Fall
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Clarifying Alibaba’s Business and Growth Strategy
Gina Mahaz
Boston University
Boston University
HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
Table of Contents
Abstract ................................................................................................................................................... 3
Introduction ........................................................................................................................................... 4
What Alibaba is, and isn’t .................................................................................................................. 5
Valuing the Consumer ......................................................................................................................... 6
SWOT Analysis ..................................................................................................................................... 7
Operating in the Shadows ................................................................................................................... 9
Confronting the Challenges ............................................................................................................. 15
Conclusion ........................................................................................................................................... 17
References............................................................................................................................................ 18
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
Abstract
This paper studies the success of Alibaba in its domestic e-commerce market and
analyzes the challenges it faces when expanding globally. Its business model has created
obstacles for expansion since entering the U.S. stock market, and these challenges are
compared with the main e-commerce competitor in the American market. An analysis of
its earnings and revenue demonstrate a departure from its original business strategy, and
suggestions are given to improve its transition into the global e-commerce environment.
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
Introduction
In the past 25 years, China has soared economically to become one of the richest
countries in the world. Much of this has to do with China’s enormous population, which
offers a hard-working and inexpensive work force that has been very attractive to foreign
investors looking to cut costs. As of July 2015, the U.S. has imported $267.7 billion in
goods from China, an amount far exceeding any imports from America’s other trading
partners (U.S. Census Bureau, 2015). The abundance of American products bearing the
label “Made in China” shows how powerful China has become in the manufacturing
sector. With the huge gains in revenue seen by large corporations since shifting their
production to the Chinese market, it only makes sense that smaller companies would also
want to capitalize on the cheap goods and labor that the Chinese are known for. This
scale of investment would not be possible without the influence of e-commerce, as it is
making global trade easier than ever before. Small and mid-sized businesses in China and
abroad are now using alibaba.com as an important tool in managing their supply chain.
This increased connectivity seems like a win-win situation for alibaba.com as well as its
consumers, so how did it get to be where it is today?
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
What Alibaba is, and isn’t
In 1999, Jack Ma founded what came to be one of the world’s leading ecommerce companies. Alibaba is an online exchange that creates a marketplace to
connect businesses to Chinese manufacturers and their products. Manufacturers can list
items for sale along with bulk pricing information, and buyers can also browse suppliers
and put in product requests. While Alibaba.com is geared toward wholesale purchasing
and manufacturing using a B2B model, its parent company Alibaba Group has numerous
subsidiary companies – such as Taobao and Tmall − that follow C2C and B2C models as
well. Alibaba.com’s revenue model blends advertising revenue with premium
memberships for sellers. Alibaba Group recently went public in 2014, conducting its IPO
in the U.S. and opening at an impressive $68 per share (TIME, 2014).
Alibaba is sometimes referred to as the “Amazon of China” (Forbes, 2015), but it
shares some key differences from its main competitor. Unlike Amazon, Alibaba does not
need to spend any capital maintaining warehouses and managing inventory. By acting as
a middleman between suppliers and businesses, Alibaba avoids the operational costs that
eat up much of Amazon’s profits.
Alibaba has also segregated its main website into a wholesale version of the
website. Its difference from the main site is not readily apparent, but it offers a distinctly
different service: instead of contracting suppliers for orders that have often not been
manufactured yet, the wholesale site allows manufacturers to sell existing inventory at
wholesale rates. Another difference is the form of payment, as the wholesale site uses
AliPay to quickly process transactions and transfer the earnings to the seller, expediting
the process. This business tactic targets small and mid-size businesses and is strategic in
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
the way that it offers products that can be shipped to consumers more quickly, with low
minimum order quantities, using Alibaba’s proprietary payment service.1
Valuing the Consumer
Before Jack Ma stepped down as CEO in 2013, he reminded his colleagues to
keep sight of Alibaba’s initial goals going forward, saying, “We will continue to adhere
to the principles of ‘customers first, employees second, shareholders third’” (Wall Street
Journal, 2015). The company’s stated purpose is to make doing business simple and
portable, allowing businesses to manage their supply chains from anywhere. Alibaba
values a company culture that “is about championing small businesses” (Alibaba, 2015)
while being transparent and innovative.
Alibaba’s user base is diverse: Chinese manufacturers and suppliers that wish to
sell their products, domestic businesses buying wholesale, and foreign businesses looking
to import Chinese-made goods. Following Alibaba’s values means catering to what the
consumers want – this includes a fast and functional website, diverse product offerings,
analytics for sellers, as well as mobile functionality. They also want secure payment
processing, which Alibaba has capitalized on with the introduction of AliPay. The
consumer’s needs are not always easy to achieve, however. Online marketplaces are
notorious for attracting scammers and middle-men looking to sell counterfeit goods at a
higher cost. Consumers are sometimes faced with a product that was misrepresented in
the listing or is of unacceptable quality. In order to mitigate this, Alibaba offers Trade
Assurance protection for participating suppliers. After signing a contract with the
1
AliPay works similarly to Paypal. It also offers financing and loans to small businesses.
In 2011 AliPay was removed from the Alibaba Group umbrella and transferred to a
private venture owned by Ma.
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
supplier, Alibaba will refund your order if the quality is not up to standards, if your order
comes late, or doesn’t arrive at all. While it does not eliminate the problem completely, it
is aimed to strengthen consumers’ confidence in doing business through Alibaba.
SWOT Analysis
Strengths:

