China’s e-commerce and the rise of Alibaba

China E-Commerce Channels

E-commerce in China is a hot-topic for doing business in China. China is by far the largest e-commerce market in the world.
The Chinese gross merchandize volume in e-commerce account for almost 425 billion USD  in 2014 and is almost 40% larger than the retail market of the United States. (De Bie, 2015)
Experts predict that the Chinese e-commerce market will continue growing in the coming years due to the rise of the number of internet users in China and those who buy their products online.
This has resulted in fierce competition for online platforms in China. The Consumer-to-Consumer (C2C) market account of half of China’s e-commerce market. Taobao is by far the largest and most important C2C online platform in China with a market share of 95%. The second biggest C2C online platform is Paipai, a subsidiary of JingDong (JD). (De Bie, 2015) These online platforms work with virtual stores where customers can freely open an account and trade and buy products. This market is comparable to Marktplaats, the Dutch version of eBay.
The online Business-to-Business (B2B) market is an online platform where brand owners, wholesales etc. offer their products. The market leader in this market is Tmall, a subsidiary of Alibaba, with 52% market share. JD comes 2nd, Suning is 3rd, VIP is 4th and Yihaodian is 5th. (De Bie, 2015) This market is comparable to companies like bol.com or Coolblue.
Due to the heavy competition on the online retail market, platforms tend to cooperate more and more with each other or even buy competitors. Due to this process two important fronts have formed on the online platform market Alibaba and JD/Tencent. (De Bie, 2015)

The two main camps

Alibaba their history

AliBaba is currently the biggest e-commerce platform in China with their brands Taobao (C2C) and Tmall (B2C). But how did they become the biggest online platform in China?

It started in 1999 when Jack Ma and 17 other co-founders created Alibaba Online. In the years after the creation of Alibaba Online they raised funds to further continue with their online platform. In 2001 Alibaba achieved profitability  and two years later they created Taobao, a consumer online retail platform. The establishment of Taobao was a reaction to Ebay their acquisition of Eachnet. A year later Alibaba established Alipay, an online payment platform, which was connected with Taobao. Alipay was an instant succes and it contributed to the success of Taobao. Taobao started to be a success and began a real threat to Ebay China. In 2005, AliBaba partnered with Yahoo and took over China Yahoo. In 2008  Taobao established Tmall, a company which will complement Taobao on the B2C market. In the following years Alibaba was listed on the Hong Kong Stock Exchange and grew to be the largest online retail platform in China. Alibaba still grows by acquiring and partnering with competitors in the market. For example they bought a minority stake in the Chinese smartphone maker Meizu and recently they acquired a stake in the online platform Lazada (South Asia). Within 20 years Alibaba grew from a start-up tech company in 1999 to a large multibillion conglomerate in 2016. (Alibaba group, 2006)

As described above Taobao was created in May 2003 as a reaction to eBay buying Eachnet  in March 2002. In 2003 eBay China/Eachnet was dominating this market with a market of more than 70 percent. But by 2006 Taobao overtook eBay China as one of the largest Chinese e-commerce platforms. In 2006 eBay decided to transfer eachnet to their joint-venture partner Tom Online. (Stanford Graduate School of Business, 2010)

But why did eBay not managed to set foot on the Chinese market?

Eachnet FrontPage

 

EBay their failed ride in China

EBay was known to be a leader in providing an online platform for millions of users to buy and sell. EBay was founded in September 1995 as an experiment and it grew to the most successful internet company in the world. With fresh new capital and high pressure for growth, eBay soon started to look beyond the United States for growth opportunities. From 1999 until 2001, eBay acquired multiple online C2C platform companies in order to grow.  By the end of 2001, eBay had expanded operations to 17 markets around the world.

But there were also failures to this aggressive growth to gain market share. In 2002 eBay admitted that it had failed in Japan and announced that they will close the Japan website. Since its launch in Japan eBay struggled to gain market awareness and market share in Japan. In the same month eBay announced to exit the Japan market it announced the investment in EachNet. (Stanford Graduate School of Business, 2010)

EBay had high hopes for China, according to Whitman: ‘Ten to 15 years from now, I think China can be eBay largest market on a global basis as we build up the local trade and the export trade…. We think China has tremendous long-term potential and we want to do everything we can to maintain our number one position’. (Stanford Graduate School of Business, 2010)

But why did eBay fail in one of the world’s most populous country, China,  when others had succeeded so successfully in the ’land of the Red Dragon’.

