Chinese Giant Alibaba Is Ready to Become the Next Google

• When Alibaba goes public Friday, in what is widely expected to be the largest IPO ever, you’ll hear the same question over and over: Will the Chinese e-commerce giant expand into the U.S. and compete with Amazon?
• But that question gets Alibaba all wrong. Yes, it sells stuff online, but Alibaba is very much its own beast. Parallels drawn between Alibaba and U.S. tech giants—from Amazon to Google to Microsoft—are bound to break down. The only real point of comparison is that Alibaba is poised to become just as giant as they are.
  Or even bigger. After all, unlike Amazon, Alibaba makes a lot of money.
  To understand Alibaba’s success—and its potential—you have to account for everything Alibaba does, which is not easy to condense into an elevator pitch. A recent Forrester Research report called Alibaba “the world’s biggest digital ecosystem.” That description may sound jargon-y and vague, but it provides a pretty good indication its sprawling operation.
  IF ALIBABA CAN RECREATE THE SUCCESS IT’S ACHIEVED IN CHINA IN OTHER PARTS OF THE WORLD, ITS POTENTIAL REACH IS VAST.
  On the consumer side, Alibaba operates Taobao, which works much like eBay, and Tmall, which brands like Apple and Uniqlo use to reach out to an estimated 302 million online shoppers in China. It runs AliExpress, a site to connect consumers outside China with exporters, and a group shopping site, Jujuasuan. Its flagship site, Alibaba.com, handles wholesale business-to-business commerce, a huge market that neither Amazon nor eBay yet dominates online. It has a small business-to-small business marketplace, 1688.com. And it offers cloud computing in the style of Amazon Web Services.
  Alibaba is also tied to online payments giant Alipay, which is now bigger than PayPal and is used for buying products across Alibaba’s sites. Alibaba doesn’t own Alipay outright, which means it won’t be included in the IPO. But the connection shows just how many corners the Alibaba brand extends into. It has investments in messaging, online video, and ride-hailing service Lyft. Assuming Alibaba can replicate even a fraction of its dominance in China elsewhere in the world, its potential reach is enormous.
  “We are not a company from China,” Alibaba founder and CEO Jack Ma told potential investors, according to Bloomberg. “We are an Internet company that happens to be in China.”
  

  Alibaba even has bicycle parking, a Silicon Valley staple. Leighklotz | CC BY­ND

  The Power of Profits

  But don’t just believe the rhetoric. Believe the numbers.
  Sales across Alibaba’s consumer marketplaces totaled $296 billion over the past year, the company reported at the end of August. By comparison, eBay in 2013 sold $76.5 billion in merchandise, only about $5 billion more than Alibaba sold on mobile devices alone. Comparisons with Amazon are trickier—the company reported just under $74.5 billion in revenue last year, but that figure does not include the value of the massive volume of third-party merchandise sold on the site, and often sent out of Amazon’s warehouses.
  But whatever the precise figure, Alibaba does a huge amount of business—and compared to Amazon, it does business much more efficiently. Unlike Amazon, Alibaba doesn’t own its own inventory. Its marketplaces handle the selling, not the stuff itself. Even Alibaba’s logistics operation exists to coordinate deliveries, not to make them.
  MORE THAN MONEY, HOWEVER, THE RESOURCE WITH THE MOST POTENTIAL TO PUT ALIBABA ON THE SAME FOOTING AS A GOOGLE, AMAZON, OR FACEBOOK IS ITS DATA.
  By keeping its overhead mainly digital, Alibaba has managed to achieve profit margins in another dimension from those of even the most exceptional Silicon Valley companies—much less any company that has yet to go public. In its most recent fiscal year, Alibaba’s net profit margin—net profits divided by revenue—was greater than 44 percent, a figure that has climbed steadily over the past few years. “That is extraordinary for a company that large,” says Brian Hamilton, co-founder of financial data clearinghouse Sageworks.
  Amazon’s net profit margin in 2013, by comparison, was less than 1 percent. Net margins at Google and Apple last year, meanwhile, hovered at just above 20 percent.
  To be clear, Alibaba isn’t bringing in anywhere near the sheer amount of cash as any of these companies, at least not yet. Its most recently reported annual revenue totaled a little under $8.5 billion, and annual net profit just above $3.7 billion. And Alibaba’s potential future competitors in the U.S. are reporting smaller margins in part because of how much money they pour into growth, whether in the form of Google’s many acquisitions, Amazon’s many warehouses, or Apple’s vast supply chain. Getting big is more important to these companies than maximizing profits—though Apple and Google have plenty of those, too.
  As the share prices of those companies have shown, Wall Street has no problem with that approach. Despite the enthusiasm surrounding its IPO, investors could grow impatient over time if Alibaba doesn’t also aggressively spend the money it makes with a clear vision toward a bigger future. And if its IPO comes anywhere near the almost $22 billion it’s expected to generate, Alibaba will have more to spend than ever.

  Data Driven

  More than money, however, the resource with the most potential to put Alibaba on the same footing as a Google, Amazon, or Facebook is its data. The sheer volume of commerce moving across Alibaba’s many platforms means the company likely has the most comprehensive and most detailed picture of consumer behavior in the largest consumer market on the planet—a market whose spending power continues to grow.
  According to Forrester’s analysis, Chinese online companies tend to differ from their U.S. counterparts in their comprehensiveness. While Amazon is mainly associated with shopping and Google with search, despite their many other ventures, Alibaba and its primary competitors in China aim to insinuate themselves into as many aspects of customers’ online and offline lives as possible.
  “With great depth and breadth of visibility into consumer behavior, Alibaba will be able to assemble a highly detailed profile of its consumers — which will allow it to become much smarter and sell far more,” Forrester analyst Brian Wang writes.
  Many questions still dog Alibaba, among them doubts about corporate governance, China’s uncertain regulatory environment, and competition from other Chinese internet behemoths. But in Alibaba’s favor is that depth and breadth of data that puts it in the same league as the biggest U.S.-based tech platforms. The specifics of the company’s designs on markets beyond China are not yet clear. And it would take Alibaba years to chip away at the grip a Google or an Amazon has on the markets they dominate. Even so, they need to be wary. Between the business it has built, the profits that business churns out, and the potential to create something much greater atop that foundation, Alibaba could reasonably set its competitive sights on any tech company in the world.BY MARCUS WOHLSEN