Alibaba’s reach is virtually unlimited, and anyone can use the site. It works for
any user and for any product, and also offers the buyers a supplier database for
creating the products that do not exist yet. This allows the site to appeal to a large
variety of consumers.

It has a loyal base of suppliers and capitalizes on this by offering premium
memberships that increase product visibility. More sellers means less visibility, so
as Alibaba’s marketplace expands, the value of a premium seller membership
increases. Businesses wanting to increase their sales will have to reach more
consumers in order to compete. Alibaba gains exponentially more revenue the
larger they grow.

Alibaba.com has infinite room to expand. They have no inventory to maintain and
operational costs are low, which gives them an advantage over the competition.
Weaknesses:

Despite precautionary measures, Alibaba is vulnerable to scammers, fraud, and
copyright infringement. It is easy for suppliers to misrepresent themselves or their
products. Mitigative efforts are the only effective solution, as it is nearly
impossible to prevent these practices completely.
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?

Suppliers must be equipped to deliver the products themselves, which often
involves crossing international borders. This may prevent some smaller
manufacturers that do not have the necessary infrastructure or legal knowledge
from listing their items.

Trade assurance does not apply to all suppliers. Alibaba has no control over the
supplier’s fulfillment of orders, and consumers may be hesitant to use Alibaba if
they had a problem with the quality or accuracy of an order in the past (even if the
price was refunded). The large variety of suppliers creates inconsistency in the
consumer experience.

Buyers must wait for the seller to respond in order to receive quotes or to place an
order. Unlike sites such as Amazon that keep inventory on hand, ordering
products from Alibaba is not instantaneous and requires buyers to directly contact
the supplier in order to purchase. There may also be a language barrier when
communicating with certain suppliers.

The site is expansive and often overwhelming. There are thousands of products in
each category to sift through if you are browsing.
Opportunities:

The massive shift of American companies toward using Chinese manufacturers is
causing the number of buyers and sellers to rapidly expand. Alibaba is the easiest
and most comprehensive source for western businesses to acquire Chinese-made
goods.

Its popularity makes the site very attractive to potential advertisers, allowing them
to charge much higher rates for ad space than a competitor with less web traffic.
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Threats

Alibaba’s success is closely tied to China’s economy, which has recently proven
to be volatile. If China’s growth slows considerably or the stock market crashes,
the vast majority of Alibaba’s user base will suffer.

