B2B Payments

Alibaba: From Start to Now (And Wow)

The Alibaba Primer

Jack Ma turned his 1995 launch of Chinapages.com into a global internet presence that has dwarfed both eBay and Amazon by doing one thing very well: understanding the constraints of doing business in China (and capitalizing on them) as well as the desire of Chinese consumers to conveniently access goods and services.

Chinapages, and a few years later after VC money was raised, Alaibaba.com, organized merchants into a marketplace that made it efficient for B2B buyers and sellers from anywhere in the world to transact. Ma’s initial focus was to open the Chinese market to outside buyers with an interest in buying cheap Chinese goods, but Alibaba is today a place where anyone with anything to sell can do so on the platform. Ma’s success is also attributed to his decision to standardize on English as the language of the marketplace – understanding that most of his buyers and sellers were already transacting in English anyway and that Chinese would only limit its potential. Today, over one billion products are listed on the site which is the 20th most visited website in the world.

Ma recognized that consumers had an entirely different need. Their universe of goods and services was limited to the handful of physical merchants that were located in big cities. Smaller physical merchants outside of the cities were inconvenient to access. And access to online merchants anywhere was also limited but for different reasons: by a lack of broadband access, by a lack of Chinese merchants on the internet, by the lack of a payment method to buy online from any merchant and by a lack of trust in the integrity of the merchandise sold by online Chinese merchants.

Taobao, launched by Alibaba in 2003, assembled a marketplace for Chinese consumers to transact, in Chinese, using a payment method that, like PayPal, kept payment credentials secure and with a mechanism for protecting buyers against getting bad merchandise (more on that later). Taobao also offers a variety of services to help Chinese merchants on this platform succeed, including merchant financing underwritten by data captured from transaction activity. The typical loan is $8,000 and book value of loans extended to Taobao merchants in 2013 is expected to reach $2 billion. Taobao merchants can also take advantage of its data dashboards to produce targeted ads, serve offers and otherwise engage consumers so that they buy more, and increasingly do so using smartphones.

Tmall opened in 2008 but with a different purpose. This online mall of retailers served an increasingly affluent Chinese consumer that wanted to buy from stores and brands that they knew. Tmall made it easy for these retailers to open a storefront and respond to that demand. It also made it possible for Western retailers, those from whom Chinese consumers increasingly want to buy from, to “be present” without owning an interest in a Chinese company. Tmall has attracted the likes of The Gap, Nine West, Adidas, the NFL, P&G, RayBan and Dell and created a “how to” guide for those interested in setting up a storefront and attracting the Chinese consumer.

Alibaba’s mission is to surround the Chinese consumer with all of the essential things that it needs to do in their day. Shopping is a big part of that focus, particularly as it relates to getting more Chinese consumers to open more AliPay accounts and to capitalizing on that shopping passion wherever Chinese consumers want to shop.

The Chinese Consumer.

When it comes to shopping online, Chinese consumers are just getting warmed up.

Nineteen years after Amazon launched in the US and seven after Apple introduced the iPhone, 98 percent of the US population has access to basic broadband services (80 percent in their own homes) and nearly 65 percent own a smartphone. eCommerce accounts for roughly 5 percent of all retail sales in the US, and eCommerce via tablets and mobile devices is fueling its growth – and over a relatively short period of time. Today, it drives a little more than 10 percent of overall eCommerce volume, but that percent will only increase as “tablet commerce” goes more mainstream and digital wallets that eliminate the hassle of shopping on small devices gain traction.

Now, contrast that to China and over about the same period of time.

In 2012, it was reported that only about 43 percent of the Chinese population had access to the internet but those 43 percent have enormous spending power. “Spare the rod and spoil the child” is truly the mantra of the one-child Chinese family who spare absolutely no expense on buying for their children. Unmarrieds spend even more. Alibaba hosted the largest single day of online shopping ever on the planet called “Singles Day” on 11/11/13 in which “singles” bought nearly $6 billion of electronics and other things. Putting that in perspective, that volume is roughly six times US sales volume on Black Friday in 2013. And, interestingly, the elderly population seems to be spending its only child’s inheritance on travel and luxury goods – one in 4 Chinese over the age of 50 is online regularly. Alibaba says that Chinese consumers made 83 million trips outside of China last year and spent $100 billion while traveling.

