Alibaba Group Holding Ltd., already the largest Chinese company by market capitalization, is nothing if not ambitious. Its chief financial officer, Maggie Wu, recently told investors she expects revenue to increase by up to 49 percent next year, a staggering prospect. But perhaps more staggering is how Alibaba hopes to get there: In part, by tapping the U.S. market.
By any measure, Alibaba dominates online retail in China. Through its subsidiary TMall, it commands more than twice the market share of its largest competitor, JD.com, with 56 percent of all Chinese e-commerce. In splashing out on more than $21 billion in strategic asset acquisitions, Chief Executive Officer Jack Ma has humbly declared Alibaba no longer a company but an “economy.” Having branched out into cloud computing, electronic payments, news media and films, he may have a point.
Yet expanding to the U.S. — much less creating 1 million jobs there, as Ma has pledged — will present some daunting challenges. In fact, the effort seems quite likely to fail.
One problem is the company’s business model. Alibaba is often referred to as the “Amazon of China,” but this ignores some important differences. Where Amazon.com Inc. has built world-class logistics operations to speed and standardize delivery, Alibaba has opted for an asset-light approach, in which customers ship directly to other customers through third-party logistics operators with warehouses throughout China. Alibaba just provides the platform.
If Ma wants to open the Chinese market to small U.S. businesses, he’ll need to expand this operation, while surmounting some serious legal and practical hurdles. Most large American companies already have operations in China, or established routes to ship goods there. Small ones won’t have the skills necessary to navigate Chinese paperwork, and shipping individual products will likely prove too costly to be worth the effort. Alibaba’s hands-off approach won’t cut it if it wants to lure new sellers on a large scale.
Another problem is that Alibaba makes much of its revenue from charging sellers for traffic. Just as Google operates auctions for companies to place ads in search results, Alibaba charges sellers to direct traffic to their e-shop. But as MySpace and Yahoo! Inc. (among others) have learned, survival in the traffic-generation business requires having a competitive edge, and it isn’t clear that Alibaba has one with American customers.
That’s because the biggest barrier for U.S. firms trying to sell in China isn’t a lack of e-commerce platforms. It’s protectionism. China’s government uses a variety of sophisticated methods to inhibit foreign competition, including requiring business and customs licenses to sell to Chinese consumers and restricting how much yuan or dollars can leave the country. Ma wouldn’t be the first ambitious businessman to attempt to open that market; they’ve been trying and failing for hundreds of years.
Finally, attracting a critical mass of U.S. users will require reining in counterfeiters, who are notoriously common on Alibaba. Even if Ma were to make a more serious effort in this regard, cracking down on small Chinese manufacturers to the benefit of foreign competitors would carry political risks of its own, especially in what amounts to an election year in China.
What about the million American jobs that Ma promised to create? To put this ambition in perspective, Wal-Mart Stores Inc. — the largest private employer in the U.S. — has 1.5 million workers. If Alibaba produced the same revenue per employee as Wal-Mart, that would mean exporting $245 billion annually to China. Considering that total U.S. exports to China amounted to $170 billion last year, it seems quite likely that the Alibaba public relations team is getting ahead of the bean counters.
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The unfortunate thing is that China’s demand for small-scale imports of authenticated goods really is booming, with everyone from smugglers to college students rushing to fill a surge in online orders. If Alibaba were able to link small American businesses to that expanding consumer market, it could well unlock substantial new opportunities for growth, to everyone’s benefit. But doing so will require making major changes to its business model, offering many more services, and growing more ambitious still. In other words, Jack Ma may have met his match.
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