Alibaba's World (21 page)

To address the logistical challenges of keeping up with the demands of China’s fast-growing e-commerce market, Alibaba brought together the five major express delivery companies in China
to set up a separate entity, China Smart Logistics Network, of which Alibaba owns 48 percent. The goal is to align and coordinate the logistics players to more seamlessly fulfill orders.

Alibaba’s approach differs from that of China’s leading online retailer, Jingdong.com, which has been building its own warehousing and distribution network, allowing it to control
the customer experience from end to end. This has set up competition between Alibaba’s loosely allied network and the vertically integrated Jingdong. But perhaps the bigger race will be
between the physical delivery infrastructure and the digital infrastructure, which is growing so quickly that it is straining China’s logistics system and risks creating a short-term
bottleneck for the growth of e-commerce.

Media and Entertainment

As the son of a Pingtan performer, Jack Ma has a flair for the dramatic. So it’s not surprising that Alibaba is making an aggressive move into media and entertainment,
investing in the video-sharing site Youku Tudou and establishing a film production company, Alibaba Pictures. To outside observers this may seem like a step away from Alibaba’s core strength.
But in the context of China, the deal may make sense.

The way to think of Alibaba’s move into film and entertainment is this: If it is a product that can be bought and sold online,
you can expect Alibaba will want
to be there. And film and video are products that can be bought and sold online. E-commerce marketplaces traditionally have sold physical products. But increasingly they are becoming marketplaces
for digital products, such as books, films, tickets, and virtual products used in video games. So it’s not surprising that Alibaba Group is interested in selling video products online through
its digital platforms.

Alibaba’s more ambitious move is into the area of content production. To explain his move into film production, Jack told the
South China Morning Post
that in China
“people’s wallets are bulging but their heads are empty.”
¹
It’s not an area entirely new to Jack, as he sits on the board
of directors of Huayi Brothers Media Corporation, producers of the China blockbusters
Cell Phone
and
A World without Thieves.
Now that China has the world’s second-largest
box office, behind the US, film has become a lucrative business providing real returns. Beyond that, Jack has a personal interest in bringing film into the lives of the Chinese. “E-commerce
can affect people’s wallets. But film can affect people’s minds,” he once told me.

Other Support Services

Beyond these core products and services, Alibaba owns and/or is invested in a wide variety of businesses. Its homegrown cloud computing arm, AliCloud, provides computing power
and storage for app developers and merchants, while its AliMama division provides Big Data analytics for marketers. Alibaba Group also has been acquiring and investing in companies in a range of
areas, from mobile web browsers to retail to microblogging. Through these aggressive investments and acquisitions Alibaba is hoping to expand its reach so that each of these related
companies further enhances the links between, and network effects of, the ecosystem. But in some corners the company’s aggressive expansion has met resistance from analysts who
argue it may be going too far, notably with its nearly $200 million investment in a Guangzhou football team, Evergrande.

Alibaba Group Tomorrow

By the time of its IPO Alibaba was 15 years old. For many companies this would be considered reaching the age of maturity. But compared with the company’s stated goal
Alibaba is a mere teenager. Thinking that his original goal for Alibaba to last 80 years was too conservative, Jack later extended the goal to 102 years, noting that it would allow Alibaba’s
life to span three centuries. If this ambitious goal is to be reached, then Alibaba still has more than 85 years left to go. If Alibaba does manage to live this long, how might it grow? And what
might Alibaba become someday?

Alibaba’s stated vision is nothing less than to build “the future infrastructure of commerce,” serving its mission to “make it easy to do business anywhere.” It
wants to build a place where people will meet, work, and even “live” online so that the company’s products and services become central to the everyday lives of its customers.
Given these goals and Alibaba’s past history, here are some of the main trends we might expect to see Alibaba focusing on in the future.

When Alibaba Group went public, only about half of China’s population of 1.36 billion was online. And of those Internet
users, only about half
had shopped online. It’s amazing to think that with only about 25 percent of China’s population, or 302 million, shopping online, Alibaba’s consumer sales volumes already exceed
those of Amazon and eBay combined. One can only imagine the scale if these growth trends continue as more of China’s population comes online and takes to Internet shopping. It’s
reasonable to argue that China’s e-commerce industry is in many ways still in its infancy and we can expect that Alibaba will continue to focus on China as it grows its main businesses,
Alibaba.com, Alibaba China, Taobao, Tmall, and AliPay.

While growing these core businesses, it will be important for the company to stay ahead of one major wave that is reshaping e-commerce in China—the shift from PCs to mobile shopping.
Although its start on mobile was slower than its competitors’, Alibaba has managed to grow and build a leadership position in mobile commerce. Holding that position and monetizing mobile will
be crucial.

We can expect Alibaba to continue to grow its ecosystem and plug in more related services, such as cloud computing, logistics, navigation, and mapping. Growing its ecosystem
without diluting its core businesses will require the company to find a fine balance. If successful, Alibaba will create a universe held together by the common links between all its services. But
in doing so, it needs to avoid overexpansion, which might weaken its main services while creating opportunities for more specialized competitors to chip away at Alibaba’s market share.

Perhaps the least-appreciated areas of potential growth for Alibaba are in massive industries that are being deregulated in China. Two major opportunities come to mind:
financial services and media.

Anyone who has lived in China can attest to the inefficiency of its banks. One need look no further than the typical bank lobby, where customers wait for as long as an hour in rows of chairs
just to pay the rent. By definition any business that creates a waiting room full of chairs is not serving its customers well.

