Two decades ago a young Chinese entrepreneur took a fact-finding trip to Seattle, on America’s west coast. An English teacher by training, Jack Ma had set up a translation firm and was hunting for clients.
The quest for new business was swiftly forgotten when a friend gave him a demonstration of an embryonic computer network, called the internet. After punching in the search terms for “Chinese” and “beer” and drawing a blank, Ma started to dream of a much bigger prize.
When he returned to his home city of Hangzhou, on China’s east coast, he launched an internet directory called China Pages. That flopped, but its successor, founded in 1998 by Ma and 17 colleagues, has become a web sensation.
Named after the humble woodcutter who stumbles across a hoard of gold in the Arabian Nights tales, Alibaba is one of the largest internet companies in the world, with 279m regular customers.
Now Ma is planning another mission to America. Over the coming days, the 49-year-old will hold a series of meetings with leading American investors ahead of Alibaba’s float, scheduled for next week.
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The offering will see the Chinese ecommerce and payments colossus raise at least $21bn (£12.8bn), potentially making it the largest float in Wall Street history. It will crystallise a paper fortune of $13.5bn for Ma, making him China’s richest man.
More importantly, the float marks the end of America’s ascendancy in the booming global internet retail industry.
Last year, Alibaba handled sales of goods worth $250bn — more than Amazon and eBay combined — and its coffers are expected to swell further as more of China’s burgeoning middle class shop online.
Ma is likely to use Alibaba’s float gains to upend the power dynamics in the global internet retail industry, thus far dominated by US companies. Having sewn up the Chinese market, he is squaring up to Amazon and eBay in their own backyards. So far this year, Alibaba has spent more than $400m on investments in America and launched its first service aimed at US shoppers, called 11 Main.
Having transformed the Chinese retail landscape, Ma last week declared that “in the future, we will be judged by how much progress we make in the world”.
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The threat to the all-powerful Amazon is clear. Alibaba is little known outside Asia, but in China it is omnipresent, with tentacles reaching into every corner of the country’s internet commerce industry.
Ma himself, a quixotic figure who regales his employees with his own versions of western songs, is venerated in China. At the company’s annual staff meeting at a Hangzhou stadium, he dressed up in leather and slapped on some black lipstick before belting out Elton John’s Can You Feel the Love Tonight.
It is Alibaba’s wide-ranging business that has captured the attention of US investors. In contrast to Amazon and eBay, which each operate a single platform for buying and selling goods, Alibaba is a multi–faceted beast with a slew of sites for different transactions.
The cornerstone of its empire, and its first venture, is alibaba.com, a marketplace where businesses can trade with each other. Originally designed to link millions of small domestic enterprises, it has become a gateway for businesses across the world to tap into Chinese manufacturers.
It is a truly global operation, greasing the wheels for billions of dollars of cross-border trade every year. In the long run, this worldwide reach is expected to claw users away from the likes of Amazon and eBay.
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Alibaba is also a consumer powerhouse, controlling an estimated 80% of China’s internet retail sales. Its Taobao service, launched in 2003, allows private sellers and businesses to market their wares in the digital bazaar.
Millions of “goods” are on offer, from sunglasses, herbal remedies and live scorpions to a “virtual girlfriend service”. For $21,000, medical students can buy cadavers to study.
Ma opened Taobao in response to a $200m raid into his home market by eBay. He likened eBay to a “shark in the ocean”that would be defeated by his “crocodile in the Yangtze river”. In 2006, eBay withdrew from China.
The company’s other main consumer division is Tmall, which opened its virtual doors in 2008. It offers a way into China for high-end brands such as Burberry and Estée Lauder.
Connecting these ecommerce sites is Alipay, a payments network used by millions of businesses and consumers in a country that has an undeveloped banking system.
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Unlike other tech companies with little profit to show for their large user bases, such as Twitter and Amazon, Alibaba is a cash machine. In 2013 its profits tripled to $3.7bn and revenues grew 50% to $8.4bn as it delivered 5bn packages to Chinese customers. In April to June this year after-tax profits were almost $2bn, according to the group’s latest filings.
Its supporters believe there is much more to come. Despite China’s boom over the past two decades, its consumer economy is underdeveloped when set against those of north America and Europe. Consumption acc–ounted for 37% of the Chinese econ–omy last year, compared with 67% in the US. As its people’s disposable incomes rise, a large portion of the surplus cash will be spent online, burnishing Alibaba’s already fat profit margins.
Yet there are doubts Alibaba can maintain its hold over China’s web shoppers. Domestic rivals have stolen a march in offering shopping over mobile phones and tablets — ahypergrowth area. We Chat, a popular messaging app, has a lucrative sideline: retailers can sell to its 400m users.
There are also concerns over the veracity of reported internet sales figures in China. In a common practice known as “sales brushing”, many Chinese retailers pay their friends and sometimes fraudsters to place fictitious orders on their websites to gain a higher ranking in virtual marketplaces such as Alibaba’s Taobao. Between a tenth and a quarter of internet orders may be faked this year.
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None of this is likely to stop Ma enjoying one of the biggest stock market offerings of all time. It is not his first venture into the markets: in 2007 he listed the company in Hong Kong. The shares started well but more than $20bn was wiped off Alibaba’s value during the financial crisis. In 2012, Ma bought back the 27% he sold to public investors, paying the original offer price.
This time Alibaba is going west after the Hong Kong stock market thumbed its nose at the company’s unusual corporate governance. Ma is among a group of 27 founders and senior employees who choose a majority of the board of directors. Even the biggest shareholders — search giant Yahoo and the Japanese telecoms and tech group Softbank — have no say over the composition of the board. The American stock market regulator — and, more importantly, investors — appear sanguine about this arrangement.
The float is likely to value Alibaba at $163bn, in line with Amazon and slightly less than the 122-year-old Coca-Cola. However, analysts say it could soon be worth more than $200bn. With 8.3% of the business, Ma’s stake could be worth $13.5bn. His interest in Alipay (not included in the New York offering) pushes his net worth towards $20bn.
The tycoon is unlikely to rest on his laurels. Ma will now decide how to deploy the cash raised next week. Alibaba has spent nearly $5bn on acquisitions this year, taking the company into new areas such as online maps and even television show production.
His raids on America are the most striking. In recent months he has ploughed $250m into the car-sharing smartphone app Lyft, seized a $120m holding in mobile games firm Kabam and acquired stakes in a slew of internet start-ups.
For years, Silicon Valley’s kings have longed to extend their empires into China’s internet economy. Now, with an emboldened Ma on the prowl, they may struggle to defend their own realms from a powerful overseas raider.
Find out more about the wacky world of Jack Ma at thesundaytimes.co.uk/alibaba