It may have taken nearly 20 years for China to get to less than half of the US broadband penetration, but things are likely to move rapidly now. China’s e-commerce market is growing at 120 percent a year according to analysts. In 2013, Morgan Stanley said that it easily eclipsed US eCommerce numbers with roughly $290 billion in sales, driven by nearly half a billion Chinese online shoppers, a number that has more than doubled over the last three years, thanks to smartphones. Online access is increasingly via smart mobile devices and Chinese consumers are buying them as quickly as handset makers can ship them. Nine out of every 10 phones purchased in China today is a smartphone, with 30 million of them sold in the month of August 2013 alone. China’s smartphone market is now three times larger than the US. Alibaba expects that the smartphone will become “one of the main channels” for Chinese people to shop.

Chinese consumers don’t pay with plastic but do pay online

Chinese consumers don’t use plastic cards, by and large, especially if that plastic is a credit card. Credit cards weren’t introduced into the Chinese market until 1985 and 15 years later in 2000, accounted for only about 10% of all purchases made. But, things have ramped considerably since then.

The People’s Bank of China reports that Chinese banks issued 331 million credit cards in 2012, a 16 percent increase over 2011. At the end of 2012, there were roughly 3.5 billion credit cards in circulation in China, most of them carrying the China UnionPay logo. All told, twelve years later, those cards drove $1.2 Trillion in purchase volume and now 40 percent of all purchases. Today, one in four Chinese consumers have a credit card, up 19 percent from 2011 with predictions that China will become the largest credit card market in the world over the next decade.

But shopping online is and has always been a challenge for Chinese consumers. Even today, seventy five percent of them still don’t have a credit card and a decade ago, that number was close to ninety percent. Those that have credit cards, have cards bearing a UnionPay logo which are not, by and large, accepted outside of China, in either a physical or online environment. And, then there’s the matter of trust. Chinese consumers don’t trust that sellers will ship them the merchandise that they’ve ordered. Without a credit card to pay online, Chinese consumers had no choice but to use their bank account which they were uncomfortable doing with a seller they didn’t know and/or having money taken from their account without any recourse if the item was not to their satisfaction.

Alipay was launched in 2004 and is often described as the Chinese PayPal. It’s one of three third party “digital payments” providers in China. (The other two are UnionPay online and Tenpay which is operated by Tencent, the big dog of Chinese Internet firms.) With its 800 million customers, Alipay owns nearly half the online transactions in China and has nearly 6X as many registered accounts as PayPal, 4X that of Amazon, and 1.5X that of Apple iTunes.

Like PayPal, Alipay is a digital account that registers a funding source (usually a bank account) to that account and enables payment online by keeping the payment credentials concealed from the seller. But unlike PayPal, Alipay actually escrows the funds until buyer and seller have agreed that that the transaction has been completed and the buyer is satisfied.

And, as a result, Alipay has had no trouble getting consumer and merchant adoption and is why it is most widely used online payment system in China. It is reported that 60 percent of the parcels delivered in China are from one of Alibaba’s enterprises. Alipay accountholders can also conduct offline transactions such as pay bills.

The Ten Facts (Plus One) You Need To Know About Alibaba (BABA)

1. Alibaba is expected to be the largest IPO in history, raising between $21 billion and $25 billion and with a market cap of ~200 billion.
2. Alibaba has 279 million buyers (as of June 30). If Alibaba buyers were a country, they’d be #4 by population, right behind the U.S. Of that number, 188 million are active on a monthly basis.
3. Alibaba accounts for 80 percent of all online sales in China.
4. Alibaba buyers place 11.3 billion orders each year and account for 70 percent of Chinese package delivery volume.
5. Alibaba’s marketplaces drove $248 billion in transaction volume last year, more than Amazon.com and eBay combined.
6. Alibaba’s sale from mobile accounts for ~ 33 percent of its overall revenue, up from ~5 percent two years ago.
7. Alibaba booked $2.3 billion in profits the first six months of 2014. Analysts project Alibaba’s profits to grow to ~7 billion in 2015.
8. Alibaba’s profit margin is 45 percent and has had a growth rate of ~50 percent a year.
9. Alibaba’s November 11th “Singles Day” promotion drove $5.6 billion in sales in a 24-hour period, eclipsing Black Friday sales.
10. Alipay, which is how buyers pay on Alibaba, has 800 million digital accounts and ~200 million mobile accounts.

And the plus one

11. Alibaba’s 50-year old Founder, Jack Ma, holds 7.4 percent of Alibaba and has a net worth of $22 billion. His salary as a teacher in 1999 was $15 a month.

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