13 May 2014 Views on News

The Alibaba Effect

Alibaba's $200 billion megaIPO ishistory making in a number ofways. Bill Kirby and WarrenMcFarlan discuss what the dealsays about Chineseentrepreneurship and Americanmarkets.

by Bill Kirby and WarrenMcFarlan

Alibaba is about to make historywith the first genuine megaIPO ofa Chinese entrepreneur-foundedcompany in the United States. Thenumbers are historic as well—ananticipated market capitalization ofsome $200 billion.

It comes to the US rather thanHong Kong for the mostold-fashioned of Americanreasons: to "raise capital andmaintain management control,"which they couldn't do in HongKong. Hong Kong believes in theprinciple that each share of stock isentitled to one vote. The USmarkets, on the other hand,proclaim that some classes ofshares can have more clout thanothers. Thus, founder Jack Ma andhis management team, who own alittle over 9 percent of thecompany, can still retain control of

its destiny. (Meanwhile, althoughHong Kong stock marketauthorities are officially pleased tostay true to their rules andprinciples, we anticipate intenseinternal second guessing amongthem and probably an eventualchange in policies and views.Losing Alibaba really stung.)

Alibaba was founded in 1999 in thecity of Hangzhou in Zhejiangprovince in eastern China. In thoseearly days, it was a small,struggling startup with an opaquemission and a remarkable ability toboth raise and burn cash. Its onlyasset was Mr. Ma, its charismaticand dynamic founder. After wewrote our first case study about thecompany in 2000, we were afraid itwould go bankrupt before we couldteach the case for the first time.Instead, we were present at thebirth of one of today's great onlinegiants.

"Alibaba's only limits arethose imposed by the speedat which these enterprisescontinue to grow"

Still largely unknown in the West,Alibaba dominates China's Internetand logistics space with over 600million subscribers and nearly aquarter trillion dollars of annual

transactions. A combination ofAmazon and eBay, it holds an 80percent share of the e-commercemarket in the world's secondlargest economy. Its net income for2013 was four times more than in2012. Its products and services lieat the core of an extraordinarytransformation of China today froma low-cost, export-driven economyto one that is driven by consumers.

Like no other company, Alibabahas succeeded in making China—acountry with countless internalbarriers to trade—seem like onemarket, where goods can bepurchased, delivered, and paid forwith a confidence unimaginablelittle more than a decade ago. It hasdone more for China's small- andmedium-sized enterprises than anygovernment policy, ministry, orbank.

Alibaba's only limits are thoseimposed by the speed at whichthese enterprises continue to grow.Health and welfare systems,especially for China's rural poor,also need to function if today's 40percent personal savings rate is tobe reduced, thereby unleashingcash to fuel new growth inconsumer spending. Creating thisdomestic safety net will be crucialto enabling Alibaba to grow evenfaster.

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But don't look for the company tomake aggressive inroads intointernational markets. Thecommercial opportunitiessupported by the extraordinaryInternet and emerging logisticsstructure in China means thatAlibaba's future lies at home. It hashuge market growth potential, realheft against local opponents, andlittle fear of foreign entrants, sincelanguage, government policy,scale, and entrenched competitionhave erected formidable barriers toentry. The major global giants likeAmazon and eBay have eitherexited the market or not even triedto enter it. Thus, think of Alibabaas a pure China play where you arebetting on the future of the Chineseeconomy.

This is a story not just of China butalso of one region. For centuriesZhejiang has been a hotbed ofentrepreneurship and privateenterprise. The Communists built

few state-owned enterprises there.Hangzhou today is China's leadingbusiness city. As anotherremarkable Hangzhouentrepreneur, Lu Guanqiu of theautomotive components makerWanxiang, once told us: "As longas there is a human race, there willbe Chinese. And as long as there isa market, there will be people fromZhejiang."

This is also a story of Chineseinnovation. Alibaba's roots arethose of a Chinese startup, notthose of a state-owned enterprise.Its unique combination of timing,wits, external capital, and alliancesmake it the kind of home-grownsuccess story Apple and Amazonhave been in the US.

Operating away from thepolitically sensitive domains ofblogs, personal information, andnews, Alibaba has had an openplaying field that it continues to

exploit. Free from the domain ofstate-owned enterprise, it is anexample of what entrepreneurshipcan do in China. As Ma puts it,"State-owned enterprises are bigbecause they are state-owned.We're big because we're good."

All this having been said, when itcomes to innovation andentrepreneurship, Alibaba is farfrom alone in China. It is merely atthe head of a parade. Stay tuned.

Warren McFarlan and Bill Kirbyare professors at Harvard BusinessSchool and coauthors of the newbook Can China Lead? Reachingthe Limits of Power and Growth(Harvard Business Review Press).In addition, Kirby is a member ofthe Faculty of Arts and Sciences atHarvard University, where hechairs the Harvard China Fund.

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