Alibaba.China king of e-commerce
December 31, 2010
Original: http://www.economist.com/node/17800299
Jack Ma knows as much as anyone about how China middle class spends its money. What will he do with this information?
Alibaba
Dec 29th 2010HANGZHOUfrom PRINT EDITION
A DOZEN big screens hang on the wall. Maps flash. Numbers stream by. The Alibaba Group “live data monitoring room” offers a snapshot of frantic activity: Chinese firms trading with foreign ones; Chinese individuals buying clothes from each other. Perhaps half a billion people use Alibaba various online services. The group diminutive founder, Jack Ma, smiles that business is “pretty good”. Yet he is far from satisfied.
In a country where tycoons are often the children of politicians, Mr Ma stands out. He failed twice to get into college. He learned English from the radio. He stumbled on the internet during a trip to America as an interpreter in the mid-1990s. He typed the phrase “Chinese beer” into a search engine. No results appeared. He saw an opportunity.
< br /> He started Alibaba in 1999, to help small firms find customers and suppliers without going through costly middlemen. Alibaba.com now claims to have 57m users, including some in nearly every country. It is sometimes likened to eBay, but is more like an online Yellow Pages.
Another venture, Taobao.com, sells to consumers. It has 300m customers and shifted $ 29 billion-worth of goods in 2009. It is like a scrappy cross between Amazon and eBay : it operates an online mall where vetted sellers can hawk their wares, and a site where anyone with a Chinese identity number can sell anything legal to anyone. It generates money through advertising.
Alibaba staff boast of the businesses they have nurtured. One Chinese village had a stack of rabbit meat, having skinned the creatures for fur. The chief asked for suggestions. A villager sold the lot on Alibaba.com. More commonly, clients are small firms that want to link cheaply to the global market. Machine-makers in Turkey or Britain use Alibaba to find cheap suppliers in China without having to go there. Buyers can read reviews that others have written about each seller, which fosters trust, though it is far from foolproof. The Alibaba campus in Hangzhou looks much like the offices of a zippy firm in Silicon Valley. The architecture is airy and feng shui-compliant. Employees enjoy ping-pong and free massages. Grey hairs are as rare as neckties. As is common at Chinese internet firms, a disproportionate number of senior managers are foreign-educated or have worked abroad. Alibaba has hefty foreign backers: America Yahoo! and Japan Softbank. Yet because of where it is, it cannot operate like a Western firm . Until the mid-1990s the growth of the internet went all but unreported in China news media. So getting started was hard for Mr Ma. But now he sees opportunities everywhere.
China has millions of small entrepreneurs but a primitive financial system. To boost traffic through his websites, Mr Ma set up an online payments system, Alipay, in 2004. Its growth was greatly helped by the ban that China imposed, until recently, on its American rival, PayPal. Alipay says it now has 470m users worldwide and that more than 500,000 Chinese merchants accept it. In some Chinese cities people can use it to pay their utility bills.
Mr Ma has also started a service called Ali-loan . He does not lend money, but works with banks, which typically have no idea if a small borrower is creditworthy. Mr Ma, in contrast, has a trove of data revealing whether small firms pay their bills on time. He can also bundle together firms that know each other, so that a seller can help guarantee a bank loan to a regular customer. According to Alibaba the proportion of Ali-loan lending that goes bad is a trifling 0.35%, which suggests that the service could be expanded fast.
The firm faces several obstacles. First, the Chinese internet market is cut-throat and evolving fast. Baidu, the country leading search engine, has not yet attacked Alibaba head on, but one day it might. Second, talent is in short supply. Wages for the best engineers and managers are soaring.
Third, in its rush to grow, Alibaba has neglected to make much profit. Its main services are free, with sellers paying only for extras such as being bumped to the top of a list of search results. Mr Ma says this is deliberate: size will eventually bring rewards. But investors will not wait for ever. Recognising this, Alibaba.com, the listed part of the group (most of which is private), promised in December to pay a special dividend of $ 140m in January.
Half a billion credit histories
Alibaba has a huge and barely exploited asset: the data it has gathered on the spending habits of China emerging middle class. The firm is cagey about what, exactly, it will do with these data, and insists that it will not violate anyone privacy.
< br /> Nonetheless, there are ways in which Alibaba could profit from what it knows. One idea might be to use customer data to identify trends and so help companies to anticipate what consumers want. Given the paucity of accurate data in China, this would be extremely valuable.
Another promising area might be credit. Ali-loan does not charge for its credit-scoring service for business borrowers, and says it has no plans to. But it would make sense: a small fee on each loan would be almost pure profit. And there is no practical reason why the group should limit itself to helping businesses borrow money. Another glittering prize would be to help Chinese consumers obtain credit, too. Very few can do so at the moment. Many would doubtless like to.
This is a politically sensitive area, however. The government largely controls the allocation of credit in China. Through state-controlled banks, it funnels the nation savings to large, politically favoured firms. Would an expansion of credit to the little people be seen as a threat to this cosy arrangement? Some in government probably think it a good idea to help small businesses and even consumers get loans, but others are cautious. The Communist Party is terrified of credit bubbles, the bursting of which might spark unrest. So Mr Ma must tread carefully.
