Burgess COMMENTARY

Peter Burgess

CHINA ... Why Alibaba is not the Amazon of China What do you know about Alibaba?



You might know that it is often called the Amazon of China. You might know that it has a market cap of nearly $500bn, or that on singles day, the Chinese equivalent to Black Friday, it made $25bn worth of sales in 24 hours. You might have heard of its founder and CEO Jack Ma who is now one of the richest men in Asia with a net worth of almost $50bn, though his early career wasn’t so successful.

But is Jack Ma’s company really the Amazon of China?

Around half of the products on Amazon are items that it buys and resells itself, like an online version of a traditional retailer. On Alibaba’s various sites, it acts as a middleman connecting buyers and sellers, earning its money from advertising and ranking fees. This gives it less revenue than Amazon, but huge margins by comparison. This also means Alibaba requires far less infrastructure and far fewer employees than Amazon, which uses its own distribution network even for most of its third-party sellers. This is something Ma likes to hammer home, he once told an exec at Walmart that if he wanted 10,000 new customers he had to build a new warehouse and lots more infrastructure, while Alibaba just needed 2 more servers. And he once said that Amazon is an apple, while Alibaba is an apple tree. So who are the apples on Alibaba’s tree, who are the buyers and sellers that it connects?

Alibaba Group has a range of platforms aimed at different people. And many of these people are, as you’d expect, China’s burgeoning urban middle class. However, Alibaba is also attracting a different kind of customer base. China has a huge rural population, that is starting to come online as the government pushes to widen internet access. Alibaba is specifically targeting these areas, which are under-served by traditional retailers – Jack Ma has said that in America, e-commerce is dessert, but in these areas of China, it is the main course. According to McKinsey, for every dollar spent online in China, 60 cents is replacing a physical sale, but 40 cents has been newly generated by the internet.

Ma’s ambition is not just limited to China, eventually, he wants half of Alibaba’s sales to come from the rest of the world. He’s even said he wants the company to become the world’s 5th biggest economy by 2036. In fact, Alibaba has been taking a particular interest in the US, it’s 2014 New York IPO was the biggest in American history. Ma has met with Donald Trump to talk about connecting American small business on his platforms and the company has invested in a range of US startups, including Lyft and Snapchat. As it has grown, Alibaba has created a network of subsidiaries and large investments that go beyond its range of e-commerce sites and have it seen it buy a major Chinese newspaper and take a stake in a football club.

It’s hard to see this growth slowing anytime soon.