Alibaba's World (20 page)

The business model is unique, with no clear parallel anywhere in the world (although in certain developing countries with large manufacturing bases and a fragmented wholesale network, there
certainly should be).

By the time of Alibaba’s 2014 IPO, Alibaba China had more than 700,000 paying members and generated US$22.7 billion in transactions that were settled through AliPay—and that’s
only a fraction of the total number of deals that originate on Alibaba China. But the numbers alone don’t tell the full story. Alibaba China is in many ways more than just a platform—it
is a rich and vibrant community whose members regularly post advice on message boards and meet offline to deepen friendships and discuss business. China’s transformation to a market economy
happened so quickly that Alibaba China stepped up to bring together business people in specialized industries—a role filled in the West by trade associations that have developed over
decades.

Alibaba China’s importance in the larger Alibaba universe cannot be overstated. Wholesalers on Alibaba China provide much of the product sold by retailers on Taobao and by global exporters
on Alibaba.com. Alibaba China’s deep links with Alibaba’s other marketplaces create incentives for participants
to stay within the Alibaba ecosystem. Alibaba
China also provides an attractive customer base for Alibaba’s financial services, as Alibaba ventures into microcredit, banking, and wealth management.

Alibaba International

Alibaba International (otherwise known as Alibaba.com) is the world’s largest wholesale marketplace for global trade, connecting importers and exporters in more than 240
countries and territories. This site is the first thing Westerners see when they click to Alibaba.com, and in many ways it is the flagship site of Alibaba Group. Because its core customers are
wholesalers, rather than end consumers, Alibaba.com is not a household name outside China. But nearly everyone in the world has likely used a product sourced on Alibaba.com, which supplies the
world’s wholesalers with products ranging from ball bearings to coffee mugs to iPhone cases.

From day one Alibaba set out to connect buyers and sellers from around the world, making it the first global Internet company to emerge from China. It’s often misunderstood as being a
website that only connects Chinese manufacturers to international buyers. In truth, while Chinese exporters form the core of the revenue base, the marketplace’s sellers come from all around
the world. So, for example, a buyer in France might order shoes from a manufacturer in India. A buyer in Kenya might purchase rugs from a seller in Pakistan. As of the date of the Alibaba Group
IPO, Alibaba.com counted more than 120,000 paying members, with millions more who use the website’s free services.

Taobao.com

Taobao (treasure hunt) is China’s largest consumer-to-consumer marketplace. At the time of Alibaba Group’s IPO, Alexa.com listed it as one of the ten most-visited
websites in the world. Every day more than 100 million people visit Taobao to buy and sell just about every product or service imaginable, accounting for an estimated 80 percent of the online
retail sales in China (along with its sister site, Tmall). Taobao has become a part of everyday life for the Chinese, who use it for everything from fashion to movie tickets to groceries from their
local convenience store. And as Chinese consumers have increasingly adopted smartphones, Taobao’s mobile app has seen a huge volume of sales and purchases.

Although often compared to eBay, Taobao plays a much larger role in China’s economy than its American counterpart does in the US economy. Most items sold on Taobao are new items sold on a
fixed-price basis, as opposed to eBay, which is largely known as an auction site for secondhand goods and collectibles. The difference owes to the early days of Taobao, when China’s retail
environment consisted of millions of small- and medium-sized businesses and mom-and-pop shops, as well as large retail chains and department stores. Taobao effectively gave these small retailers a
place to market their wares online while also improving upon the offline shopping experience by introducing features such as instant messaging and elaborate seller rating systems that allowed for
convenience, communication, and trust building.

Taobao’s website reflects the local culture and shopping habits of Chinese consumers. Compared to the home pages
of Western websites, Taobao’s looks busy,
with flashing icons and animated cartoon characters promoting special deals. If clicking through eBay is like a walk down Main Street, USA, clicking through Taobao is like a walk down
Shanghai’s busy Nanjing Lu, where sights and sounds bombard the shopper. To Western eyes Taobao’s home page might seem too cute or flashy, even distracting, but it is what Chinese users
prefer and expect.

