China’s inequality gap widens beyond U.S. levels. Bloomberg Business News
Retrieved from: http://www.bloomberg.com.
25
Terry, S. (2013, August) The challenge of high inequality in China. Retrieved from: http://www.worldbank.org.
 14

million Chinese live on less than $1 a day which was below the poverty line. China’s poor faced

issues like lack of access to education, infrastructures, health care, and loans.

The growth of heavy industry in China, much of which was energy intensive and high polluting,

worsened the already deteriorating condition of its environment. This led to increased health risks.

Less than 1% of the 500 largest cities in China met the air quality standards recommended by the

World Health Organization, and seven of these were ranked among the 10 most polluted cities in

the world.26 For example, the World Health Organization estimated that air pollution in China

caused the death of 470,649 people in 2008.27

Political and Technological Challenges in China: The Chinese government was largely involved

in the technological industry of China. China’s technological environment had made rapid

advancements over the years. Yet, there were government regulations and policies that made it

difficult for companies and consumers to fully navigate all the resources available on the web. The

Chinese government imposed censorship on items, such as politically related, controversial, or

morally unacceptable. Some of the Chinese government regulations required companies, including

multinational companies doing business in China, to turn over their secret source code and submit

to invasive audits.28

As of 2015, the U.S. was one of the world leaders in technology. It continued to be at the forefront

26
The Asian Development Bank. (2012) Toward an environmentally sustainable future: Country environmental
analysis of the People’s Republic of China, p. xviii.
27
World Health Organization. Retrieved from:
http://gamapserver.who.int/gho/interactive_charts/phe/oap_mbd/atlas.html.
28
Jacobs, A. (2015, January 29) China further tightens grip on the internet. The New York Times. Retrieved from:
http://www.nytimes.com.
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in technological advancement with continuous and rapid growth in industry research,

development, and innovation. Silicon Valley in the United States was home to the world’s leading

internet companies. With a favorable regulatory environment, US companies continued to

dominate in areas like internet, social media innovations and microchip technology. Corporate

names like Intel, Google, and Facebook reflected the United States’ leadership in the world.29

Upcoming Collisions among Top E-Commerce Companies

Though Alibaba had not glamorously advertised its entry to the US market, as of May 2015

Alibaba was already serving manufacturers, wholesalers, and consumers in the U.S. through

Alibaba.com and Aliexpress (Exhibit 5). Alibaba’s successful IPO in the U.S. signaled how the

U.S. was critical to the company. Alibaba’s fast growth had benefited greatly from lack of quality

competition in China. Since China’s commerce infrastructure was still developing, e-commerce

platforms, like Alibaba, came as better options to the Chinese customers. Ma once said, “In the

U.S., e-commerce was a dessert. In China it’s a main course.”

There already existed two e-commerce giants in the U.S. – Amazon and eBay. Both had cornered

a large percentage of the U.S. market share and continued to fight each other for dominance.

Alibaba’s entry into the United States could only be successful if certain obstacles were overcome.

Some of the potential obstacles were differences in culture and work ethic, lack of understanding

of the logistical and supply chain terrain, and being able to gain the trust of the American

customers.

29
Bobelian, M. (2014, October 21) Will U.S. regulations threaten America's technological edge in virtual currencies?
Forbes. Retrieved from: http://www.forbes.com.
 16

Alibaba operated an “open marketplace” where it connected sellers to buyers. The opposite was

the case for Amazon which operated a “managed marketplace” that was closer to traditional

retailing. Amazon owned massive distribution centers, sold a majority of its products directly, and

even manufactured its own brands of smartphones and tablets. Amazon’s model gave the company

far greater control over the customer experience and had allowed it to build a storied reputation

for customer service. This model had worked well for Amazon as trust and good customer service

were important to the America customers.

