Alibaba Group, known in the West mostly by importers looking for sourcing goods, is about to present its shares for trading in an Initial public offering (IPO) on Wall Street in September. In fact, beyond just being the world’s trade fair and wholesale marketplace, the group also controls a giant share of the Chinese online space.
In this article we will examine the rise of the massive Alibaba empire and present the implications of the expected IPO for China and the world economy.
The Alibaba Group was established in 1999 by eighteen partners led by Jack Ma, a former English teacher from Hangzhou, a sub-provincial city in Eastern China and the fourth-largest metropolitan area in the country.
From the outset, the company’s founders shared a belief that the Internet would level the playing field by enabling small enterprises to grow and compete more effectively in the Chinese and global economies. Since launching its first website, helping small Chinese exporters and manufacturers to sell internationally, Alibaba Group has grown into a global leader in many aspects of online commerce.
Today the group and its related companies operate both wholesale and retail online marketplaces as well as Internet-based businesses offering advertising and marketing services, electronic payment, cloud-based computing and network services and mobile solutions, among others. We will present just a few of these Alibaba businesses; TaoBao, Alipay and Yu’e Bao to demonstrate how the group has changed the way Chinese markets operate, including finance, in an unprecedented way.
Taobao Marketplace is China’s largest consumer-to-consumer online shopping platform, similar to Ebay in operation. Founded in 2003, it offers an incredible variety of products for retail sale with around 800 million product listings. During 2013 it was the third most visited website in China and among the top ten in the world.
When eBay sunk $200 million into the Chinese market, Alibaba used its local knowledge and familiarity with the specific challenges of its home turf to repel the Western firm. Or as Jack Ma put it: “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.”
Taobao, whose name translates into “digging for treasure,” also set up an online financial funds marketplace last November, partnering with over twenty major Chinese asset managers to distribute bonds, stocks and hybrid funds. It told customers they could now “buy funds alongside kitchen essentials like oil, salt, sugar and vinegar.” The group also opened a related platform called Tmall in 2008, directly offering luxury brands along with Nike and Apple to an affluent Chinese consumer base, which is the eighth most visited site in China in its own right.
During 2013, the combined gross merchandise volume of Taobao Marketplace and Tmall.com exceeded one trillion yuan and the group facilitated the delivery of 5 billion packages in China from transactions on its retail websites, more than half of the total packages sent by delivery companies in the country.
Alipay was launched in 2004 as a payment provider for TaoBao, and later for Tmall, but since then has detached from its parent company and is now a standalone service owned by the tech giant. Alipay provides an escrow service, in which consumers can verify whether they are happy with their purchased goods before releasing money to the seller. This service was tailored to meet the needs of China’s weak consumer protection laws, which had previously reduced consumer confidence in online trade.
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AliPay can be used to make online payments, mobile-based transactions, vending machine purchases, paying for taxi cab fare, and much more, as it provides payment services for more than 460,000 Chinese businesses. With 300 million users and a market share of 48.7% of China’s online payment space, accepting AliPay is not merely a suggestion when operating in the Chinese market, it’s a must.
In June of last year, Alibaba launched Yu’e Bao, (meaning leftover treasure in Chinese) a money market fund offered as a service to hold client money waiting to be used for purchases with Alipay.
The service proved so popular, that in less than a year Yu’e Bao had over 83 million depositing clients and the product now has more than $93 billion in assets under management, making it one of the world’s top four money market funds. Many Chinese investors, especially the younger generation, use Yu’e Bao as an alternative to a bank savings account that offers better returns (6%), has no minimum amount, and allows customers to withdraw their cash anytime.
There is a lot of talk of “disrupting established markets” in the West, but no American tech firm has so far had the courage to try something similar to Yu’e Bao. If the Chinese regulator ever allows Alibaba to open this service to foreigners, we might see Yu’e Bao attracting many Westerners and challenging the likes of Bank of America before Apple or Google even discuss anything of this kind.
There are also no PayPal operated vending machines in New York or the ability to invest in shares on Amazon – Alibaba Group offers all these services in China, as we have already seen. There is certainly enough space for Silicon Valley to copycat Chinese firms despite otherwise claims in the media.
Crowding out Investments
The value of the Alibaba Group is about to draw much of the world’s capital resources, major global funds and investment banks are reportedly pushing aside all other plans and clearing the table for the IPO to avoid clashing with the event that will suck all the air out of the room.
As to the latest estimates, analysts expect that the Alibaba IPO will value the group at approximately $200 billion, bypassing Facebook as the biggest tech IPO ever, although only an estimated $20 billion worth of stock will actually be issued at the initial stage.
The ticker symbol for the Alibaba stock is expected to be “BABA,” which sounds in Mandarin like double 8, an auspicious number in the Chinese culture. The original date the group wanted for the IPO was August 8th, in keeping with the same lucky number theme, but it had to be postponed due to various legal, regulatory and capital reasons. It seems like Western investors will have to learn more about the Chinese culture in order to understand the new world that is taking shape.
In the China Special Series, a bi-weekly review, Forex Magnates brings to the front recent economic news and developments from the world’s largest economy. The rapidly growing Chinese economy presents traders and brokers some exciting business opportunities, and here we will shed light on everything one needs to know about the Asian giant. After presenting in-depth economic reviews, like how trends in Chinese Real Estate investment are reflected in the American markets, we will continue to gravitate towards the financial markets and feature more interviews with major players in the Chinese FX trading realm. Stay tuned.