Taobao’s marketplace offers another important feature that sets it apart from many of its Western counterparts—shoppers are able to immediately click through to the seller and
initiate a live chat. This is not surprising—the Chinese are accustomed to building a relationship with a seller before making a purchase, and in China’s shopping culture haggling and
negotiation are standard. Whereas prices in an eBay auction start low and get bid up, prices on Taobao often start high and get haggled down. In fact, it’s hard to imagine e-commerce thriving
in China without Taobao’s popular Wang Wang live chat feature.

The most important of Taobao’s features are those that allow online buyers and sellers to establish trust. Like eBay, Taobao allows buyers to rate the services of sellers after a
transaction. Taobao’s ratings system tends to be much more extensive, allowing buyers to rate their sellers on many more variables. This reflects China’s lack of credit infrastructure
and has led to Taobao’s filling the void often filled in North America by private companies and nonprofit organizations such as the Better Business Bureau. In conjunction with AliPay, Taobao
has become the best source of rating and credit information for small businesses in China.

Taobao’s monetization model sets it apart from its Western counterparts’. Instead of taking a commission from each transaction, Taobao makes money by
offering sellers ways to promote themselves, such as through premium storefronts, keyword advertisements, and other advertising opportunities. Because of its history as a largely free service,
Taobao has introduced fees slowly over time, opting for a more conservative “take rate” on Taobao which captures less than 2.5 percent of a transaction’s value versus eBay’s
take rate of 8.5 percent. But Taobao’s contribution to the Alibaba ecosystem is a powerful one, because it maintains a strong relationship with customers that can mean more money in
Alibaba’s pocket through its other services, such as Tmall or AliPay.

Tmall

In many ways small, scrappy entrepreneurs built e-commerce in China through their storefronts on Taobao. Students or small retailers had more incentive than a behemoth to take
to the Internet, because it brought them to the attention of potential buyers from all over China. Although small retailers were quick to embrace and pioneer e-commerce, large brands and retailers
were slow, because e-commerce initially represented such a small percentage of their overall sales.

However, once Taobao was established as China’s largest shopping destination, large brands and retailers began to pay attention. At the same time many consumers were receiving uneven
levels of service from the small retailers on Taobao and wanted a way to go directly to a large retailer or brand owner. “Why buy a product from a small corner shop and risk the
product’s being a refurbished or damaged one when you can buy directly from a large, reputable retailer?” they thought.

With this situation in mind Alibaba Group introduced Tmall. com, a marketplace that connects large brands and retailers directly with consumers. The site opened in April 2008 as a part of Taobao
and became an independent platform in 2011. As of June 30, 2014, it featured 110,000 brands and described itself as “dedicated to providing a premium shopping experience for Chinese consumers
in search of top-quality branded merchandise.” If Taobao is a flea market with scrappy entrepreneurs hawking their wares, Tmall is the shiny shopping mall with glossy storefronts and
dedicated sales and customer service staff.

One of the main benefits of Tmall for Alibaba Group is monetization. Whereas the fiercely independent and cost-conscious sellers on Taobao are highly resistant to paying commissions, fees, or
anything that might seem like a tax on their sales, the large brands and retailers on Tmall typically are more than happy to pay commissions of around 5 percent to Alibaba Group for each sale. To
them a few percentage points is a small price to pay to reach hundreds of millions of consumers in an online environment that bypasses the expensive retail and logistics infrastructure to which
they are accustomed in the offline world.

Tmall has become an important channel for foreign brands to establish a presence in China and reach customers in China’s interior, where their retail infrastructure has yet to be built
out. Brands such as Gap, Levis, Adidas, and Ray Ban have stores in Tmall and often use their Tmall shops as a way to learn about local customers while exploring how to further grow their presence
in the market.