Amazon relied on third parties, mainly UPS and FedEx, for its deliveries and had 90 fulfilment

centers around the U.S. Its delivery system made it the largest direct-to-consumer fulfillment

operation in the U.S. retail industry. Amazon and eBay had mastered key factors of the e-

commerce industry and they continued to change their business models to keep up with the current

business environment. In 2014, Amazon started testing out its own delivery network by handling

last mile delivery and making away with third-party delivery services like UPS and FedEx.30

On the other hand, in 2015 Ma was planning to expand into developing economies. These

economies had a lot more similarities in terms of the business terrain and external environmental

factors with China. Jack Ma was counting on these similarities and the huge untapped market of

these economies as an engine for the success of the expansion. In an interview in 2014, Ma said:

“There is a lot of opportunity we could have…we are trying to get Nigerian SMEs to sell

to the Philippines and the Philippines sell to Pakistan and Pakistan sell to Argentina. If

30
Bensinger, G. & Stevens, L. (2014, April 24) Amazon, in threat to UPS, tries its own deliveries. The Wall Street
Journal. Retrieved from: http://www.wsj.com/
 17

we can make that happen, that’s where the money should go.”31

Many analysts stated that Alibaba’s strengths lay within its own country. China was still a largely

unpenetrated market where more than 50% of the 1.5 billion population did not shop online. A

similar view was also expressed by Alibaba’s founder Jack Ma when he declared: “eBay may be

a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose –

but if we fight in the river, we win.”32 This declaration attested to the fact that Alibaba had been

able to ward off competition in its home country mainly due to its exploitation of its understanding

of the China market.

Challenges in 2015

Needless to say, entry into the U.S. market would not only be difficult, but also require premium

strategic decisions with little to no room for errors. Amazon and eBay had been in the U.S. market

for almost two decades and had developed a deep understanding of American customers. Could

Alibaba make large-scale success in this market? What should it do for such success? Perhaps Ma

would focus on the virgin e-commerce opportunities of developing economies like he planned.

Either way, the world was watching to see Ma’s next big move.

Lessons Learned

1. The Chinese environment had shaped Alibaba’s business.

The Chinese Business Environment supported Alibaba by offering institutional voids, rapidly

31
Mac, R. (2014, September) The crocodile and the shark: Could Alibaba swallow eBay? Forbes. Retrieved from:
http://www.forbes.com.
32
Mac, R. (2014, September) The crocodile and the shark: Could Alibaba swallow eBay? Forbes. Retrieved from:
http://www.forbes.com.
 18

growing economy and middle class, and weak competition. First, China’s economy continued to

grow in the years leading up to 2015. In 2013, for example, its GPD Per Capita grew to $6,087.

Along with the rapid growth of the economy, the middle class in China simultaneously had grown.

The Chinese middle class were eager to shop diverse and high-quality goods assisted by their rising

purchasing power. Alibaba could satisfy the need of the growing middle class by offering a

comprehensive list of goods. While Taobao provided consumers with access to diverse product

offerings, Tmall gave consumers access to international brands such as Apple, Nike, and Gap.

Still, 50% of the 1.5 billion population had not done any shopping online before. This provided a

huge market potential to online retailers including Alibaba.

Second, the Chinese business environment lacked well-developed shopping structure. Unlike

advanced economies, China didn’t offer sophisticated and efficient shopping outlets, rather

constraining retailers with strong regulations. Alibaba took the advantage of being the first on the

scene in the Chinese e-commerce market. Due to the highly regulated environment, there were

only a few shopping places for Chinese customers. Alibaba took on this chance and created

alternative market place for the people in China, skipping the traditional brick and mortar market

to the online market.

Third, Alibaba benefited from weak Chinese competitors in the Chinese online market space. In

fact, Alibaba itself experienced difficulties dealing with stringent government regulations and

interventions. Stringent regulations were applied to internet access, encryption, domain name, and

content. Ironically, the situation also prevented quality competitions in China. However, the

regulations and interventions shielded Alibaba from foreign firms entering the Chinese market.
 19

On the other hand, the Chinese business environment also imposed challenges to Alibaba, such as

unfriendly political and legal environment, underdeveloped transportation infrastructure, and

unfamiliarity of credit-based transactions. The political and legal environment posed a threat in

the form of stringent regulations. These regulations served as a huge constraint during Alibaba’s

early years, possibly slowing its growth. Thus, Alibaba had to find ways to operate its business

without breaking the law and also without disappointing their customers. The highly stringent

environment also stifled innovation and development within the company.

China’s transportation system was underdeveloped. Certain rural areas were not accessible with

public transportation and the problem was a constraint for the company. Alibaba’s business model

involved a lot of inbound and outbound logistics for shipping goods between locations. Due to an

underdeveloped transportations system, it was very difficult to accurately estimate delivery time

or cost. This might in turn caused customers to turn away from shopping online.

