Will Alibaba overtake Amazon in the West?

Will Alibaba also become dominant in the West?

Alibaba had a great quarter, expanding our user base to 674 million annual active consumers, demonstrating our superior user experience,” said Daniel Zhang, Chief Executive Officer of Alibaba Group. “We will continue to expand our customer base, increase operating efficiency and deliver robust growth. With strong cash flow from our core commerce business, we will continue to invest in technology and bring digital transformation to millions of businesses globally.”

The quote above is from the latest report on Alibaba’s financial results. In the report, the company boasts about its many users, revenue growth, and technical innovation. Alibaba is the biggest in total revenue of all marketplaces globally, and there are no indications of it slowing down. This continues growth, in combination with the departure of Jack Ma – founder and charismatic leader of the company – it seems appropriate to take a closer look at the Chinese challenger of Amazon. In this article I want to provide a broader view at Alibaba’s success in China, and ask whether it will be able to replicate its success in Western markets. The goal is to provide a perspective in which the fast day-to-day developments of China’s biggest marketplace. I will do this by looking at the (dis)advantages the company has in regards to strategy and culture compared to Amazon. However, the topic of Alibaba is too big to discuss every relevant aspect of its successes and challenges. Therefore, I will provide some ‘recommended reading’ for those of you who want to know more.

Section one

1.1 How Alibaba became successful in China:

Alibaba was first founded by Jack Ma and a group of investors right before the Dot-com crash in 1999. To be the successful e-commerce giant it is today, the company needed to resolve two key problems: a lack financial resources, and a lack of trustworthy credit. The first problem resulted in a lack of Chinese e-commerce businesses until funding became more plentiful in the current decade. The second problem resulted in the failure of Western companies like eBay in China where the lack of trustworthy credit resulted in false product information and delivery statuses undermining eBay’s trust and business model.

The company resolved these two problems with the ‘Trustpass Membership’.This programme offers third party retailers on the platform an official certificate of trustworthiness in exchange for 2300 RMB (about 300$) deposit. As a result of this system, customers knew which retailers were to be trusted, creating a safe marketplace environment. In addition, Alibaba gained access to large amounts of cheap capital needed to fund its operations. With these problems solved, Ma’s company became dominant within China’s small and medium Business-to-Business retail, revolutionising the way in which ordinary Chinese have access to national and global markets.

Once Alibaba had the capital and trust it needed to grow its operations it launched ‘Taobao’ in 2003, a free to use marketplace concentrated on the greater Chinese market, that is, also serving cultural Chinese living outside mainland China. Indeed, almost all Taobao merchants are culturally Chinese. The focus on the sino-ethnic world resulted in minimal service-costs and economies of scale, giving the platform a competitive edge. Taobao is not the only new service Alibaba started in the past 20 years. Alipay, a product that works similarly to PayPal, for instance, provides ordinary Chinese with all the benefits of a cashless society. In the figure below, all subsidiaries of Alibaba are depicted.

Businesses and Web properties of Alibaba Group (2016-2017)

1.2 Why Amazon didn’t become successful in China

In ‘Why Amazon didn’t make the cut in China’, Mark Greeven and Howerd Yu give two important reasons for why Amazon, with its global reach and seemingly unlimited resources, didn’t succeed in China. Although the reasons for the lack of success of Amazon in China are surely more complex, these two reasons give an important foundation from which to look at the phenomenon.

The first reason is focus. Greeven and Yu state that: ‘There are always a million things a company could do to serve customers better, so it must prioritise. For Amazon, the US will always be the home market, the one to which its investors pay the most attention.’ (Greeven and Yu, 2019). Amazon has had similar problems in culturally similar places such as Latin America. There, they are playing catch-up with local rivals, having problems with cultural and bureaucratic differences. In Brazil, Amazon faces problems with building a network of logistical centres needed to deliver on the promises of the platform. Much like the rainforest from which it got its name, the company is in a constant struggle to remain prominent.

The second reason is more focused on China, Greeven and Yu state: ‘As for Amazon China, it just did not do enough to build a brand reputation and get close to the Chinese consumer. Shopping festivals, discount campaigns, nation-wide red envelope promotions and orchestrated efforts to integrate online entice the Chinese consumer have always stayed the domain of local retailers. Chinese retailers have become the synonym for the new retail movement that is satisfying the increasingly on-demand and location-based needs of Chinese consumers’ (Greeven and YU 2019).

In this section, I’ve described how Alibaba became the dominant marketplace in China. When looking at the core of Alibaba’s success, it is the way in which the company understands the needs of the Chinese market better than its competition, and using Chinese business culture to inform its strategic choices. This is especially true if you compare the company with performance, or lack thereof, of Amazon within the Chinese market. In the remainder of this article, I will explain to what degree Alibaba has been successful within the global market, and if it is likely to takeover Amazon’s dominant position in the Western Markets.