Tmall gets credit for pioneering China’s November 11 Singles’ Day promotion, a shopping day when consumers receive discounts. On November 11, 2014, Tmall
and Taobao generated $9.3 billion in sales. Alibaba Group has made “going global” a major theme for Tmall and is increasingly recruiting foreign brands to sell on the marketplace.

Juhuasuan

Before there was Groupon, there was Taobao’s Group Buy feature, which allowed groups of friends to negotiate for a volume discount from sellers. Group Buy reflected the
social nature of commerce in China, combining China’s group-oriented culture with the Chinese habit of haggling to get better prices on goods.

The trend of leveraging the power of group purchases to reduce product prices became so strong on Taobao that in 2010 the company started Juhuasuan as a separate group-buying marketplace that
offers products at discounted prices by aggregating demand from numerous consumers, often through flash sales. Despite competition from hundreds of similar sites that popped up as Groupon gained
attention in the West, Juhuasuan emerged as China’s most popular online group-buying marketplace, largely as a result of the relationships that Alibaba Group had with its existing customers
on Taobao and AliPay.

AliExpress

AliExpress is Alibaba’s first attempt to connect Chinese sellers directly with consumers in international markets. Begun in April 2010, it showcases a wide variety of
products at wholesale prices from wholesalers and manufacturers in China. By June 30, 2014, it was generating annual sales of US$4.5 billion,
catering largely to
consumers in emerging markets such as Russia, Brazil, and Nigeria.

Ant Financial Services Group

In October 2014, Alibaba Group launched Ant Financial Services Group, putting AliPay and its many related financial and credit services under a new roof. The name
“Ant” is meant to refer to the small and micro-sized businesses the company serves, filling a void neglected by China’s state-backed banks, which tend to serve China’s
state-owned enterprises. Among Ant Financial Services, AliPay is the shining star, having grown to become the world’s largest third-party online payment provider, quickly approaching $1
trillion in annual transaction volumes. It offers both direct and escrow-based payments for buyers and sellers engaged in domestic China transactions as well as cross-border transactions. AliPay
facilitates transactions with Alibaba Group marketplaces as well as transactions for third-party merchants and service providers. Users can set up payments for utilities, mobile phone charges,
rent, tuition, fees, and peer-to-peer fund transfers.

AliPay’s mobile service, AliPay Wallet, is increasingly replacing cash in China, supporting offline payments by allowing users to electronically transfer funds through advanced
technologies including QR codes and sound wave payment. People are using AliPay Wallet at offline shops, restaurants, vending machines, taxis, and cinema chains. It is quickly becoming a routine
part of life with such features as allowing a group
of friends to split a bill equally at a restaurant through its Go Dutch feature.

China’s inefficient state-run banking system allowed Ant Financial (and its predecessor, Small and Micro Financial Services) to move into related areas more aggressively than have other
payment systems, such as PayPal in the West. For example, when the company opened a money market fund, Yu’e Bao (leftover treasure), in June 2013, it quickly attracted 125 million users with
interest rates that exceeded those at China’s traditional banks. Those users invested RMB570 billion in the fund. So while AliPay was launched as a payment system, it has evolved into a much
larger and more diversified provider of financial services.

Alibaba Group describes Ant Financial as a “related company” because of its arm’s-length ownership structure, which was designed to comply with China’s heavily regulated
financial industry. Through this complicated structure, Alibaba Group receives favorable terms for AliPay services while retaining an ownership stake and long-term claim to a portion of AliPay (and
Ant Financial) profits.

Logistics

Logistics inefficiencies in China present both challenges and opportunities for e-commerce companies. While Western markets like the US are served by established national
delivery services such as DHL, UPS, and FedEx, China’s logistics landscape is much more fragmented, with the market divided between several different players with varying levels of
reliability and coverage. So it’s no surprise that China’s logistics providers have scrambled to catch up to the e-commerce boom, which saw
more than 250
million packages shipped in the days after the 2014 Singles’ Day promotion.