Alibaba’s business model was centered on an online payment system. However, the Chinese

economy was largely cashed based. Chinese consumers preferred to conduct their transactions

with cash as opposed to debit cards, credit cards or other forms of online payment method. Having

little trust in online payment system, Chinese customers were skeptical about sharing their

financial information online. Unlike eBay which internally operated a secure online payment site

PayPal, Alibaba had to affiliate itself with trusted banks in China to gain the trust of the customers.

Even with the backing of China’s biggest banks, Alibaba customers were still preferred to use cash

for their transactions (see Exhibit 7 for Alibaba’s strengths and weaknesses relative to Amazon
 20

and EBay).

2. Given their roots in the home country, Alibaba, Amazon and eBay were facing different

(dis-)advantages in the competitor’s home turf.

1) Alibaba in the U.S. e-commerce market

As of 2015, though Alibaba was serving manufacturers, wholesalers and consumers in the U.S.

through Alibaba.com and Aliexpress, its presence in the U.S. market was largely unknown to most

Americans. Alibaba will face tough competitions and possible retaliations from Amazon and eBay,

at least in the beginning. Alibaba would have to first understand the differences in logistical

infrastructure, national culture, and regulatory terrain before it could keep up with Amazon and

eBay, and eventually master it enough to be as innovative and reliable as them. Though Alibaba

gained a lot of recognition in the US market, mainly due to its successful IPO in September 2014,

Amazon was expected to be at the forefront in the industry in terms of innovation, responsiveness

and effectiveness, offering both low prices and quick delivery. For example, Amazon unveiled its

plans in 2013 to have packages delivered to customers using flying drones within 30 minutes of

purchase. The following reason are why it would take a long period of time for Alibaba to gain

competitiveness in the U.S. market:

Maturity of the market and lack of experience. Alibaba’s success had concentrated in China, based

on filling the void in the weak Chinese retail system. Yet, the American market system was already

well-developed and differentiated itself from less-developed ones including the Chinese system.

Alibaba’s “open marketplace” was well suited for the Chinese market but will pose a problem

should it try to apply it in the U.S. market. Alibaba lacks understanding of the logistical and supply
 21

chain terrain. Thus, it will be a steep learning curve for the company while it expands in the U.S.

Cultural differences. Cultural factors embedded in Alibaba’s business system might not fit well

with the American culture. For example, the findings of Hofstede’s research and the GLOBE

project, showed drastic differences between the Chinese and US cultures. Chinese culture scores

high in power distance and in collectivism, while the U.S. is more individualistic with a low power

distance. These factors can also pose challenges to Alibaba in managing American employees who

expect individual-based rewards and shared leadership style. It will also take trials and errors in

understanding US consumers’ preference.

Brand recognition and customer loyalty. Alibaba would not have the first mover advantage like it

did in China. It would therefore take it much longer time to build up customer recognition and

loyalty. Both Amazon and eBay, in comparison, offered unique services and already had a loyal

customer base who would do business constantly with them. The loyalty program and membership

services of Amazon and eBay even locked in customers to continue to use only their service. An

example would be the Amazon Prime Membership.

Presence of strong (and innovative) competitors. The US e-commerce market was far more

advanced than that of China. Amazon and eBay had had two decades to master the dynamics of

the market, and were able to create, and adjust to, trends. Apart from offering differentiated

services through its Amazon Prime initiative, Amazon had tapped into product diversification by

the introduction of 1) Amazon Kindle, 2) Amazon Fire Smartphone, as well as 3) Online video

streaming services, which fitted to the US market.

 22

In conclusion, in order to become a victor in the U.S. e-commerce market, Alibaba would have to

offer equally enticing services to its potential customers. It is not likely that Alibaba acquire market

leadership in the U.S. right away.

