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Alibaba wants to be more than the Amazon of China

Alibaba Executive Chairman Jack Ma. REUTERS/Stephane Mahe /File Photo
Alibaba Executive Chairman Jack Ma. REUTERS/Stephane Mahe /File Photo

Imagine a website where you can buy not only products like clothing and electronics but also discount tickets for the Empire State building and services like house cleaning and proofreading. And like other major online retailers, you can expect cheap delivery within two days, even on weekends.

Are you tempted to log on and start shopping?

That’s what Alibaba founder and Chairman Jack Ma (BABA) wants you to do. And he’s already getting people to do it. In the 12 months ending in March, Alibaba’s China retail marketplaces reached 454 million active buyers and saw $547 billion in gross merchandise volume. Alibaba recognized $23 billion in revenue during that period.

This week, the Chinese e-commerce giant’s stock soared by more than 10% after it forecast sales growth of 45% to 49% for the current fiscal year.

In a speech to investors this week, Ma set the goal for Alibaba: to become the fifth-largest “economy” in the world by 2036 by serving 2 billion consumers around the world.

Though often compared to Amazon (AMZN), Alibaba is not quite the Chinese equivalent of the US online giant, according to Ma.

“The difference between Amazon and us, is Amazon is more like an empire — everything they control themselves, buy and sell,” Ma said at this year’s Davos Forum. “Our philosophy is that we want to be an ecosystem. With our technology, our innovation, our partners — 10 million small business sellers — they can compete with Microsoft and IBM.”

Different business models

While they’re the dominant e-commerce players in two big economies, Alibaba and Amazon have different business models. Amazon, which has more than 70 fulfillment centers, uses a mix of services like UPS and FedEx along with the US Postal Service, to deliver packages to your door. (Though it has also been building its own delivery operation.)

Alibaba’s biggest retailing website, Taobao, works differently from Amazon. It has no warehouses, for example. It also consists only of direct sales from manufacturers to consumers, whereas Amazon features a mix of products it sells directly and products from third-party sellers.

Taobao’s goods are delivered by express courier companies, which handle logistics. China’s online retail boom is driving a surge in the country’s domestic delivery industry, which is a win for Alibaba. Low labor costs, fierce market competition and the huge scale help keep shipping costs low.

“The shipping price is almost always cheaper than in the US. It’s a major perk of using Taobao,” said Ethan Roberson, a North Carolinian who currently studies in China.

In a conversation with Yahoo Finance, Roberson said he shops on Taobao every week, buying goods from tuna fish to bed sheets.

“It’s simpler than shopping in the US,” he said. “Whatever I want, I find it on the app and purchase it almost immediately.”

One of Alibaba’s major couriers, ZTO Express (ZTO), had the largest US IPO of 2016.

Merchandise on Taobao often promise discounts.
Merchandise on Taobao often promise discounts.

Since China is a global leader in low-cost manufacturing, it can sell bargains directly from the assembly line. Some sellers on Taobao tout that they sell the same products made for American brands like Coach and Nike at a huge discount to domestic consumers.

However, it has also been criticized for selling counterfeit or low-quality goods. But buyers are aware and they’re getting savvier.

“If you’re smart, and you read the reviews, you can weed out the bad sellers and end up with what you were looking for,” said Roberson, whose friend ordered a leather couch, but found it was only a miniature model of a couch when he received the package.

Beyond e-commerce in China

Like Amazon, Alibaba has been doubling down on its cloud business, which is growing at twice the rate of its core e-commerce, according to Bloomberg. The company also hugely invests in entertainment, especially the movie industry.

Source: Bloomberg
Source: Bloomberg

Back in 1999, when Alibaba first started as an English-language global wholesale marketplace, the target was overseas business owners. China’s booming domestic demand soon became its focus, and it wasn’t until 2010 that the company launched AliExpress to reach individual consumers around the world.

Expect Alibaba’s presence in the US to be stronger in the next few years. In January, Ma met with President Donald Trump and promised to create 1 million jobs by linking American small businesses to Chinese consumers.

World domination is clearly still very much at the top of Ma’s mind.

Disclosure: Yahoo Finance’s parent company, Yahoo, owns a stake in Alibaba.

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