The biggest IPO in history is coming to New York in September – one which will open the door on the world’s largest e-commerce market – China. The company? Alibaba, the Chinese retailer which, with a merchandise volume of $248bn, last year grossed more sales than Amazon and eBay combined.
So what’s so special about Alibaba, and can it go from being the biggest IPO (initial public offering) to being the most valuable company on earth?
(1) Alibaba 101 – What Is It?
Dubbed by the Wall Street Journal as “a mix of Amazon, eBay and PayPal with a dash of Google,” Alibaba is the e-commerce giant which handles 80% of all online retail in China. It was founded in 1999 by Jack Ma, initially as a bridge between China and the rest of the world, a B2B platform connecting small Chinese manufacturers with buyers overseas. There is additionally a consumer-to-consumer site called Taobao.com (a bit like eBay), on which you can buy and sell any product imaginable. More recently it launched Tmall.com, a business-to-consumer portal that helps global brands such as Disney and Levi’s reach China’s middle classes (a bit like Amazon).
The scale is huge, and in just one day last year – a ‘Singles’ Day’ promotion held every year on November 11th – the firm’s sales exceeded $5.7 billion. The connecting glue that enables all these transactions is Alipay, developed – like eBay acquired and further developed PayPal – because of the lack of a trustworthy online payments system. Alipay has likewise been extended to enable people to pay their mobile and utility bills, and is now China’s biggest third-party payment tool. Alibaba has also supported the growth of the logistics industry in China, although a recent KPMG has highlighted that if Alibaba is to keep up with its explosive growth projections, an additional $2.5 trillion may need to be invested in buying land and constructing warehouses alone over the next 15 years.
(2) From Hangzhou To The New York Stock Exchange – The Biggest IPO Ever?
Alibaba wasn’t always going to list on the New York Stock Exchange. Initially, it tried to list in Hong Kong, lobbying the Securities and Futures Commission and the stock exchange to be allowed to have a partnership structure that would have let its top executives nominate the majority of board members (as is permissible on the NYSE). This was a particular issue for Jack Ma, who wanted to be able to keep full managerial control of his company, even when Japan’s Softbank and Yahoo! have respective 34.4% and 22.6% stakes. Under its agreement with Yahoo, Alibaba will be buying back 20% of Yahoo’s stake (for at least $7 billion), and Yahoo will have the right to trade-in a further 20% if Alibaba lists by Dec 2015.
Ma would rather accept a potentially lower market valuation and retain control of his company. This control has in the past led to contentious results, such as when, in 2010, he and a handful of associates spun out the Alipay division into a separate company, without Yahoo’s consent. Alibaba claimed that it needed to spin out Alipay and turn it into a domestic entity, to prevent delays in obtaining an operating license under newly issued Chinese regulations. Investors in the New York IPO should be aware that it does not include Alipay – and may also wish to reflect on the fact that, by comparison, PayPal currently represents 43% of eBay’s revenue.
Yet even without Alipay, at around $20bn, Alibaba still looks likely to be the largest IPO in US corporate history, and possibly in the world. This will imply an underlying market capitalization of at least $168bn. According to Piper Jaffray analyst Gene Munster, it could actually be as high as $221bn. In a research note, he said, “We believe Alibaba could grow 40% in FY15 and 30% in FY16. We believe this would imply $15.3bn in revenue in Alibaba’s FY16.”
At a market cap of $221bn, Alibaba would be the 15th biggest company in the world (it would be the 33rd biggest at $168bn), even if at $15.3bn, it would only be the 257th biggest in terms of global revenue.
So with the bullish growth estimates going up and up, what are potential Alibaba investors actually speculating on? Cheung Kong Graduate School Of Business (CKGSB) professor Teng Bingsheng told Forbes Magazine: “This is a play on China and China’s internet sector, which has made a bigger impact than any other country in the world. In a metaphor that Jack Ma proposed, he was using a machine gun while traditional companies were still practicing martial arts.”
The Economist believes that “the ongoing shift from investment- to consumption-led growth means that firms that make it easy to sell directly to consumers should benefit disproportionately,” and that while, “internet penetration is still lower than in developed countries; China will surely catch up. One informed estimate holds that China’s e-commerce market could double by 2020, to over $600 billion.”
Yet as Alibaba Vice President Joe Tsai acknowledges, “Over 90% of our business is in China,” and this is currently very much a Chinese rather than a global growth play. He adds, “it’s actually natural that we start with China and use acquisitions and investments to complement our business growth. So I wouldn’t be surprised that we do most of our things in China. We’ll be very careful in expanding through acquisitions outside of China. Obviously there are cultural challenges.”