2) Amazon and eBay in the Chinese e-commerce market

Though both Amazon and eBay have had international operations including in China, their focus

had laden in the United States. Amazon had also been weary of international operations due to the

risks involved like exchange rate fluctuations. eBay entered China in 2004 expecting it would

dominate the market. Yet, defeated by Alibaba mainly due to its lack of understanding of the

Chinese consumers, eBay virtually withdrew its auction business from China.33 Similarly, Amazon

entered the Chinese market in 2004 by acquiring a book and music seller, Joyo.com. Despite its

huge investments over the years, Amazon China’s e-commerce market share in China remained

tiny—less than 1.5% in 2014.34 Entering the Chinese e-commerce market it might not be smoothest

rides to both eBay and Amazon. The following reasons are why Amazon and eBay would possibly

not emerge as a winner in the China market, at least in a short term:

Strict government internet regulations. The Chinese government regulated the internet very

stringently and limited the ability of both individuals and companies to fully access all the

resources available on the worldwide web. These regulations required companies doing business

in China, to turn over their secret source code, submit to invasive audits, and build back doors into

their hardware and software. The Chinese government also placed restrictions on certain contents

33
http://www.forbes.com/sites/china/2010/09/12/how-ebay-failed-in-china/
34
http://fortune.com/2015/03/06/humbled-amazon-turns-to-rival-alibaba-for-help-in-china/
 23

and enforced extreme censorships. Amazon and eBay, whose major activities had been

concentrated in advanced economies, would have troubles navigating all these rules and

restrictions. In contrast, Alibaba had operated in China for long time and mastered how to navigate

through these regulations and censorship without hindering its business.

Underdeveloped logistics system in China. The transportation system of China was less developed

than that of the United States. This was an obstacle that Alibaba had to deal with in its early years.

Navigating the underdeveloped logistics would not be easy for both companies. Amazon and eBay

would have to develop understanding about the Chinese transportation system (e.g., difficulties in

estimating delivery time and costs). Launching the best supply chain structure in terms of

warehouse locations, transportation types, etc., would require extensive local research and

experience.

Cash-based economy. The Chinese economy was largely cash based and a majority of the

population did not perform any transactions online. This presented itself as a market opportunity

in China, but it also posed challenges. Amazon and eBay would have to effectively convince

potential Chinese customers about the security of online payments. Alibaba was able to do this by

partnering with large banks in China. A long adaptation process would be required for Amazon

and eBay.

Differences between the American and Chinese culture. According to Geert Hofstede’s cultural

dimension classifications, China and the U.S. have very different cultures. China scores 80 in

Power Distance while the US scores 40. In the Individualism dimension the Chinese culture scores
 24

20 while the US scores 91. China scores 26 in Long Term Orientation while the US scores 87.

This vast difference in the American culture vs China’s culture will pose as a problem for eBay

and Amazon potentially leading to a clash between the American companies and Chinese

employees.

Potential protection of the Chinese government against foreign companies. Through the years, the

Chinese government had interfered with the activities of foreign companies in order to protect

Chinese companies. Amazon and eBay would likely face similar tangible and intangible actions

of the Chinese government.

On the other hand, both Amazon and eBay had been quite successful in revising and innovating

their business models to fit changing business environments over years. Though they would face

numerous challenges and have to change their current business models, over time those firms

would learn about the host country business environment, including their culture and regulations,

and become strong competitors.

If Amazon succeeded in offering low prices and quick delivery to its Chinese customers it might

be able to garner sufficient market share. Alibaba in 2014 through its platform Taobao, had 90%

of the Consumer to Consumer (C2C) market in China. If eBay were to enter into China again, it

would have to acquire new customers. For Chinese’s’ lack of trust in the online purchase system,

Amazon and eBay might be able to utilize their own systems such as the Feedback forum of eBay.

Also, the success story of PayPal might entice new customers to try out eBay. In April 2015, eBay

announced it would team up with JD.com to launch cross-border e-commerce platform that can
 25

link foreign companies to Chinese customers who desire to directly purchase goods from non-

Chinese firms.35

3. Prospect of future expansions outside their home countries

Each firm had different strengths and weaknesses, and each host country would offer unique

opportunities and threats. Depending on the match of these factors, a firm might be positioned

better in different countries. Based on the preceding analyses of the case, Alibaba seems more

likely to succeed in developing countries whereas Amazon and eBay had greater advantages in

developed countries.

Alibaba’s business models had been tuned into the Chinese business environment, stifled with

intuitional voids. The Chinese economy offered unique business opportunities and Alibaba took

advantage of them by molding its business model to fit the local environment. Alibaba having

already developed a business model that worked well in China, better understood what it will take

to operate an e-commerce site in a developing country. Alibaba will find it is easier to adapt its

business model to a developing country environment than it would in a more developed economy.

Developing countries were also largely untapped markets without strong competitors.

