Last Friday’s high-flying NYSE IPO of Alibaba beat even the most optimistic expectations. Its share closed at $ 93.89, 38.03% higher than the target price and thus will raise $25 billion, a record in NYSE IPO history. At that price, the market value of Alibaba will be $213.4 billion, larger than that of Amazon and E-Bay combined, making it the world’s second largest e-commerce giant after Google.
He Weiwen
Alibaba closed its American roadshow ahead of schedule, as potential investors swamped into the Waldorf Astoria ballroom. Its original target was easily met. Just ten days before the IPO, the New York Times columnist Charles Lane wrote an article entitled “China has big stakes in Alibaba’s mega-IPO,” warning investors about the company structure, and its implied control by the Chinese government and the Chinese Communist Party. Three months before, the US-China Economic and Security Review Committee forwarded a report to Congress, warning of the risk of investment losses due to Alibaba’s company structure and its VIE returns. However, all those remarks were completely neglected by fervent investors.
Invest in the Vast Chinese E-Commerce Market Potentials
One third of Alibaba’s shares were bought with international capital. As capital always chases after good returns, or the prospect of good returns, the fundamental reasons behind this record IPO is Alibaba’s extraordinary performance over the past ten years. Alibaba earned a record revenue of RMB 15.77 billion during the second quarter of the 2013/14 fiscal year, 46.3% higher than a year ago. Its net profit hit RMB 7.3 billion, up 62%. Alibaba currently commands almost 80% of the vast and fast growing Chinese e-commerce market.
China was a late starter in e-commerce. It had less than one million Internet users in the late 1990s, when the US already had over 100 million. However, by mid-2014, China had 632 million Internet users, twice the population of the US. It is estimated that the number will quickly grow to 850 million by the end of 2015. Total retail sales by Alibaba’s T-Mall reached RMB 501.0 billion, or US$ 81.29 billion, for Q2 2014, surpassing US revenue of $ 69.2 billion for Q4 2013. There is plenty of room for growth ahead. China’s online shoppers numbered 190 million, with a penetration rate of 48.9%, considerably lower than the US at over 70%. This rate has gained an average of 4.5 percentage points per annum for the last 6 years. If the current tempo continues for the next 6 years, the rate will hit 76% by 2020, or over 600 million. Moreover, the scope of Alibaba’s business has gone fare beyond on-line shopping, and penetrated into on-line payment, delivery services and smart logistics, entertainment and information, and the whole supply chain. And it is still expanding into a full-fledged eco-system of commerce. It can well be anticipated that Alibaba will continue to deliver fast growth and fabulous returns in the foreseeable future.
The US IT Innovation and Capital Market will Contribute to Shaping the Alibaba Empire
Alibaba is a typical private business with different international resources. Apart from a large investment from Masayoshi Son, Chairman of Soft Bank, Japan, the rise of the Alibaba empire has been strongly influenced by US IT innovation. As early as 1998, Jerry Yang, founder and president of Yahoo visited the EDI center of Chinese Ministry of Foreign Trade and Economic Cooperation and started their cooperation. Jack Ma was then working at EDI and they became acquainted. Two years later, when the dot.com crash hurt the American internet sector badly and Alibaba was in difficulty, Jack Ma launched the 2001 Annual Gathering of Clients in New York City in early December, less than 3 months after the 9/11 attack. The gathering became very successful. During the following years, Google，Amazon, Face-book, E-Bay made surprising successes with continuous innovation in internet technology and innovation in connectivity. Alibaba learned all the best lessons, and created its own business model and entire supply chain connectivity, instead of simply copying. Now, with its IPO at the NYSE, Alibaba has gained access to the world largest and most sophisticated capital market and vast resources of capital, and thus started a new phase of global growth.