Alibaba’s rapid success with its Yu’e Bao money market fund showed the potential for e-commerce players in banking. It’s easy to imagine that Internet companies like Alibaba
and its rival Tencent could quickly convert their e-commerce customers into clients for financial services, everything from banking, loans, and insurance to wealth management. The big question is
how quickly China will deregulate its banks. A hopeful sign for Alibaba came in the fall of 2014, when it received approval from the China Banking Regulatory Commission to establish a privately
owned bank.

Another industry ripe for Alibaba’s participation is media and entertainment. Like banking, China’s media have been dominated by the government since the Communist takeover in 1949.
The result is bland state-created media content, which may satisfy government leaders but is not good at meeting the demands of audiences.

The Internet has created a much more open playing field for film and video content in China. While censorship still inhibits growth in certain areas of political content, China’s media
have become much more market oriented as the Internet has grown. China’s youth are much more likely to spend their time watching Internet content in front of the
computer than watching staid government-sponsored content in front of the TV with their parents. At the same time China’s huge box office makes films aimed at the domestic audience
commercially viable.

As government control of media content continues to loosen, we can expect that Internet companies will take up the slack, providing content that is much more market driven. And as distribution
moves from cable television to the computer, tablet, and streaming, e-commerce companies such as Alibaba are well positioned to monetize digital products in the same way they monetized physical
products. Indeed, immediately after Alibaba’s IPO Jack Ma spent time in Hollywood meeting with executives and positioning Alibaba as a gateway to the China market. While it begins to
distribute content made by others, Alibaba Pictures will be moving toward producing original content.

Outsiders often overlook or forget that Alibaba has always been a global business, from the day it began in 1999. Because Alibaba’s domestic China retail business has so
dominated recent headlines about the company, people often forget that, of all of China’s Internet companies, Alibaba has the greatest international presence. Alibaba Group already has nearly
ten million users in the US, three million in India, two million in Brazil, and half a million in Germany. Thus the question is not whether Alibaba will go global but how Alibaba will continue to
go global, especially in its consumer businesses.

As Alibaba headed toward its IPO in New York, a number of journalists asked me whether Alibaba would be “invading” the US and taking on eBay or Amazon
directly. My opinion is that Alibaba has learned from the mistakes of its competitors. Just as eBay’s US models didn’t fit the China market, Taobao’s and Tmall’s model
don’t fit the US market. It would be hard to imagine that Alibaba could parachute into the West and compete directly with its Western counterparts. More likely is that Alibaba will first
focus on cross-border trade, helping Chinese companies sell abroad through AliExpress and foreign companies sell in China through Tmall. And it’s likely that Alibaba will use its growing war
chest to make strategic investments in similar e-commerce businesses in other countries.

While I don’t expect Alibaba to pose a threat to Western e-commerce giants on their home turf in the near term, one tantalizing possibility should not be ruled out—that Alibaba might
acquire one or more of the US giants, such as eBay. These businesses would be entirely complementary, with little overlap. Back in 2003, when reporters asked Jack if he would sell his company to
eBay, he would often joke in response: “No, but we might consider buying them.” With eBay valued at over $30 billion at the time, and Taobao yet to earn any revenues, it seemed a
preposterous claim. But not anymore.

Alibaba must continue to innovate and provide relevant and powerful services that encourage its buyers and sellers to stay
within its ecosystem.
Despite all the great opportunities before Alibaba today, Jack and his management team are well aware that the tech road is littered with failed companies who had their brief moment in the sun
before they were overtaken by new technologies and entrepreneurs. Alibaba needs to look only as far as its major partner, Yahoo!, which saw Google and Facebook speed past it in search engine usage
and social networking, opportunities that Yahoo! had been well positioned to grab for itself, if only the company had had the vision and foresight to do so. In my early days at Alibaba, Jack Ma
often quoted Intel’s Andy Grove: “Only the paranoid survive.” In the tech world at any moment a new idea or gizmo or app can cause a massive industry shift that renders old
business models instantly obsolete. Maintaining a healthy level of paranoia will be important for Alibaba’s senior management.

An early risk for Taobao was that it might educate the China market about e-commerce only to see retailers break away over time and create their own online retail presence, bypassing Taobao
altogether. The introduction of Tmall helped make this less likely by giving sellers the option to create a deeper and much more customized brand experience for their users. Meanwhile services such
as AliPay, whose customers have gone to considerable trouble to link their bank accounts to Alibaba’s infrastructure, encourage shoppers to stay within the Alibaba ecosystem. Still, some
specialized retailers have done well enough to leave the Taobao and Tmall platform and create their own websites, selling directly to customers. Alibaba will have to use all its data, technology,
and innovation to offer the best shopping experience in China for a diverse set of products and brands.

eBay’s withdrawal from the China market left several years’ worth of running room for Taobao to gain a foothold in the market. But as e-commerce went mainstream, it
was only natural that homegrown competition emerged. The most prominent of these competitors is Jingdong.com, whose business-to-customer retail store went live in 2004 and ten years later had about
22 percent of the B2C e-commerce market in China. Unlike Alibaba’s marketplace model, whose only inventory is the bits and bytes in its servers, Jingdong is a large retailer modeled after
Amazon.com. It has an inventory of products and delivers them through an extensive warehouse and distribution system. Following Amazon’s long-term investment strategy, Jingdong spent heavily
on expanding its infrastructure, losing money as it grew to scale. By being able to control the customer experience from order to fulfillment, Jingdong is banking on providing a more reliable
customer experience than users receive through Taobao or Tmall. It will be interesting to see whether Jingdong’s retail model or Alibaba’s marketplace model will triumph in the long
run. For now investors are betting on Alibaba, but with a market cap of approximately $40 billion at the time of Alibaba Group’s IPO, Jingdong is a formidable force in China.