THE KEY TO SUCCESS IN CHINA: THE ALIBABA STORY

For anyone doing business or shopping in China, Alibaba is a household name. The firm’s online e-commerce platforms offer anything from heavy machinery to light apparel. The company boasts the biggest IPO in the world, generates more revenue than Amazon and eBay combined and its founder, Jack Ma, topped the list of China’s richest billionaires for several consecutive years.

Today, Alibaba Group owns several e-commerce platforms (Taobao for B2B and Tmall for B2C), operates a search engine (eTao), has created China’s biggest online payment system (Alipay), ventured into finance and banking with its Ant Financial Group, and offers marketing, engineering, data, and cloud computing services for shopping.

A TALE OF ALIBABA’S RISE

The e-commerce giant’s journey began in 1999 when Jack Ma and his 17 friends began operating out of a small apartment in Hangzhou. From 1999 to 2000, Alibaba Group raised a total of US$25 million from SoftBank, Goldman Sachs and other financial institutions, achieving profitability in 2001.

In 2003, Alibaba created Taobao, China’s biggest online marketplace with over 7 million vendors. By 2012 these platforms were handling a US$170 billion worth of sales. Net income surprised US$11.06 billion in 2016 (source: Statista).

Having conquered its home market of China, in 2014 Alibaba put forward its first IPO on the New York Stock Exchange (NYSE), initially reaching a market valuation of US$231 billion. The company had successfully gone from startup to multinational in just 15 years, mirroring the meteoric economic rise of China itself.

KEY FACTORS BEHIND ALIBABA’S SUCCESS IN CHINA

While both Jack Ma and the company’s acting CEO Jonathan Liu attribute their success to “always putting the customer first”, there are quite a few more contributors to the company’s success.

  1. Easy Entry. Necessary paperwork documentation aside, establishing a shop on Taobao is free and easy. Costs associated with selling on the platform are clear and the relationship transparent. Buyers only need to verify their identity when registering a user account. This makes buying and selling with Alibaba convenient.
  2. Ecosystem. More than anything else, Alibaba is a commerce platform. It includes online sales portals, a secure and easy-to-use payment system (Alipay), a quickly developing logistics network, and a growing number of financial services — many of which are superior to those offered by traditional financial institutions (e.g. banks). Alipay is now ubiquitous well beyond Alibaba’s platforms because China’s market is highly fragmented and there are few convenient payment platforms trusted by all market actors.
  3. Trust and Security. For reasons both historical and recent, trust in China is based on personal relationships. Yet, in online commerce, it is impractical — if not impossible — to establish a strong working relationship with each vendor or customer. Alibaba addressed this problem by creating AliPay, a secure online payment system. The identities and veracity of both customers and vendors are verified for each account. As well, payments to vendors are withheld until the customer has received their order as agreed upon. This ensures vendors are paid and customers aren’t cheated. China’s e-commerce market could not have developed as rapidly — or smoothly — without AliPay, which overcame the trust deficit in the domestic market.
  4. Scale. The firm dually attracts an ever-greater number of vendors and customers, which, in turn, makes buying and selling on the firm’s platforms increasingly attractive; a virtuous cycle. Having observed Amazon’s ability to lower costs and improve service by controlling every step of the purchase and delivery process, Alibaba is also developing its own logistics network. This will further contribute to the firm’s dominance due to scale: lower costs, less time, faster service.
  5. Service. Most companies in China focus on price and delivering products via no-frills customer service. Alibaba delivers highly responsive customer-oriented service at relatively low cost (e.g. online). In a crowded marketplace where most consumers are accustomed to a poor customer service experience (often focused on serving the company, rather than the customers), this has allowed Alibaba and its brands to stand out.
  6. Localization. Early on, Alibaba clearly understood how the average Chinese consumer approached shopping, their expectations, and factors impacting purchase decisions. For example, whereas consumers in the U.S. prefer ‘clean’ website designs free of clutter and convenient navigation, Chinese consumers want websites that allow them to find everything they need on the main page.

Although Alibaba is facing strong competition from relatively new entrants — such as Jinggdong.com, Tencent, and Amazon — the firm’s early insights into the nature of the Chinese consumer market and local preferences allowed it to establish a dominant position early on. Its future depends on its ability to quickly perceive how these are changing and adapt.

WHAT LESSONS CAN FOREIGN FIRMS LEARN FROM ALIBABA’S SUCCESS IN CHINA?

  1. In China’s competitive market, consumers have many options, so firms which fail to offer a convenient way to use their platform, product, or service risk losing out to competitors.
  2. Though generally, cohesive ecosystems and platforms are particularly valuable to firms and customers alike in China’s large, highly fragmented market.
  3. More so than in many other markets, trust between companies and consumers is lacking, so companies should develop transparent policies and systems which will make customers feel comfortable doing business with them.
  4. The size of China’s market demands greater scale and integration.
  5. Good customer service is uncommon in China, so firms delivering good customer service will have a competitive advantage.
  6. Be flexible and observant; what may not work well in another market may be exactly what is needed in China.
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