Alibaba and China’s E-Commerce: “Open Sesame” comes true in the Arabic tale of “Ali Baba and the Forty Thieves.” Ali Baba, the poor woodcutter, opened the cave with hidden treasure by saying the magic words “Open sesame!” In modern-day China, Alibaba is a family of e-commerce businesses, which The Wall Street Journal described as “comparable to eBay, Amazon, and PayPal all rolled into one, with a stake in Twitter-like Weibo thrown in to boot.” Alibaba’s main trading platforms are Taobao and Tmall; together they processed $170 billion in transactions last year. This is more than Amazon and eBay combined! So, what is Alibaba’s magic? Alibaba had a humble beginning. In 1999, a former English teacher named Jack Ma started the company with a team of 18 in his apartment in Hangzhou, a city some 100 miles southwest of Shanghai. The year 1999 also marked the start of China’s explosive growth of Internet users (See Fig-24). By 2012, China’s Internet users grew to 564 million, a compound annual growth rate (CAGR) of a whopping 37.6 percent. figure 24 Figure 24 Initially, Alibaba’s website was a business-to-business (B2B) platform where China’s small and medium-sized businesses could showcase their products to buyers around the world. Alibaba was not the first company to explore opportunities in introducing China’s manufacturing to global demand, but it was the first to do so online. In its first year of operation, Alibaba signed up new members at a rate of 1,200 per day. By 2002, the young startup was already profit-able. By 2012, Alibaba facilitated transactions in basically every country in the world. 1999, EachNet, another Chinese Internet venture, was founded in Shanghai by two Harvard MBAs who wanted to create a “Chinese eBay,” an auction site for locals to sell and bid for goods. By 2003, EachNet had 2 million users and 85 percent market share in China’s consumer-to-consumer (C2C) transactions. At the time, eBay was actively looking to expand in China and eventually acquired EachNet as its China operation for $180 million in 2003. Fearing eBay would lure away small businesses, Alibaba launched a competing C2C platform, Taobao (meaning “digging treasure” in Chinese), as a defensive strategy. Unlike EachNet which charged listing and transaction fees from sellers, Taobao was free for the user. But Taobao’s free services did not erode EachNet’s loyal customer base. EachNet’s dominant market position meant more products and more opportunities for both buyers and sellers to trade. Although EachNet was competing head to head with Taobao on advertising campaigns, eBay made a decision to terminate EachNet’s homegrown technology platform and move all EachNet users to eBay’s US platform in 2004. Internally, this was called a “migration” at eBay. The intent was to create one global trading platform that would allow eBay users to trade with each other, no matter where they were located. The problem was that eBay’s US platform did not have the set of features that EachNet needed to compete in China. The online data that once freely flowed within China now became cross-border traffic and had to pass the Chinese government’s “firewall.” The speed to load EachNet’s web page slowed significantly. Frustrated users left EachNet in droves and turned to Taobao for a better alternative. While most decisions at EachNet had to go to eBay’s US headquarters for approval, Alibaba swiftly launched a number of innovative services to assist transactions on Taobao. One was Aliwangwang, an instant messaging service helping buyers and sellers interact. Another was Alipay, an escrow payment system to reduce online transaction risks. Just three months after eBay’s migration, Taobao had captured 60 percent of the C2C market share, leaving EachNet at 30 percent. In 2006, eBay shut down EachNet and folded its China operation altogether. Alibaba, meanwhile, continued to build its e-commerce venture around Taobao. In 2007, it set up Ali-soft, where Taobao sellers could buy customized third-party software to help with their day-to-day operations, and Alimama, where Taobao sellers could post ads on a network of specialized websites. Anticipating a growing share of business-to-consumer (B2C) transactions of online retailing, Taobao launched TMall, a dedicated B2C platform to complement Taobao in 2008. (See Fig-25) figure 25 Figure 25 By 2012, Alibaba employed 24,000 people and had over $4 billion in revenues, becoming the clear market share leader in all three e-commerce areas (B2B, C2C, B2C) in China (see Fig-26). Alibaba’s initial public offering is highly anticipated because the company is valued at somewhere between $55 billion and $120 billion. China’s Internet e-commerce market is expected to grow to $600 billion by 2020. The US online search firm Yahoo owns a 24 percent stake in Alibaba. figure 26 Figure 26 Apply the CAGE distance framework to help explain why eBay was not successful in the Chinese market. Why do you think Amazon has only 1.9 percent market share in China (see Fig-26), while it holds some 26 percent market share of the $226 billion US e-commerce market? What general conclusions do you draw?

Alibaba and China’s E-Commerce: “Open Sesame” comes true in the Arabic tale of “Ali Baba and the Forty Thieves.” Ali Baba, the poor woodcutter, opened the cave with hidden treasure by saying the magic words “Open sesame!” In modern-day China, Alibaba is a family of e-commerce businesses, which The Wall Street Journal described as “comparable to eBay, Amazon, and PayPal all rolled into one, with a stake in Twitter-like Weibo thrown in to boot.” Alibaba’s main trading platforms are Taobao

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