Other risk factors include Alibaba’s delay in going fully mobile, with the majority of its profits coming from its PC business. Facebook faced a similar challenge at the time of its IPO in 2012, although the majority of its revenue does now come from mobile. This is a particular concern given the rise of Tencent in China, and its mobile social-messaging app WeChat. This led The Economist to argue: “So successful is WeChat, at integrating social networking, payments, e-commerce and entertainment that it has been valued by some analysts at more than $60 billion, three times what Facebook paid for WhatsApp, another messaging service.”
3) Culture & Leadership: Ma The Chinese Dreamer & Warrior:
As I discovered while researching my book ‘Dream to Last’, Chinese CEOs are fantastic at dreaming big, yet frequently lack the Western capacity of execution and innovation, which is needed to create truly great companies. Jack Ma is a notable exception. The first mainland Chinese entrepreneur to appear on the cover of Forbes Magazine, first to be named one of the world’s 100 most influential people by Time, and one of ‘Asia’s Heroes of Philanthropy’ by Forbes Asia, Ma’s success is attributed to his vision, perseverance and daring.
He is aiming high: “Set your sights high, the higher the better. Expect the most wonderful things to happen, not in the future but right now. Realize that nothing is too good. Allow absolutely nothing to hamper you or hold you up in any way.”
And like many Chinese CEOs, Ma is much more focused on the long-term rather than next quarter’s earnings. Just three days after the company filed for its US IPO, Ma led a ‘mass wedding’ for Alibaba employees on May 9 in Hangzhou. There were 102 married couples, to resonate with the 102 years that Ma has said Alibaba shall survive. His blessing went: “The length of our marriage is 102 years, and we have 87 years left. After 87 years you can marry some else. But within these 87 years, you cannot change your mind.”
When I questioned Ma at a China conference in 2008 whether it was better for companies to build winning families rather just making money, he responded that, “people are responsible for their own families but companies should build a sense of shared community”. He is attempting to build a sense of this into the corporate culture, with employees having a stake in the company. In 2011, Alibaba set up an interest-free mortgage fund called ‘iHome’, and already, 4,000 employees have received over $150m in loans.
And in 1999, Ma also listed another 17 people as co-founders in the company; people who had been his English students where he was teaching at university. Vice President Joe Tsai comments: “What really, really struck me, was that it wasn’t just Jack himself, or it was himself with another one or two guys. It was Jack already was with a group of followers. Basically these were his students… I just saw this energy. They were working very hard. They seemed happy. They had that glimmer in their eyes. And I thought to myself, ‘Wow, this is a guy who can really get people together. He’s a great leader. He can really build something’… Jack gave away a very substantial part of his equity to the founding team. That’s Jack. I think that is unique. You don’t see that in other places… Jack was all about being open and sharing from day one. I was quite amazed.”
Management gurus often talk about a “flattened hierarchy”, but again Ma is making it work in practice. He recognizes the need for individual recognition. On Day 1, all Alibaba employees have to come up with nicknames for themselves. COO Daniel Zhang’s nickname is Xiao Yao Zi, meaning ‘free and unfettered man’. He goes by ‘Old Xiao’. Ma’s nickname is Feng Qing Yang, which, according to The Financial Times, “comes from a reclusive swordsman character who was unpredictable and aggressive.” Ma acknowledges that he has a warrior spirit, commenting, “I had always wished that I was born in a period of war. I could have been a general. I thought about what I could have achieved in war.”
Finally, Ma has a social conscience, commenting, “We do not do business for survival, we are trying to positively impact the world. Society has given me so much, too much. What I can do is repay society.” His humble origins shape his guiding mission, as he reflects, “Others can imitate my management model, but they can never endure the hardships I have experienced, nor have my passion persistently to push forward.” Like Bill Gates, Ma has announced that he will give several billion dollars to finance, environmental, medical, and educational projects. He has been named chairman of the board of the Nature Conservancy in China.
He hopes that he can lift Chinese society, reflecting: “Just as the internet is revolutionising retail, we at Alibaba believe it will eventually do the same to fundamentally information-driven industries such as finance, education and healthcare. Once this change happens – once we are all connected – I believe the spirit of equality and transparency at the heart of the internet will make it possible for Chinese society to leapfrog in its development of a stronger institutional and social infrastructure… Our water has become undrinkable, our food inedible, our milk poisonous and worst of all the air in our cities is so polluted that we often cannot see the sun. 20 years ago, people in China were focusing on economic survival. Now, people have better living conditions and big dreams for the future. But these dreams will be hollow if we cannot see the sun.”
4) Global Battle: So Who Will Be The Most Valuable Company In The World?
In a world still adjusting to the loss of Steve Jobs, it is refreshing to find a such spirited and visionary entrepreneur in Jack Ma. In the next century, I believe that the truly great companies will be those which can successfully build global presence – succeeding both in China and the West – and continuing to do breakthrough innovation at scale.
