Monday October 14, 2019

ALIBABA’S SUCCESS AND BUSINESS IN CHINA

September 25, 2014

On Friday, September 19, Alibaba emerged into the international stock market with an initial public offering of $25 billion, the largest ever in history. The Chinese e-commerce company set its initial share price at $68, a figure that jumped 38% to $93.89 by the time trading ended on Friday. Alibaba’s IPO dwarfed Facebook’s $16 billion two years ago, and surpassed the initial  offering of the Agricultural Bank of China, which earned $22billion on the Shanghai and Hong Kong exchanges in 2010.

Alibaba is an e-commerce company similar to eBay and Amazon combined. The company owns the popular retail sites Taobao, which allows members of the public to buy and sell directly from one another, and Tmall, where companies set up online stores to sell products to consumers. Alibaba was founded in 1999 in English teacher Jack Ma’s apartment in Hangzhou, where he and 17 other partners pooled together $60,000 to start their business. Now, Alibaba dominates Chinese online retail, accounting for over 80% of e-commerce in China over the last year. After Friday’s IPO, it has also made Jack Ma, the company’s Chairman, the richest man in China.

The e-commerce titan’s rise to riches owes much to the innovation and foresight of its leadership. Jack Ma and his fellow founders saw the lack of brick-and-mortar infrastructure in China and the hurdle it presented for the many small business owners who sought a wider market for their products. They decided to build an online marketplace instead, to great success. However, this success has created some anxiety on the part of American business leaders, who see Alibaba as a potential threat should it attempt to expand further into the United States market.

Already, the company has begun to invest in countries around the world, from South Asia to Latin America. As Ma is quick to point out, Alibaba is expanding into developing countries, which, like China, lack brick and mortar infrastructure and have the opportunity for further growth online. The United States, with an already well established commercial infrastructure, both physical and virtual, poses more difficulty Alibaba.

Additionally, Alibaba’s rise to international riches on Wall Street has served to highlight issues American companies have recently faced in China. Alibaba’s IPO follows closely on the heels of Chinese anti-monopoly investigations of Microsoft and Qualcomm this summer. Attempts by Beijing to limit, or completely block, the access American companies have to Chinese markets is a source of tension between the U.S. and China. To many American companies, this move seems an overtly protectionist measure, and illustrates the existence of a double standard. Beijing accuses foreign companies of being monopolies, but Alibaba, which processes the large majority of internet sales on its own, is under no such scrutiny.

For internet based companies, such as social media sites or online retail platforms, this frustration must feel particularly acute. The 600 million internet users in China, double the population of the entire United States, presents an incredibly attractive opportunity for expansion. The blocking of Facebook, Google, and Twitter in China has allowed native equivalents like Baidu and WeiBo to control the market. As Erin Ennis, Vice President of the U.S.-China Business Council, remarked, “Alibaba’s IPO is a good reminder that among the reasons why U.S. firms haven’t succeeded in China is that they are largely barred from doing business there.”

Legal aspects of Alibaba’s public offering present yet another source of trepidation for investors. Under Chinese law, foreigners may not own stocks in Chinese internet companies because this might encourage dissent and make information spread on the internet more difficult to control. In order to get around this law, Alibaba is using a Variable Interest Entity (VIE) in order to go public internationally. VIE creates a holding company with a Chinese subsidiary that is entitled to profits from the original company.

American stockholders do not own Alibaba, but, as The Diplomat explains, “a company that has some contracts that are supposed to mimic what it would look like to own the Chinese company.” Thus, foreign stockholders have no control over the company and only the Chinese court may enforce profit claims. Investing in Alibaba and other Chinese tech companies, like Baidu, which follow the same structure, presents a distinct risk because it places investments at the mercy of the Chinese government. Certainly, the high IPO of the company speaks to the trust  investors have in it, and Beijing is unlikely to attempt to intervene so directly in such a prominent company, but the possibility remains.

Alibaba and Jack Ma appear to have a long road ahead, particularly as the company expands into new ventures in other developing countries. Critically, the booming success of Alibaba illustrates the power of the Chinese market on the world stage, particularly to American businesses and investors.

 

For more information about this topic, consult the following news sources:

China Daily – “Alibaba issues additional shares to raise IPO total to $25b”

Entrepreneur – “How Alibaba’s Jack Ma Became the Richest Man in China”

Fortune – “Alibaba’s Jack Ma become’s China’s richest tycoon”

People’s Daily – “IPO of Alibaba indicates growing confidence in China’s economy”

Reuters – “Alibaba and China’s Slowdown”

Reuters – “Alibaba’s Jack Ma rises to top of China’s rich list as tech tycoons gain”

Tampa Bay Times – “As Alibaba celebrates, U.S. internet firms suffer from being shut out of China”

The Columbus Dispatch – “It’s official: Alibaba largest IPO of all time”

The Diplomat – “No One Who Bought Alibaba Stock Actually Owns Alibaba”

The Economist – “Alibaba: The World’s Greatest Bazaar”

The Hindu – “Alibaba in New York”

Wired – “Alibaba’s Founder on Why His Company is Killing It in China”

Xinhua – “Alibaba stocks surge 38 percent on record NYSE debut”

People’s Daily (人民网) –成就阿里巴巴的还有谁?”

Sina (新浪) – “阿里巴巴巨无霸战舰之下的隐形利润引擎”

Xinhua  (新华) –“马云成为新首富 阿里巴巴上市成为全球最大IPO”

Compiled and edited by Molly Bradtke