Alibaba Will Shape China-US Market Connectivity
On the other hand, Alibaba’s American IPO and subsequent global growth will also contribute to shaping China-US market connectivity, both electronically and physically. Alibaba’s growth strategy in America will not be symbolized by a factory or warehouse build-up, but rather by extending its services to American suppliers and consumers. It will expand and upgrade a strong e-commerce platform for the on-line sale of American goods in China, or Chinese online shopping of a vast variety of consumer goods, from food and drinks, home appliances, consumer electronics, iPad and iPhone, to home furnishings, etc. It will eliminate the physical distance and bring American suppliers and Chinese consumers side-by-side, similar to shopping online. The conventional e-commerce will become cross-border e-trade. Chinese online sales to the US will also grow. The growth of online shopping will naturally need online payment, smart logistics services, and online customs services, and will certainly be accompanied by an increase in physical facilities, such as product show centers, warehouses, and after-sale service facilities.
Beside the e-trade in goods, Alibaba is likely to help the bilateral trade in services. The US is already pretty strong in its service exports by digital delivery, or digital delivery services (DDS). In 2011, the US DDS exports amounted to $357.4 billion, 60% of its total export in services; and its DDS imports amounted to $221.9 billion, 56% of its total import in services. However, the US DDS has mostly been individual service providers, such as design, loyalties. Alibaba should and could create a more extensive platform for different service deals and deliveries. The platform could also serve the other way round, or DDS of Chinese services to the US. In this sense, Alibaba’s new global strategy and performance will contribute to China-US market connectivity.
Inevitably, Alibaba has to compete with Google, Amazon, E-Bay and Facebook. The competition in innovation, marketing and services will make the whole connectivity faster and better. Just as a number of large companies, including Boeing, GE, IBM, GM, Ford, Lenovo, Haier, are connecting both Chinese and American markets, a number of leading e-commerce companies, including Alibaba, Google, Amazon, E-Bay, Baidu and Tencent and Facebook will connect the two markets electronically. The two economies, once solidly based on the connectivity, will have a solid relationship and share mutual benefits.
The trade rules governing China-US trade, and international trade as a whole will have to change. Cross-border e-trade has made existing measures inadequate, and requires new rules regarding border governance. In this sense, Alibaba’s globalization could also contribute to trade rules, including China-US bilateral investment treaty (BIT) talks and a future free-trade-agreement.
Caution after a Jubilee
The resounding success of Alibaba’s successful IPO has focused on face-value wealth only. A number of headlines in the Chinese media have trumpeted Jack Ma’s ascension to become the richest man in the country; the fact that over a thousand people in Hangzhou have become millionaires overnight; and Alibaba’s market value eclipsing the GDP of Portugal. This is indeed negative attention for Alibaba. This author fully agreed with Ma when he expressed no feeling at all at being “the richest man in the country”.
Alibaba’s market value calculated on the share price multiplied by the number of shares is only the face value of the business, instead of its real, tangible assets. The author worked in San Francisco in late 1990’s and heard many of my friends in Silicon Valley say that “Silicon Valley creates 62 millionaires per day.” However, with the dot.com crash that followed, many of them became homeless as their face value evaporated and had to sell their luxurious houses. Measurement of wealth by share value, although still used, is already outdated in significance and tends to make people lazy.
The goal of Alibaba is certainly not to remain an empty facade, but to become a global player providing cutting-edge services to change the world. Alibaba faces three major challenges in the US.
Compliance. Alibaba has to comply with all US laws and regulations, especially regarding intellectual property rights, and financial governance, trading and accounting. These regulations are considerably different to those in China. Online shopping garnered 97,350 customer complaints in China in 2013, and this could be a serious problem in the US. Also essential is naturalization, or local business practices.
Competition. Alibaba has to face intense competition with the local giants (Google, Amazon, E-Bay and Face-book), who definitely have an advantage on their own soil.
Creativity. Alibaba must make new innovations every month in order to compete and grow. All previous innovations could be summarized as “cost innovation,” saving money in the supply chain due to trading facilitation. The next generation of innovation has to penetrate into the product and service core technology. Alibaba should pioneer in all the new creativity to become an ever stronger, sustainable global leader.
