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Digital Transformation

The secrets behind the success of Alibaba, the Chinese e-commerce giant heading for a $24bn IPO

By Andrew Harrison |

September 10, 2014 | 6 min read

Welcome to a regular new monthly look at marketing insights and breaking stories in Asia – everything from A to Z – from Alibaba to Xian, Yangon and Zhengzhou. In a series of posts, we’ll introduce you to this fascinating market where traditional marketing othodoxy meets the speed and scale of Asian opportunity.

In the first blog, we’ll look at Alibaba, a modern-day fairytale to rival 1001 Arabian Nights from which the company takes its name – and the poster boy for the speed and scale of Chinese marketing opportunity.

Alibaba's much hyped IPO is fast approaching

You’ve probably never heard of Hangzhou, the capital of Zhejian province in Eastern China, even though its population of almost 10 million is 10 times the size of US tech city San Francisco and bigger than any city in Europe. But Hangzhou, near Shanghai, is the home of schoolteacher Jack Ma, who launched his fledgling web business, Alibaba, from there connecting local Chinese manufacturers with potential buyers overseas not much more than a decade ago.

From this modest business to business idea in his home town, Ma’s company expanded quickly in the next few years. Alibaba is now a network of interlocking companies serving complementary markets. On the one hand is the consumer platform Taobao – similar to eBay – which Ma established to help consumers connect with each other; while on the other hand, Tmall occupies the retail space, formed in response to sellers’ demands for a piece of the action on the Alibaba portal.

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Both Taobao and TMall are now an indelible part of Alibaba’s success. The combination is a runaway success: shoppers on the Taobao and TMall sites spent almost $6bn on China singles day in Autumn last year – and Alibaba handled the sales transactions too, charging Tmall’s shops commission fees and charging Taobao merchants for advertising.

Put together, Alibaba now completes an integrated online portal in China that’s bigger than Amazon and eBay combined. In total, Alibaba’s customers spent almost $300bn last year – most also through the firm’s Alipay online payment system – owing to rapid growth in internet usage and an expanding middle class. So steep has been Alibaba’s growth that the different companies in the group lead across the “holy trinity” of internet metrics – transactions, sales and deliveries – accounting for about one half of all online payment transactions in China, about 80 per cent of online retail sales and about 60 per cent of all parcel deliveries.

Now, western investors can get a piece of the action with Alibaba set to become the largest-ever initial public offering (IPO) in America, with the firm having unveiled its prospectus to list in New York earlier this summer. Analysts estimate the IPO could raise as much as an initial $24bn, based on filings in New York last week to the US Securities and Exchange Commission valuing the whole company at more than $163bn. Quite a return in 15 years and catapulting this Hangzhou start-up into the top five of global tech companies!

So what’s the secret that has helped grow Alibaba over the last decade? Two things stand out:

First, Alibaba has developed quickly an interlinked network of related operations. Those strategic moves into the complementary B2B and B2C spaces have created a ringfenced network of companies that serve each other. Now, group companies sweep together a single corporate offering that would be as if eBay and Amazon, Paypal and WhatsApp were all housed in one corporation. In Alibaba they are – a mind-blowing combination of scale and market leadership.

Second, Alibaba has tapped into surging market growth: the spectacular rise of China’s economy in general has been supported by a leap in mobile phone adoption (with consumers by-passing landlines and 2G to move straight to smartphones) and a further surge to become the world’s largest e-commerce market.

Now Alibaba is the first chance for western investors to see the Chinese dragon up close with other companies like Tencent (which owns WeChat, China’s leading social network) and Baidu (China’s market leading search engine in a Google-free market) set to come along next and challenge the nature of global branding.

The key next question will be who wins in the next market transformation to mobile commerce for China’s 1.4bn consumers. Alibaba’s IPO is the first fundraising designed to secure that future leadership by freeing up funds to invest, especially in the social networks that are changing communications overnight for Chinese consumers. But it won’t be the last. Watch this space!

Andrew Harrison is development director Asia Pacific for WPP’s Brand Union. You can follow him on Twitter @AndJHarrison

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