Easier Trade All Over the World - the Inspiration of Alibaba’s Success for Canada’s E-Commerce Development

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CRITICAL FACTORS FOR ALIBABA’S SUCCESS

There are many critical factors that made the Chinese e-commerce giant Alibaba the world leader. The China’s economic factors give the basement for e-commerce’s development; the underdevelopment infrastructure consideration drives the opportunities. And its business model in creating and serving business-to-business relationships, customer-to-customer relationship has been their unique ability to link suppliers and buyers around the world, which lead to their success.

Economic Factors Considerations

Alibaba has perfectly coincided with the rapid growth in several China’s economic factors.

• China’s Internet acceptance and usage: From 2002 to 2007, China’s Internet penetration rate had risen from 3.6% to 12.3% crossing an important threshold to catch up to countries like the US, Japan, and South Korea where penetration is over 65%. China Internet user is already reaching to 618 million in 2013, and 302 million internet shoppers in China.

• Expected surge in e-commerce amongst SMEs, which had risen from 4.5% in 2002 to 28% in 2006, and is estimated to climb to 82% by 2012. SME are Alibaba’s focus.

• China’s continuation as one of the largest manufactures in the world.

Infrastructure Consideration

For China, due to its vast land area and its low retail space capita and disparate geographical spread and economic growth, e-commerce has been a higher adoption rate, even over traditional bricks-and-mortar retail.

The underdeveloped offline retail infrastructure in china especially outside tier 1 and 2 cities drives online opportunity.

Figure 2.2 Retail space capita in square meters, 2013

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Source: Euromonitor International

Business Model Consideration

The additional reason for Alibaba’s success is their business model and value proposition. The service they provide is vital to the business world.

Actually, the business model of Alibaba is simple. It is just to help sellers meet buyers, it provides an Internet based business-to-business (B2B) platform where sellers can meet buyers on a global scale and provides Internet based customer-to-customer platform which dominate in china’s market share.

Figure 2.3 Net work effects in Alibaba’s ecosystem

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Source: Alibaba Amendment No.1 to Form F-1

One key to Alibaba's success has been its trailblazing approach to its flagship site, Alibaba.com, which is also its original site and the group’s name came from, so we took Alibaba.com as our major analysis target. For Alibaba.com, Customers are both the sellers and the buyers, who are able to post “storefronts” to advertise their products or needs. Alibaba offers several services to aid the e-commerce, some of which is free and come with the basic account, and others must be paid for.

The operations of Alibaba can best be understood through an analysis of its value chain, which provides a framework for its supply chain. Traditionally, the primary activities of a company included receiving supplies, manufacturing the product, and shipping it out. Each one of these steps increases the value of the final product.

Figure 2.3 Typical Trading Process on the Alibaba.com marketplace

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Source: Asia Case Research Centre, The University of Hong Kong

For the virtual service companies, the model has changed. For Alibaba, the operational steps are the inputs, operation of information, and outputs. The inputs are the customers who join the service looking for a matching company for their supply chain needs. The operations of the website manipulate the information and generate business connections the customers are using Alibaba for. These operations steps, done through their technology, include gathering, organizing, selecting, synthesizing, and distributing information. Outbound for Alibaba is when a supplier and a buyer have formed a relationship and leave Alibaba to finalize their transaction.

The entire value proposition is built upon the whole time of the value generating operations.

COMPARISON WITH AMAZON

Alibaba already have been the world e-commerce leader in company’s value but there is another giant e-commerce company we can’t ignore, Amazon.

Model Comparison

At first glance, these two companies are so much similar with each other, these two companies all want to help people buy a vast variety of products at low prices online, without stepping into a store.

But the similarities end there. Alibaba operates an “open marketplace” that connects buyers with sellers. It has created an e-commerce platform that helps small businesses as well as branded manufacturers reach consumers. It does not sell anything directly and does not own any warehouses.

In contrast, Amazon much likes an online marketplace that is closer to traditional retailing. It owns massive distribution centers, sells a majority of its products directly, and even manufacturers its own brands of smartphones and tablets.

The business model’s differences between these two giant e-commerce companies lead to their different financial position. As a result, although Amazon’s revenue is 4 times larger than Alibaba, Alibaba is vastly more profitable than Amazon, with margins of almost 40%.

Figure 3.1 Revenue and Profits, 2Q 2014, in billions[pic 5][pic 6]

Source: the companies

Future Concern

There is a trend we should also concern is that the different growth rate of two different countries China and America’s e-commerce consumer. From 2010 to 2015, for prediction, China’s e-commerce consumers will grow to 520 million; almost more than four-fold in 5 years, but America’s e-commerce consumers will only grow 40% with prediction. With these different consumer base growth rates, and the