Going back to the early days of Alibaba, the name “Alibaba” inspired Jack Ma because it was a

good representation of his business model which incorporated his desire to help small and medium

size businesses in China. Given that China was a developing economy, he knew there was a huge

potential for growth. Mr. Ma stated: “In the U.S., e-commerce is a dessert. In China, it’s a main

35
http://www.zacks.com/stock/news/170883/ebay-teams-up-with-jdcom-in-china-on-consumer-demand
 26

course.” He understood that e-commerce was still a developing industry in China and so there

would be little competition in a large untapped market. This advantage would also be present in

other developing economies and Alibaba’s experience will help mitigate the risks involved in

entering less-than-ideal business environments. These advantages will not be available to Alibaba

in developed countries.

Amazon had operating service centers in, Europe, Singapore, Tokyo, Sydney, Brazil, and China.

Its main operation was, however, located in the U.S. Amazon stated in its form 10-k that it was

weary of international expansion due to the risks involved such as currency fluctuations. Amazon

still operated nine international websites to serve customers around the world. It had established

itself in the U.S. and was well known around the world. Amazon had a strong brand recognition

to utilize if it decides to go into another country. More importantly, Amazon’s innovation

capability and proprietary business model will likely receive a warm welcome from customers in

advanced economies. Such Amazon’s characteristics would be also welcomed in developing

countries, especially by rapidly growing their middle class. Yet, Amazon’s experience, most

confined in the U.S., will make it easier to enter developed countries first.

In 2013, approximately 60% of eBay’s transactions were international. eBay already had expanded

into a good number of countries and had gained international acclaim over the years. It had

operations in Canada, Argentina, Brazil, Mexico, Australia, Japan, China, Korea, Hong Kong,

Malaysia, India, Singapore, Taiwan, Belgium, Ireland, Russia, Czech Republic, Spain, Denmark,

Israel, Sweden, France, Italy, Switzerland, Germany, Luxembourg, Turkey, Netherlands, Norway,

Poland and the UK. This broad international experience of eBay will help steer the company in
 27

the right direction should it decide to expand into other international markets. Though it was better

positioned than Amazon, eBay had stronger advantages in developed countries since its knowledge

and experience earned in the U.S. were more closely applicable to the similar business and

economic terrain.

South Korea would be an interesting country to watch for understanding three companies’

competition. South Korea is geographically close to China, yet in terms of development in

infrastructure and technologies the country was somewhat close to the U.S. Alibaba entered Korea

in 2008 and had offered logistic services and online payment systems. By partnering with a Korean

bank (Hana Bank), Alibaba made Alipay available facilitating online payment for at least 400

South Korean companies. As of May 2015, Alibaba was also collaborating with the South Korean

city of Incheon for a joint investment worth $920 million, in a whole new business area in the city.

The complex would include a huge shopping mall, a hotel, and a logistic center. On the other hand,

eBay had been operating in Korea since 2004. In 2004, it acquired a Korean company, Auction,

which had a similar business model to eBay, and acquired another online business company,

GMarket in 2009. As of 2009, the combined market share of Auction and Gmarket in Korea

reached almost 90 percent in the online market. Yet, the combined market share declined to 60

percent in 2013. In 2015, Amazon was in a preparation stage for opening its first branch office in

South Korea.
 28

Exhibit 1
Alibaba Income Statement (millions, Chinese Yuan)

Source: www.chinainternetwatch.com
 29

Exhibit 2
Alibaba.com Website

Source: Alibaba.com
 30

Exhibit 3
Alibaba China Retail Marketplaces GMV

Source: www.chinainternetwatch.com.
Note: GMV (Gross Merchandise Volume) measures the total value of merchandise sold over a given period of time
through an e-commerce website
 31

Exhibit 4
GDP Per Capita of China and the U.S. (U.S. $)

Year China U.S.