Section 2:

International chances for Alibaba

Small and Medium Business Expert Alibaba is the largest B2B marketplace in small and medium enterprises (SME). The expertise of the company is to connect these small players in a global network. This can be a first-movers advantages in a competitive global field. An advantage the company has over Amazon is, that its network is mostly based in China, the largest producer globally. Therefore the company has more opportunities to shorten the supply chain.
International expansion From 2009 onward, Alibaba has already successfully expanded to Western markets like the USA, Japan, and Western Europe, in addition to developmental nations, such as India. Within these markets they are specialised in B2B.
East – West Alliance Cross-border alliances have been a successful tool used by the company in the past. The most notable example of this was the cross-investment of Alibaba with Yahoo. Know-how on partnerships can be a useful tool for acquiring cultural knowledge and technology
Tactical acquisitions Since 2012, Alibaba has made investments and acquisitions in all kinds of companies that are beneficial to its long-term expansion. Anwar sums them up: ‘These include software companies, digital mapping, Singapore Post, e-commerce platform, robotics firm, mobile gaming and ticket booking and theater management service firms, Jet.com, Shanghai Media Group, SnapChat, South China Morning Post Group, Internet TV, a phone-maker, Didi Kuaidi, and an online retailer’ (Anwar 2017). In Europe specifically, there is a trend of increased investment by Abibaba in European tech.
Aliexpress Through ‘Aliexpress’ the company utilises its SME network for B2C marketplaces sales. Within the West, the platform is a success within the lower end of the market.

Why it won’t overtake Amazon in the West

The advantages of Alibaba described in the previous section may give the impression that the Chinese marketplace is destined to dominate the globally. However, there are four key challenges that problemises its potential success within Western markets.

Priority of resources Similar to Amazon, Alibaba has a limited amount of resources to invest in broadening the scope of its operations. Within the competitive markets of Europe and the USA, it is unlikely that it will be able to meet the already existing infrastructure of Amazon, let alone local players like Otto, Cdiscount, and Zalando. With about 80% of its revenue based in China, Alibaba won’t be quick to prioritize foreign investment over maintaining its domestic dominance of its.
Cultural apathy Again, this challenge is similar to what Amazon faced when it wanted to create a foothold in China, worsened by a bad reputation of Chinese goods within Western markets. If the company wants to be a key-player in higher segments of the consumer markets, Chinese products (both cultural and technical) need to gain more good will. Ask yourself: when, if ever, have you recommended a Chinese product or service for its quality, and do you think you will recommend a Chinese product in the future?
Trade war Recent trade tensions between the US and China could result in restricted access, increased import taxes, or even bans. Just look at how Huawei was restricted due to trade tensions. Recent rumours of the possible delisting of Chinese companies on American stock exchanges could further problemise Alibaba’s rise in the West.
Chinese political/bureaucratic challenges China’s political landscape is notoriously versatile, bureaucratic, and corrupt. The country has a weak rule of law, and finance from state-owned banks is almost exclusively channels through state owned enterprises. Jack Ma, the charismatic CEO of Alibaba has always had the right connection with the government to create success for his company, however, he is stepping down and his successor might not be as popular with the regime in Beijing. Indeed, in September of this year the government announced it will place government agents at all big private companies, including Alibaba.

Conclusion

In this article I have asked the question whether Alibaba will become dominant within Western markets at the cost of Amazon. The development of marketplaces, both in the West and the East, has been to dynamic to give a definitive answer to predict the future. I can, however, make a broad statement on what I think is likely to happen based on the arguments made above. Surely Alibaba will maintain and increase its presence within Western markets, forcing Amazon to remain competitive and innovative within the region. However, based on cultural differences and current market dominance, Alibaba will likely not take Amazon’s spot in Europe and definitely not in the US. Chinese brand like Alibaba don’t have the goodwill, infrastructure, and capital to challenge dominant Western players like Amazon. In line with this argument, it is perhaps not unthinkable to see a European-native marketplace overtaking Amazon top position in the future.

But, as always, I’m curious to know what you think. Do you agree with my analysis? Or, do you think that Chinese players will overtake the position of Amazon in Europe? Send your comments and questions to ivo@bandsom.nl, or in the relevant comment sections.

Bibliography

Articles and books:

Anwar, S. T. (2017). Alibaba: Entrepreneurial growth and global expansion in B2B/B2C markets. Journal of International Entrepreneurship, 15(4), 366-389.
Cui, Y., Mou, J., Cohen, J., & Liu, Y. (2019). Understanding information system success model and valence framework in sellers’ acceptance of cross-border e-commerce: a sequential multi-method approach. Electronic Commerce Research, 1-30.
Galloway, S. (2017). The four: the hidden DNA of Amazon, Apple, Facebook and Google. Random House.
West, J. (2018). Getting Better Value Out of Global Value Chains. In Asian Century… on a Knife-edge (pp. 91-123). Palgrave Macmillan, Singapore.
Kim, Y. C. (2018). Alibaba: Jack Ma’s Unique Growth Strategy and the Future of Its Global Development in the Chinese Digital Business Industry. In The Digitization of Business in China (pp. 219-247). Palgrave Macmillan, Cham.

Websites:

Alibaba’s quarter results: https://markets.ft.com/data/announce/detail?dockey=600-201908150705BIZWIRE_USPRX____BW5317-1
Aliexpress Investor Day: https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2019_AliExpress.pdf
Lucas, ‘China government assigns officials to companies including Alibaba, Financial Times: https://www.ft.com/content/055a1864-ddd3-11e9-b112-9624ec9edc59
Greeven and Yu, ‘Why Amazon didn’t make the cut in China’ The Business Times: https://www.businesstimes.com.sg/opinion/why-amazon-didnt-make-the-cut-in-china
Greeven, ‘Digital China is coming to Europe’ LSE Business Review: https://blogs.lse.ac.uk/businessreview/2018/04/24/digital-china-is-coming-to-europe/
Darlington, ‘Amazon Sees in Brazil Continent-Size Profits and Problems’ The New
York Times: https://www.nytimes.com/2018/12/27/world/americas/amazon-brazil-expansion.html