American legislation that discourages companies from using Chinese-made
products could hurt the manufacturing industry and prevent expansion into the
U.S. market. It is unclear whether these laws will be put in place, but if American
businesses pull out of China, Alibaba’s suppliers may start going out of business.

Disgruntled buyers have posted several negative reviews online discouraging
others from using Alibaba after having a negative experience with sellers. This
may scare potential new buyers away from using the site.

There is a lot of “brand confusion” among American business owners and the
public (Fortune, 2014). Many westerners do not understand what Alibaba is or
how it works, which prevents it from becoming as ubiquitous in the U.S. as it is in
China.

Past lawsuits and scandals have raised questions from foreign investors about the
integrity of the company.
Operating in the Shadows
Alibaba’s increased success led Ma to expand his focus to other investments. Its
extensive list of subsidiaries and business investments are impressive, and Alibaba
Group’s portfolio continues to expand. Ma has also voiced his plans to expand globally
into other markets. Despite their surging profits, could Ma be spreading his company too
thin? And how much is alibaba.com actually making in relation to its sister sites?
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
Foreign investors have no idea, because Alibaba Group does not report the
breakdown of revenue from each individual company – only the total quarterly revenue
from all of its subsidiaries is reported. The company explained:
“Although the online and mobile commerce and related services consist of
different business units of the Company, information provided to the chief
operating decision-maker is at the revenue level and the Company does not
allocate operating costs or assets across business units, as the chief operating
decision-maker does not use such information to allocate resources or evaluate the
performance of the business units” (Ciecielski, 2014).
This is unusual and potentially worrying for some investors. Different segments
have different needs, as well as different markets.2 In the case of alibaba.com, it is
unclear whether this site is showing growth in comparison to the other subsidiaries or
whether some aspect of the business model needs to be changed to keep pace. In other
words, it is difficult to tell if the website is being managed effectively and if what they’re
doing is succeeding.
It is also possible that this obfuscation of finances is a deliberate strategy on the
part of Alibaba Group since launching their IPO. BABA’s3 annual income statement
reveals an escalating trend of investment spending, which increased by nearly 10,000%
from 2013 to 2015 (NASDAQ, 2015). Reported revenue has also risen at an average of
56% per year (Laing, 2015). Looking at their sprawling investments and acquisitions,
Alibaba Group seems to behave more like a hedge fund than an e-commerce syndicate.
2
Such is the case with taobao.com, whose market is Chinese consumers, and
alibaba.com, which markets to domestic and international businesses.
3
BABA is Alibaba Group’s stock symbol.
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
Figure 1: BABA’s statement of cash flows for fiscal year 2015. Investment spending
totaled over $8.6 billion, a sharp increase from 2013. (2015, NASDAQ).
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12
Its stake in most of their investments,
which include Lyft and Snapchat, are below 50%;
this means investment gains do not need to be
included in Alibaba’s operating profit, potentially
shielding its reported earnings from losses due to
these investments. It is also speculated that their
reported user base may be inflated, as shown in
Figure 2, although there is no tangible proof of
any wrongdoing on the part of Alibaba Group.
However, Alibaba’s steady growth rates4 amidst a
slowing Chinese economy are suspicious, in
addition to its ultra-consolidated earnings reports
and off-the-books investments.
There are several hypotheses for this trend.
It is very unlikely that the revenue being reported
is nearly on par with total e-commerce spending
by the average American, so where is this money
coming from? Due to governmental regulations
on foreign trading, BABA is only able to list itself
in the U.S. stock market though a holding
company.5 It is possible that adding investment
Figure 2: Alibaba’s active user base has
grown at a consistent rate each year, closely
matching revenue growth. The slowdown of
China’s economy has no noticeable effect on
Alibaba’s expansion. (2015, Barron’s)
Alibaba’s average three-year revenue growth surpassed Google, Amazon, and
Facebook.
5
Revenues are reported through Alibaba Group Holding, located in the Cayman Islands.