The answer to that question are numerous.  First of all eBay immediately changed the interface, categorization and technology of the website of eBay China to align it more with the global website of eBay. A year after the acquisition, the website of Eachnet was officially moved to that of the global platform of eBay. This confused existing customers of Eachnet. (Sander)

Second: eBay China’s servers were moved from China to the United Stated. This considerably slowed down the website of eBay China, causing time-outs and blocking certain pages because of the Great Firewall of China.  Due to this move, maintenance of the website was carried out by maintenance workers in the United Stated. Maintenance was done at midnight in the US West Coast, but that was during peak time in China. Meanwhile website change requests were queued and would take months to fulfil. (Sander)

EBay also changed the corporate structure of eBay China, by bringing in foreign employees as CFO’s, COO’s. To make it even worse The Marketing and ICT department were moved from China to the United States. (Sander)

Meanwhile Taobao introduced in 2003 Alipay, to make it more easier for their customers to buy goods on Taobao. EBay China also had been developing a similar system to AliPay which was called ‘An Fu Tong’. This service was launched in 2004 on eBay China their website (one year later!), it worked similar as to that of Paypal. Meanwhile eBay acquired PayPal in 2003 and started to introduce the payment system with its US website. The idea was to also introduce PayPal on eBay China, but it encountered a lot of regulatory difficulties. But the most important obstacle was that customers got confused due to the two payment systems. (Sander)

Ebay China began to lose a lot of customers but these alarming figures didn’t reach the CEO Meg Whitman. Due to corporate bureaucracy, dysfunctional reporting lines figures were presented more positive than actual facts. (Sander)

Crocodile in the Yangtze

Cultural and social aspects

The big advantage for Taobao was that it understood the market and the culture where as eBay clearly didn’t. Not understanding the market is a big no-go in any country. Chinese consumers have different needs and desires when it comes to online services.

China was in 2001 still a rising market with customers not used to buying second hand goods simply because there weren’t that much second hand goods on the market. Customers in China preferred to buy new goods. (Sander)

As I said earlier foreign eBay staff were sent to China to lead the company but they had no knowledge of the Chinese language and did not understand the Chinese culture and local market. The board came up with a plan to charge a fee for their customers and consumers. Taobao launched with an no-fee model. This no-fee model extended for a couple of years whereas eBay defended it fee model, noting that ‘free is not a business model’.  More and more consumers started to use Taobao instead of eBay China. (Sander)

Another important cultural difference which led to the demise of eBay China was the way of communicating between buyer and seller. EBay China tried to block communication whereas Taobao offered this form of communication. As a consequence Taobao was perceived as informal and friendly compared to eBay China. (Sander)

Fundamental differences

With the above in mind we can conclude that the most important differences, from an organizational viewpoint, between Alibaba and other competitors are that Alibaba is more focussed on the users of their platform to  let them benefit of the platform. Whereas other competitors in the world are more focused on earning money and providing dividend to shareholders.

The future of Alibaba outside Greater China

With the success of Alibaba in China, the acquisition of the online platform Lazada, active in South Asia, and the introduction of Alipay in Europe I suspect that Alibaba will try to get a foothold in other countries outside of Greater China. Although I don’t think they will try to grow aggressively in Europe and the US due to the existing competition there. But I do think that they will look at Newly Industrialized Countries (NID’S) for further growth. For example South Asian, South American and African countries. E-commerce in these regions are still an untapped market.



What the future holds

Why do i think that? Well although the Chinese market is still growing Alibaba faces new threats from rivals. Their biggest threat is JD (backed by Tencent), their rivalry in China has earned the nickname ‘the great cat and dog war’ (referring to the mascots of both companies). (Wong, 2015)The competition is tough and I’m sure Alibaba will look for new markets outside Greater China to expand in.

I even think that Alibaba will follow companies like Google, Facebook and Apple by buying companies which do not fit in to their portfolio. For example Alibaba Finance recently acquired EyeVerify, a company which uses pictures of the human eyeball to unlock mobile services. (Wang, 2016) If Alibaba tries to go international with their brand and will stick to their strategy I believe I twill be a success story. The most important goal for Alibaba in China was not to make profit, not to make dividend but to help the businesses and customers to grow. 

Bibliography

Alibaba group. (2006, 01 01). History and milestones. Retrieved from www.alibabagroup.com/en: http://www.alibabagroup.com/en/about/history

De Bie, R. (2015). China Cross-Border E-Commerce. Guangzhou: Consulate General of the Kingdom of the Netherlands .

Sander, E. (sd). Alibaba & E-Commerce. Alibaba & E-Commerce. Chinatalk, Deventer.

Stanford Graduate School of Business. (2010). Taobao vs. eBay China. Stanford: Stanford Graduate School of Business.

Wang, S. (2016, September 13). Alibaba Finance Arm Buys Eye-Scan Startup in First U.S. Foray. Retrieved from www.bloomberg.com: http://www.bloomberg.com/news/articles/2016-09-13/alibaba-finance-arm-buys-eye-scan-startup-in-first-u-s-foray

Wong, G. (2015, August 17). Alibaba Faces Fresh Threat From Rivals. Retrieved from The Wall Street Journal: http://www.wsj.com/articles/alibaba-feels-heat-from-new-rivals-1439758165