Many Western companies have gone into China and failed – or, like Google, Facebook and Twitter – have been blocked out by the Chinese government. This has led to much ‘copycat innovation’ – with domestic players such as Baidu, RenRen and Sina Weibo filling the vacuum in search and social networking.
Rather than winning by default, what’s interesting about Alibaba is that, on a more level playing field, it managed to take on its Western equivalent, eBay, at home and win. Under Meg Whitman, eBay squandered an 85% market in e-commerce in China, after Alibaba launched its Taobao site. In a series of publicity stunts not unlike those of Virgin’s Richard Branson, Ma assumed the mantle of the underdog, proclaiming: “eBay may be a shark in the ocean, but I am a crocodile in the Yangzi river. If we fight in the ocean, we lose; but if we fight in the river, we win.”
Former employee, Porter Erisman, told The New York Times. ““With eBay he liked looking foolish and stupid. From a Wall Street investors’ perspective, he was willing to run Alibaba into the ground to defeat eBay – the only thing worse than a smart competitor is a crazy one who is willing to just spend all their money with no hope of making a profit.”
Yet while Alibaba can win at home, there are not yet enough signs that it can “Open Sesame” on the markets of the West. Amazon’s Jeff Bezos is already doing a excellent job of running a hypergrowth company that prioritizes giving customers the lowest possible prices at the lowest possible margins, over and above generating Wall Street profits.
CKGSB Professor Teng Bingsheng reminds us that, “Alibaba started as a bridge between China and the rest of the world. It was an import and export platform for the small to mid-sized importers in other parts of the world to find Chinese exporters.” With 90% of Alibaba’s revenues in China, for potential investors in the IPO, this is indeed a Chinese rather than a global play. When asked if Alibaba can repeat its success internationally, Bingsheng says, “Probably not any time soon… For the time being, Alibaba will probably focus on its e-commerce platform in China and maintain this bridge between the East and West.”
Against this backdrop, the world’s current most valuable company – Apple – is doing pretty well in China. Yes, Apple does software and services, but by being primarily a hardware device maker, it has managed to avoid some of the freedom of expression and big data pitfalls of other Silicon Valley companies entering China. With a premium brand appealing to fashion-conscious Chinese consumers, in 2013, Apple did $37.9bn of business in China, 4.5 times Alibaba’s current annual revenue. And with a long-awaited deal now completed to sell iPhones through China Mobile, the world’s largest cellular operator, last quarter Apple saw Chinese revenues jump 28%.
So Alibaba is currently a great bet on China, whose sheer domestic scale alone gives it a prospect – but no certainty – of becoming the most valuable company in the world. However, there is one domestic competitor in particular which could still steal Alibaba’s thunder. With a market cap of 1.2tn Hong Kong dollars ($166bn US), Tencent is an excellent company, with a similar market cap to that expected of Alibaba.
Tencent founder Pony Ma famously once said “To copy is not evil”, yet Jack Ma, founder of Alibaba Group, has said of Tencent: “The problem with Tencent is there is no innovation, and all things are copied.”
Well, contradict this: Tencent’s WeChat messaging app has over 100m international users, and is one of the first examples of the kind of leapfrog innovation that’s likely to come from China to the West, rather than vice versa. With over a billion users overall, Tencent is already set to overtake Facebook’s 1.2bn users. So Jack Ma should keep a intense eye on Tencent.
Jack Ma came up with the name Alibaba while sitting in a coffee shop in San Francisco, because, “e-commerce is global, so we needed a name that was globally recognized”. He said he asked a waitress whether she recognized the name and she said yes. In battle to become the biggest company of the 21st century, Alibaba is set up to be up in the top 5 or 6, alongside Tencent, Amazon, Google, and possibly eBay.
The overall winner will be the one that can be a true global player in the West, China and emerging markets, and become a real bridge between China and the West. For this company, it will be vital that the leadership at top ensures it continues to innovate, execute flawlessly and maintain integrity and connection with stakeholders.
Alibaba is in with a strong shout to overcome Apple as the world’s premier company, if it can continue to make the right big calls. As it moves towards IPO, Alibaba has been on a buying spree of smaller Western companies to attempt to bolster its global presence, but, as it matures and its organic growth continues, it’s going to have to make sure that a more global outlook from its Hangzhou heaquarters, and continued innovation, are firmly implanted in its DNA.
The world’s premier company will continue to be right on the tough calls to. In particular, I would bet that Jack Ma, like Steve Jobs, will be prepared to fight to the last to ensure his company succeeds. With the iPhone 6 and possible iWatch launch on Tuesday Sept. 9th, we’ll learn more this week about Apple’s innovation pipeline, and how much fight it has left in it… for the moment, Tim Cook seems to be on the backfoot.
Credit: Steve Tappin