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HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
earnings to reported revenue when funds are transferred into the holding company could
create the illusion of these disproportionate earnings. Since the breakdown of BABA’s
earnings is not available to shareholders, it is very difficult to know how revenue is
distributed within the company. It is easy to covertly add money from private investments
to revenue when it is exchanged through so many different hands, and Ma has a large
constellation of companies6 that would allow him to do this. One of these companies,
owned by Ma, acquired AliPay after it was removed from Alibaba Group’s investments.
This is a large potential source of undisclosed funds since it expanded its operations to
include financial investment operations.
Ma and the members of his board of directors annually receive a huge amount of
shares, billions of which have been cashed out within the past few years. Alibaba’s
structure could be allowing Ma and his partners such a large percentage of the company
so it can convert capital gains into revenue under the table. These are just some of many
ways Alibaba could potentially boost its earnings artificially. The complicated corporate
structure ensures their financials are difficult to make sense of.
If this is true, and Alibaba Group is inflating its revenue to attract American
investors, then alibaba.com’s business model may not be as successful as it seems. And
even if the earnings are accurate, Alibaba’s broad investment strategy may be distracting
from its core business operations. The possible managerial neglect of alibaba.com is
convincing due to a number of customer complaints and legal issues with the site, most of
A large number of these are investment companies owned by Ma, Alibaba’s co-founder,
or another investment partner. The transfer of funds between these companies are not
disclosed.
6
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which revolved around deceitful suppliers and customer care. Despite preventative
measures, Alibaba has had many recurring issues with fraud.
At one point, many verified gold status suppliers7 were scamming buyers,
amounting to over 1,100 fraudulent transactions in 2010 alone (Harris, 2011). It was
discovered that a large number of internal sales employees were likely receiving
kickbacks to allow fraudulent suppliers to bypass the independent verification process.
Not only is this a significant internal management problem, but it also undermines
buyers’ trust in the legitimacy of Alibaba’s suppliers. While the goal of the Trade
Assurance program was to lessen these risks, not all suppliers participate in the program,
and many businesses cannot afford the hassle of a product shortage if they are not sure
the supplier is legitimate. Buyers have also voiced complaints about the refund process
tying up their capital for extended periods. Alibaba has also faced a number of lawsuits
regarding counterfeit items being listed that violate intellectual property laws. The
number of extremely dissatisfied customers posting their experiences on the web is not
something one would expect from a company with 367 million users and growth that
surpasses tech giants like Google. These trust issues have not been eradicated completely,
and many buyers seem to be turning away from Alibaba. This raises red flags – how can
so many dissatisfied customers lead to increased growth? However, it is unclear in the
financial statements whether alibaba.com’s reputation affected sales or what internal
resources are being used to improve the customer experience.
7
Gold status suppliers pay tiered premium membership fees and receive a verification
icon, indicating to buyers that their company is legitimate.
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15
Confronting the Challenges
One of the biggest hurdles for Alibaba is expanding beyond the Chinese market.
A large portion of sales still comes from the domestic market. As mentioned on page 10,
there is a lot of brand confusion about what alibaba.com is and how the other companies
in the Alibaba conglomerate are related. It will also lose its role of market dominator in
China and face some strong competitors, mainly eBay and Amazon. Not everyone is
impressed by the numbers – Josh Green, owner of a global trade consulting company,
says, “I have great confidence about their ability to beat Amazon in China, and very little
confidence in their ability to beat Amazon in the U.S.” (Tully, 2014).
After a brief surge of interest in BABA from investors, Amazon’s stock has been
performing at an
increasingly higher
rate than its foreign
competitor. Alibaba is
often touted as being
