By Juro Osawa
Alibaba Group Holding Ltd. dominates China's e-commerce market,
which by one measure is now the biggest in the world.
The best way to understand Alibaba is as a mix of Amazon.com,
eBay and PayPal with a dash of Google thrown in, all with some
uniquely Chinese characteristics.
Unlike Amazon, which buys goods from suppliers and sells them to
customers, Alibaba has always acted as a middleman, connecting
buyers and sellers and facilitating transactions between them.
While it isn't an auction company, its middleman role is similar to
the one played by eBay.
Taobao, Alibaba's biggest website, is like a gigantic Chinese
bazaar with about 760 million product listings from 7 million
sellers. Merchants don't pay to sell products on Taobao--and that
fee-free model is a big part of its appeal in China. Instead, they
pay Alibaba for advertising and other services to allow them to
stand out from the crowd. Much like on Google, the ads from
merchants appear with Taobao's product-search results.
While Taobao is mostly for small merchants, Tmall, another
shopping site run by Alibaba, is designed for bigger merchants,
including some well-known brands such as Nike and Gap. Earlier this
year, Apple Inc. opened its store on Tmall. Unlike Taobao, Tmall,
which has about 70,000 merchants, charges each seller a deposit,
annual fee and a commission fee on each transaction.
What sets Alibaba apart is size. The company has said Taobao and
Tmall account for more than half of all parcel deliveries in China.
By one measure, Alibaba has already surpassed U.S. e-commerce
firms. In 2012, the combined transaction volume of Taobao and Tmall
topped one trillion yuan ($162 billion), larger than the 2012
totals for Amazon and eBay combined.
Alibaba's revenues are a fraction of Amazon's because it doesn't
actually sell the products on its site. But the Chinese company is
far more profitable. In the three months through September, the
most recent numbers available, Alibaba's revenue rose 51% to $1.776
billion from a year earlier. Net profit stood at $792 million,
giving the company a net profit margin of 44.6%, according to
shareholder Yahoo Inc., which owns a 24% stake in Alibaba. In the
same quarter, Amazon posted a loss of $41 million on revenue of
$17.09 billion.
The company has also emerged as a huge player in China's creaky
financial system. To solve the problem of buyers trusting the
merchants on the site, Alibaba created Alipay, which is a payment
system that protects buyers if sellers don't deliver. Alipay has
become so ingrained in China, that when the company launched a
money-market fund, it grew to be one of the world's largest in just
eight months.
Alibaba now does micro lending and is taking part in the Chinese
government's program to set up five private banks on a trial basis
in some big cities. Run by an affiliate of Alibaba, the payment
system has allowed the company to accumulate a vast amount of
information on Chinese small businesses, consumers and their online
transactions.
Even though Alibaba is still by far the biggest player in
China's fast-growing e-commerce market, the company is facing
stiffer competition as more Chinese consumers use smartphones. In
this new environment, social media and online gaming giant Tencent
Holdings Ltd., which operates massively popular WeChat mobile
messaging application, is emerging as a powerful competitor to
Alibaba, because of its ability to use WeChat as a mobile-based
platform to offer other services such as e-commerce. To further
bolster its e-commerce capabilities, Tencent earlier this month
announced a deal to buy a 15% stake in JD.com Inc., China's
second-largest e-commerce firm.
Alibaba has fought back with a string of deals, including its
offer last month to pay $1.13 billion for the 72% stake in Chinese
online map company AutoNavi that it didn't already own and a $585.8
million investment last year for a 18% stake in Sina Weibo, the
popular microblogging site majority-owned by Sina Corp. Weibo
unveiled plans Friday to sell $500 million of stock in the U.S.
Alibaba was founded in 1999 by Jack Ma, an English teacher in
the eastern Chinese city of Hangzhou, when the Internet as a
concept was still foreign to many Chinese businesses even though
the dot-com bubble was taking the U.S. by storm. Mr. Ma and 17
other founding members launched Alibaba.com., a trading website
that connects Chinese manufacturers with overseas clients. Shortly
after eBay entered the Chinese market by buying a stake in a local
e-commerce company, Alibaba launched Taobao in 2003 to enter a
consumer e-commerce business, at a time when China's Internet user
population was growing rapidly.
Write to Juro Osawa at juro.osawa@wsj.com
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