2000 949 36,450
2001 1,042 37,274
2002 1,135 38,165
2003 1,274 39,677
2004 1,490 41,922
2005 1,731 44,308
2006 2,069 46,437
2007 2,651 48,061
2008 3,414 48,401
2009 3,745 47,001
2010 4,433 48,377
2011 5,447 49,803
2012 6,093 51,496
2013 6,807 53,042

Source: World Bank

 32

Exhibit 5
The US Website of Alibaba.com
 33

Exhibit 6
Alibaba Executive Senior Management Team

Name Job Title Short Bio

Jack Ma Executive Jack Ma was the lead founder of Alibaba Group. He served as the
Chairman chairman and chief executive officer from the company’s founding
in1999 till may 2013. In May 2013 he became the executive chairman.
Joe Tsai Executive Vice Joe Tsai joined Alibaba in 1999 as a member of the Alibaba founding
Chairman team. He served as the chief financial officer and served as the executive
vice chairman from May 2013. He is also a board member.
Jonathan Vice Chairman Jonathan Lu joined Alibaba in 2000 and succeeded Jack Ma as chief
Lu executive officer in May 2013, and has at different points served as the
top executive officer of almost all of its key business units.
Daniel Chief Operating Daniel Zhang has been Alibaba’s chief operating officer since September
Zhang Officer 2013. He was appointed president of Tmall.com in June 2011, when
Tmall.com became an independent platform. He was chief financial
officer of Taobao from the time he joined our company in August 2007
until June 2011, and also served as general manager of Tmall.com during
the latter three years in this period.
Maggie Chief Financial Maggie Wu has been Alibaba’s chief financial officer since May 2013.
Wu Officer She served as Alibaba’s deputy chief financial officer from October 2011
to May 2013.
Jian Chief Jian Wang has served as Alibaba’s chief technology officer since August
Wang Technology 2012. Prior to his current position, he was the chief architect from the
Officer time he joined Alibaba in September 2008. He also served as president of
Alibaba Cloud Computing from its inception in September 2009 until
September 2013.
Peng Deputy Chief Peng Jiang joined Alibaba in 2000 and has been the president of Alibaba
Jiang Technology Cloud Computing, YunOS and Digital Entertainment and the deputy
Officer chief technology officer since September 2013.
Lucy Chief People Lucy Peng joined Alibaba in 1999 as a member of its founding team and
Peng Officer was reappointed as its chief people officer in June 2014.
Xiaofeng Chief Risk Xiaofeng Shao joined Alibaba in 2005 and has been its chief risk officer
Shao officer since June 2012.
Trudy Chief Customer Trudy Dai joined Alibaba in 1999 as a member of its founding team and
Dai Officer has been our chief customer officer since June 2014.

Tim General Counsel Tim Steinert has been Alibaba’s general counsel since July 2007 and also
Steinert and Corporate serves as its corporate secretary.
Secretary
Jianhang President Jianhang Jin joined Alibaba in 1999 as a member of its founding team
Jin and has been appointed the president of Alibaba in August 2014.
Source: http://www.alibabagroup.com in March 2015
 34

Exhibit 7
Alibaba’s Strengths and Weaknesses Relative To Amazon and EBay

Strengths
Alibaba had good understanding of the Chinese
business environment. In the Chinese business
environment, weak infrastructure and strong
regulations constrained business operations.
Alibaba had thus far, operated in less than
favorable economic and political environments
and had succeeded. Alibaba’s understanding and
experience of the weak institutional environment
will be applicable to other developing
economies.
Alibaba had developed its brand recognition in
China and started gaining brand recognition in
advanced economies. For example, Alibaba’s
IPO in 2014, the largest ever in the New York
Stock Exchange (NYSE), drew huge attention
from investors and potential customers.
Alibaba had the first mover advantage. Alibaba Alibaba didn’t have strong partnerships and
had developed strong partnerships and relationships with suppliers and distributors outside
relationships with its Chinese suppliers and China.
distributors.
Jack Ma was a very visionary leader who had had
a lot of life experiences and passed through many
obstacles. This provided a resilient and strong
leadership to Alibaba.
Weakness
Due to its lack of experience in advanced economies,
Alibaba was less familiar with well-developed
infrastructure (e.g., sophisticated logistics system in
the U.S.).
Alibaba operated on an open market place, where
buyers were connected to independent sellers lacking
direct control over consumer experience. In
comparison, Amazon operated a managed
marketplace where it had greater control over
customer experience.
Alibaba’s brand recognition was still weaker in
advanced economies, relative to Amazon and eBay.
Alibaba’s weak brand recognition can reflect
potential customers’ doubt about Alibaba’s service
quality and security in its online payment system. In
contrast, eBay had a secure payment site PayPal that
customers trusted and was comfortable using.
Alibaba lacked of international exposure. Its Chinese
employee base and management would face
difficulties in dealing with consumers and investors
from different countries and cultures.