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October 26, 2017

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Coming in 2018: The Amazon of China

January 25, 2018

 

At GrowthWorks, we’re constantly looking at Amazon and the myriad ways it has single-handedly disrupted so many retail categories (see our new COMPASS offering to learn more). But, in thinking about the coming year and beyond, we got to thinking, does Amazon truly have no apples to apples peers? What companies could disrupt the disruptor?

 

Enter Alibaba.

 

Most Americans haven’t heard of Chinese ecommerce platform Alibaba, and its chairman and founder Jack Ma isn’t yet a household name like Jeff Bezos, but that is poised to change very soon.  Apart from the government, experts are predicting Alibaba could be the one to dethrone Amazon—or at least become its most formidable competitor.

 

A little bit on who they are:  Alibaba is essentially a trading platform for business and individuals, similar to eBay. Its Tmall site connects big companies like Apple and Nike to the public; its Taobao platform connects individual consumers and small businesses to each other. These two platforms combined transacted $486B in its 2016 fiscal year, more than Amazon and eBay combined.

 

Today, Alibaba absolutely dominates the Chinese market—with an 80% share of the online shopping market there.  They enjoy the largest ecommerce market on the planet almost exclusively. It also doesn’t hurt that they are tapping into a country of over a billion people with a rapidly growing middle class who prefer the convenience and discounts of online shopping. It also hosts around 800 million products at any given time, everything from shoes to lamps to dead mosquitos (used for what, I don’t know), which ensures them a high share of household.

 

All of this is a means to say Alibaba has tremendous scale—high revenue, a large and growing user base, and very low operating costs. Chairman Jack Ma shared his vision of continued growth to investors in 2014: expanding into North America and Europe. The company launched a record-breaking US IPO in 2014 as well.

 

Thinking about Alibaba’s presence in the US, they hold a number of advantages over Amazon. A major strength lies in the fact that Alibaba also owns its own payment method, Alipay. This means that when buying on Alibaba, no revenue is lost to competitors like PayPal, ApplePay, or anyone else along the way. Alibaba holds onto all of it, end to end. Many have speculated on the possibility of Amazon going into banking—Alipay is already there. You can use it to buy concert tickets, take out a loan, or even invest in a money-market fund.

 

To ensure consumers are confident in their transactions, the very first line of their homepage, in bold letters and colors, describes their “Trade Assurance” guarantee, a 100% refund if anything goes wrong with your order (see below). Control and confidence largely rests with the consumer—payments to vendors are held in escrow until packages arrive and the consumer is satisfied. This is especially difficult considering China has no national delivery companies, like UPS or FedEx, to rely on.  On the day the US IPO was filed, Jack Ma wrote a letter to his employees detailing his customer-centric vision:  “We will continue to adhere to the principle of customers first, employees second, shareholders third.”

 

 

 

Not to mention, Alibaba has the one essential component, the Holy Grail of business, that continues to elude Amazon: profit. The company has maintained steady profitability since 2012. And while Amazon still generates more revenue, Alibaba could be a better bet for more shrewd investors.

 

However, critics note Alibaba traditionally hasn’t done well expanding into other markets.  And to figure out where the company will invest next, just follow the capital. Capital invested back into Chinese operations has paid off handsomely so far, while capital invested in other markets has not. But a larger question remains… would Americans ever make the switch? The “Made in China” label can evoke distrust or even resentment these days because of associations with poor quality or scandal. Would consumers ever really trust a company like Alibaba? Let us know what you think in the comments.

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