Credit: Shutterstock photoO ne week after being named the new chief executive of China's Internet giantAlibaba Group ( BABA ) on May 7, Daniel Zhang put international markets at the top of the company's shopping list.
"We must absolutely globalize," Zhang said at a companywide meeting, as reported on Alibaba's news site Alizila.com. "We will organize a global team and adopt global thinking to manage the business, and achieve the goal of global buy and global sell," he said.
Halfway around the world, Seattle-based e-commerce giantAmazon.com ( AMZN ) laid out similar priorities. During an April 23 conference call after reporting first-quarter earnings, Brian Olsavsky, vice president of finance, was asked about Amazon's international business, especially in China.
"You're seeing a lot of invention from us in China right now," he said. "We're doubling down now with an Amazon Global Store on our own site, which gives Chinese customers access to over 1 million Amazon products globally."
In addition to its own online store in China, Amazon, in March, also opened an online storefront on Alibaba's business-to-consumer platform, Tmall.
"We continue to be selective in our investments there, but we're taking the long-term view, and we have hopes for the new initiatives with the Global Store and the Tmall flagship store," Olsavsky said.
Alibaba dominates e-commerce in China as Amazon does in the U.S. How much damage either might inflict on the other as they pursue global domination will play out over the next several years. The most likely winner: consumers.
Despite years of effort, Amazon has captured only a small market share in China.
Amazon, along witheBay ( EBAY ),Google ( GOOGL ),Facebook ( FB ) andTwitter ( TWTR ), has struggled to break into China. Government restrictions are part of the challenge. Another is understanding the psyche of China's consumers and businesses and how best to reach them. Amazon's decision to use the Alibaba Tmall platform reflects how difficult it is to break into China without partnering with a Chinese company.
"The China e-commerce market is very complicated compared to the U.S.," said Wenbin Qiu, chief executive of China e-commerce companyBaozun (BZUN), in an interview with IBD following the company's initial public offering on May 21. Alibaba Group owns an 18% stake in Baozun.
"The China e-commerce market is growing very fast and you need to have a flexible strategy and be able to move very quickly," he said.
Qiu said he is not concerned about competitive threats from Amazon in China, as many foreign companies have lacked this flexibility and speed. In the first quarter at Amazon, international sales accounted for 36% of revenue, but just a sliver of that came from China.
"We don't see them as a big threat to us," Qiu said.
EBay In Over Its Head
An example of the challenge of breaking into China comes from eBay. It entered the China market in 2002, through an acquisition, to tap into what then was China's small but growing e-commerce market. It grew quickly and reached a 75% share of the online auction market. Alibaba took notice and acted.
Founded in 1999, Alibaba was still a fledgling startup, but with bold ambitions. Founder and then CEO Jack Ma responded to eBay by creating Taobao, a consumer-to-consumer e-commerce website in 2003. It was free of charge for buyers and sellers of goods. But eBay, unlike Taobao, charged sellers a fee for listings and transaction fees. Ma was not aiming to make money from Taobao at the time. He simply wanted to thwart eBay. Ma also had a clear understanding of how to appeal to Chinese consumers and businesses, which eBay lacked.
"EBay may be a shark in the ocean, but I am a crocodile in the Yangtze River," Ma said at the time, as quoted in the book "The Chinese Dream" by Helen H. Wang. "If we fight in the ocean, we lose, but if we fight in the river, we win," Ma said.
Having committed a variety of strategic errors, eBay shut down its China site in 2006.
"One thing we've learned operating here for three or four years is that actually we are going to be better served by tapping into a local partner who has local knowledge," eBay's then-Chief Executive Meg Whitman told Reuters in December 2006.
The company does have an eBay China website, operated as a wholly-owned subsidiary. And in April, eBay announced a partnership withJD.com (JD) to create an online hub for buying and selling goods. But eBay's grand ambitions in China have dwindled and it is no longer considered a competitive threat. JD.com operates a direct-sales business resembling Amazon.com and is partnered withTencent Holdings (TCEHY), one of Alibaba's chief competitors.
"EBay initially went into China with a very un-localized approach that didn't appeal to the China consumer," said Scot Wingo, CEO of e-commerce software firmChannelAdvisor (ECOM). "EBay's playbook didn't work in China."
U.S. Market: Open Sesame
The evidence suggests that Alibaba will face less resistance in entering the U.S. market.
That is in part because U.S. regulators and consumers are more welcoming than China to foreign companies. But also among Alibaba's advantages over Amazon in China is its business model.
Alibaba's core e-commerce platforms, which account for a majority of revenue, are Tmall and Taobao. Tmall is China's largest business-to-consumer platform, which retailers worldwide use to establish online stores. Its clients range all the way toApple (AAPL) andNike (NKE). On Tmall, Alibaba charges sellers a much lower rate than Amazon on the sale of goods. Taobao's consumer-to-consumer marketplace is still free to use, but Alibaba makes money on the site through advertising, search-placement fees and other services.
Unlike Amazon, Alibaba's Tmall does not maintain massive distribution centers to hold inventory, nor does it take part in direct sales. The benefit is that Alibaba has a lower-cost business model, saving it money that it passes on to their customers.
"There is less cost in the Alibaba ecosystem," said Wingo. "The Alibaba business model has proven to work against eBay and Amazon in China. Whether that model will work in the U.S. we don't know yet," he said.
Alibaba has been investing heavily in numerous U.S. companies as it plans an aggressive expansion.
In October 2013, Alibaba set up a U.S.-based investment group to research and guide Alibaba's investments. Leading the group is Michael Zeisser, who joined Alibaba after leading digital media and Internet commerce strategies atLiberty Media (LMCA) for nearly a decade. The group's initial investments included $202 million for a stake in ShopRunner, an Amazon competitor that sells products from thousands of brands.
Alibaba also took a $170 million stake in Fanatics, a sports merchandise e-commerce retailer. It also invested $120 million in U.S. mobile game developer Kabam. And it's invested in Quixey, a mobile search developer.
Last year, Alibaba set up offices near Amazon in Seattle, leading to speculation that the site will be its U.S. headquarters. In March, Alibaba announced that it is opening a cloud-computing data center in Silicon Valley. It will be run by Aliyun, which competes with Amazon's cloud operation, Amazon Web Services.
Alibaba also owns and operates 11 Main, a U.S. e-commerce retail site for unique goods and crafts. And in April, Alibaba announced the purchase of a 9% stake in Seattle-basedZulily (ZU), an e-commerce website offering flash sales on children's apparel and other products for mothers, including clothing, shoes, home decor, toys and gifts.
Alibaba has said its strategy is a two-way street, aiming to connect overseas retailers to Chinese consumers, and link Chinese suppliers to international retail markets.
"If Alibaba does bring its China business model to the U.S., there is a high likelihood they will be disruptive to incumbents," said Wingo. "We just won't know until they do it. By planting these seeds with their investments they are learning a lot about U.S. consumers."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
