I think the recent success of
Alibaba’s IPO shows that most investors believe they will continue to grow.
However, I believe Alibaba’s aspirations to become a global company will
require a great deal of time and capital investment. In my opinion, I don’t
think Alibaba will have much success outside of China, even if they invest the
resources and time. This doesn’t mean that Alibaba will not continue to see
dramatic growth in their revenues; those revenues will just continue to be
almost exclusively from China.
Looking at the financials provided
by Alibaba for their IPO, I see that less than 10% of their revenues for the
year ended March 31, 2014, were derived from international commerce. This is
down from almost 19% for the same period ending in 2012, and 12% for the period
ending in 2013. Although the share of international commerce has decreased as a
percentage of total revenues, the total revenue has increased each of these
three reporting periods. Revenue from international commerce increased 10.4%
from 2012 to 2013, and 16.6% from 2013 to 2014. These increases are not
insignificant and would be excellent for any company. Compared to the total
domestic income and growth over the same three year period, however, shows that
Alibaba’s success is almost entirely due to its revenue from China. The total
China commerce revenue over this period increased almost 300%! I believe this
shows what a great market Alibaba has in China, and they can continue to see
great growth in this market given the room China has for growth in its internet
user base.
Alibaba
does face some challenges if it wants to continue the growth it has experienced
in China over the past several years. One of the issues that came up related to
its IPO was the use of a variable interest entity (VIE) to divert the laws in
China of foreign ownership. Alibaba set up a VIE in the Caymen Islands to allow
it to be listed on the New York Stock Exchange. This was due to both US regulators
and laws in China dealing with ownership percentage from foreign investors in
companies based in China. Having to structure the company this way has raised
concerns from investors regarding their lack of recourse and control of the
company. Another challenge Alibaba faces is competition from other companies
looking to gain a share of the market Alibaba has dominated. Some very large
companies are looking to get a piece of the Chineese E-commerce pie, including Baidu
and Tencent. Baidu is “ the Google of China”, and as the dominant search
engine, they are trying to take advantage of the large amount of traffic and
turn it into customers for E-commerce. Tencent owns WeChat, and they also have
a large user base they are trying to convert to E-commerce customers.
Another
challenge I think Alibaba will face moving forward will be deciding how to best
use their resources to strategically grow. I noticed in their IPO documents,
Alibaba stated it had over 70 subsidiaries. Several articles I read stated that
Alibaba was moving into various industries through their acquisitions. It does
not seem that Alibaba has a very focused growth strategy, instead opting to use
their money to try and buy into every conceivable industry and try to become a
leader. I’m not sure how well this will work for Alibaba, but I cannot think of
any other company that has successfully done this. But then again, they are
operating in a communist China where they very well may be picked as the
winner. I know for certain that they will likely not face much competition from
real global companies in their home country. This is why Alibaba will not be a
successful global company, in my opinion. The Chinese government can shield them
from competition domestically, but outside those borders the free market
determines who succeeds.
SOURCES:
Tops in E-Commerce,
Alibaba Is Now Taking On China’s Banks
Why China’s growth
story is helping the e-commerce market thrive
Alibaba rivals
redouble efforts on Single’s Day
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