significantly more
profitable than
Amazon, but Alibaba
Group’s success may
be misleading due to
Figure 3: BABA’s performance has been declining as Amazon’s stock
surges. (2015, Forbes)
HOW MUCH GROWTH IS TOO MUCH FOR ALIBABA?
its reliance on investments for growth, as well as their recent controversial income
statements. Amazon has none of these investments and much higher revenue,8 but
Amazon’s extensive operating costs puts the two e-commerce giants on a level playing
field financially. Investors may be seeing Amazon as the safer option due to the
unpredictability of China’s economy and Alibaba Group’s messy and obscure business
strategy.
Alibaba Group needs to begin prioritizing its core businesses over its investments
in order to reinforce the value of their brand. Customers as well as investors do not have
enough faith in the ability of alibaba.com to stay relevant in the e-commerce world. The
brand has seemed to lose focus and could be compensating for a slowdown in its ecommerce platform by jumping into new ventures. There is a very large opportunity for
alibaba.com to take advantage of the growing desire of U.S. businesses to source
products from China, but they have yet to establish a significant space in the American
market. Alibaba must simplify its brand image by focusing on alibaba.com as a global
directory for supply chain managers. The current website is confusing for first-time users;
a North American version of the website needs to be developed to emphasize how
Alibaba works and which directory (Alibaba, Alibaba wholesale, or AliExpress) is right
for what kind of business. Alibaba must continue to innovate their online exchange
approach in order to stay above the competition and stand out globally as an e-commerce
leader. It also needs to drastically improve consumer confidence and the quality of
sellers.
NASDAQ reported Amazon’s 2015 revenues at nearly $89 billion (NASDAQ 2015a).
Alibaba’s was $12 billion (NASDAQ 2015b).
8
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Conclusion
China’s economic success and growing middle class have given Alibaba a firm
control of the Chinese e-commerce market. But their capacity for growth may be limited
if they cannot implement the needs and wants of foreign markets, such as the United
States. Alibaba is in an excellent economic position to shift its focus to improving their
existing business models through innovation and by streamlining its services. Their
internal structure and management strategies still remain a mystery, and if full
transparency is not possible, then an exceptional end product is necessary to gain
consumer and investors’ trust internationally. Jack Ma’s vision created a service that the
market did not even know it needed, and if Alibaba continues to operate with that same
kind of focus and innovation that started the company, it could become unstoppable as
the most powerful facilitator of global trade on the web. But if it continues down their
apparent path of inflated earnings and risky investments, its days in the corporate world
are numbered.
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References
Alibaba Group. (2015). Company overview. Retrieved from
http://www.alibabagroup.com/en/about/overview
Ciecielski, Jack T. (2014, Sept 4). What’s an accounting puzzle like Alibaba (really)
worth? Forbes. Retrieved from http://fortune.com/2014/09/04/whats-anaccounting-puzzle-like-alibaba-really-worth/
Harris, Dan. (2011, Feb 23). Why Alibaba is not your complete answer to China sourcing
[Web log comment]. Retrieved from
http://www.chinalawblog.com/2011/02/alibabaisnotyourchinaanswer.html
Laing, Jonathan R. (2015, Sept 12). Alibaba: Why it could fall 50% further. Barron’s
Online. Retrieved from http://www.barrons.com/articles/alibaba-why-it-couldfall-50-further-1442036618
Luckerson, Victor. (2014, Sept 18). Everything you need to know about Alibaba and its
mega-IPO. TIME. Retrieved from http://time.com/3398957/alibaba-ipo-china/
NASDAQ. (2015a). AMZN Company financials. Retrieved from
http://www.nasdaq.com/symbol/amzn/financials?query=income-statement
NASDAQ. (2015b). BABA Company financials. Retrieved from
http://www.nasdaq.com/symbol/baba/financials?query=income-statement
The Wall Street Journal. (2014). [Interactive translation of Jack Mao’s letter to
employees]. What is Alibaba? Retrieved from http://projects.wsj.com/alibaba/
Tully, Shawn. (2014, Sept 19). Alibaba’s muddled growth strategy. Fortune. Retrieved
from http://fortune.com/2014/09/19/alibaba-growth-challenges/
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U.S. Census Bureau. (2015). Top trading partners – July 2015. Retrieved from
http://www.census.gov/foreign-trade/statistics/highlights/top/top1507yr.html
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