A few years ago at the CES conference in Las Vegas, I met with Alibaba.com. And it was their exhibit that really blew my mind.
Yes, all the robots and drones at CES were cool. But what Alibaba.com, their B2B business, was doing sent my mind reeling. They were aiming to build a completely new – and massive – ecommerce platform. This article has the strategy.
First a bit of background on Alibaba.com.
Recall Alibaba.com, the B2B Biz Nobody Talks About
Launched in 1999, Alibaba.com, a b2b platform, was actually Jack Ma’s first e-commerce product. It was a platform connecting foreign companies with Chinese manufacturers, back when China was mostly a manufacturing country. And at the beginning, it was little more than an online bulletin board, a place where manufacturers and companies could find each other online and then work out a deal, mostly offline.
Taobao and Tmall (originally Taobao Mall) were launched later in 2003 and 2006 – and they began Alibaba’s focus on consumers. Ironically, the move into B2C was a defensive move to protect their B2B business against eBay. And as we now know, these consumer marketplaces rocketed upwards. It turns out scalable software businesses are an awesome way to capture the spending of rapidly rising Chinese consumers.
You have to give Jack Ma credit. He (or someone on his team) had an uncanny ability to spot the largest opportunities out there, typically 10 years before they manifested themselves. Chinese online retail reached $1T in spending in 2015. And today, Alibaba is mostly thought of as a consumer e-commerce giant.
Alibaba followed this up with Ant Financial (now Ant Group), a move into global financial services and another super big opportunity. Note: Ant Financial did an investment round in 2018 that priced it at $150B.
They also moved into entertainment, with Alibaba Pictures, Youku Tudou and other plays. Also huge in terms of attention. Maybe not so much revenue.
And now Alibaba is focused on “new retail”, another really big idea. New retail, in theory, could expand online retail from 20-25% of Chinese retail to 30-50%. That makes it an opportunity in the trillions of USD. Note: In 2019, total Chinese retail reached $5.5T, surpassing US retail at $5.4T.
Alibaba just seems remarkably good at spotting and then (sometimes) capturing truly massive opportunities, while remaining mostly a highly scalable software company (which means good economics). At its best, Alibaba is a platform builder that uses data technology to capture and reshape really big opportunities.
Which brings me back to Alibaba.com and their B2B business.
As mentioned, Alibaba.com (and 1688.com) were their first businesses. The company began in B2B but have not gotten much attention relative to the consumer platforms in a long time. However, what Alibaba.com described as CES was really interesting. And it was big.
Note the following:
- Prior to his departure, Jack Ma had been very active in the eWTP and the working group on SMEs at the G20. He was crisscrossing the global meeting with governments in his last years operationally at the company.
- Alibaba has long been bringing trade ministers from around the world for training at their Hangzhou headquarters.
- Alibaba.com did try a partnership with Office Depot in the USA. But US-China politics later scuttled that US focus.
- Management continues to crisscross the globe, meeting with governments and especially trade bodies.
It’s kind of weird. You see their senior people spending a lot of time with governments around the world.
My take is that Alibaba has been bringing more foreign merchants onto their B2C platforms – but they have also been laying the groundwork for their big idea of a global e-commerce platform. Their big idea is to digitize and democratize global trade. Basically to let any small business in the world buy and sell globally. And effectively make SMEs into multinationals. More on this shortly.
First a bit of platform theory (yes, I like the theory side).
On Marketplace Platforms and Transaction Costs
Alibaba is in the digital platform business. That’s what they do. And they mostly build marketplace platforms. They also have audience-builder and payment platforms. But these are still platforms and they generally don’t operate stuff. They don’t buy and sell things. They are a digital creature that likes to make connections between users. And they have long seemed allergic to doing much operationally in the physical world. Although that has changed with new retail somewhat.
They mostly create platforms and that means building data technology tools and services that empower and connect user groups. They connect merchants and consumers with Taobao. They connect content creators and viewers with Youku. They connect manufacturers and retailers with Alibaba.com. And generally, the more users and activity on a platform, the more valuable it becomes. The value of a platform usually increases directly with transactions and demand aggregation – and indirectly with data produced and new use cases discovered.
There is some important economics behind all this. Marshall Van Alstyne of the MIT Initiative on the Digital Economy (now at Stanford) has great thinking on all this. But here is a quick summary of one of his talks.
- Per Ronald Coase (Nobel Prize 1991) and Oliver Williamson (Nobel Prize 2009), the total cost of a sale is the production cost plus the transaction cost. And transaction costs are usually from search, coordination, negotiation and information asymmetries (including the risk of being cheated). Their insight was that when the production plus transaction costs are high, transactions and activities are usually done within a firm (i.e., you do it yourself as a company). But if total production plus transaction costs are small, then a company can do things through a marketplace via contracts. That pretty much won them the Nobel Prize. Note: Transaction costs are sometimes called coordination costs.
- So what marketplace platforms, like Taobao and Tmall, are really selling is reduced transaction costs. They are enabling firms to do things out in the marketplace that they would otherwise have to do internally or not at all. So Alibaba’s Taobao platform lowers transaction costs (search, coordination, negotiation and information asymmetries) and this enables small and medium enterprises (SMEs) in particular to do things in the marketplace. Suddenly they can do transactions with consumers across great distances. They can do transactions with other businesses. All via a marketplace because the transaction costs have been reduced so much.
- So if you are looking to build a marketplace platform, you don’t want to connect KFC or Walmart to consumers – or help them interact with their suppliers better. These are large companies that can build internally, create supply chains and open stores themselves. You want to create a platform and digital tools that enable small companies (a much big user group btw) to do transactions in the marketplaces they could never do otherwise. That’s Taobao. And that has really been Alibaba’s mantra: to develop digital tools that empower small merchants and brands – and that level the playing field with big companies. It’s a really powerful approach. Note: SMEs typically make up 50% of a country’s GDP.
Platforms are mostly about lowering transaction costs. And generally, the best marketplace platforms connect small, differentiated sellers to small buyers in fragmented markets.
- Meituan enables transactions between Chinese consumers and local restaurants (SMEs in services ad not products). But mostly locally and nationally.
- Upwork enables transactions between small businesses and international freelancers. And this happens globally.
- Trulio, a real estate marketplace, enables transactions between individual home buyers and individual real estate brokers. This is almost entirely local.
Question: Could a Platform Digitize and Democratize Global Trade?
This is the big opportunity Alibaba.com has been going after. They are trying to build a platform that lowers the transaction costs between all the world’s SMEs. That’s a really big idea. Because global trade is huge.
B2C Chinese e-commerce is a big opportunity because Chinese retail is $5.5T per year, with about $1T of that happening online. But global trade (not counting services, commodities, and large products like airplanes) is probably above $20T per year. So if you could digitize 10-20% of that, you are talking about a $2-5T opportunity.
But it is actually even a bigger opportunity that that.
Because you wouldn’t just be digitizing existing trade, you’d also be democratizing and increasing it. So much of global trade today is done by large companies with big distributors and supply chains. Because they are the only ones that can overcome the cross-border transaction costs and difficulties. But if you lower the transaction costs with a digital platform, SMEs could start to do the same activities. If you democratize global trade, it could become much bigger.
- What if Alibaba’s digital tools and services could enable an SME in Texas to both source from and sell to other SMEs all over the world?
- What if such a company could source their products in the Philippines and China as easily as they source in the US?
- What if they could sell as easily in Brazil and France as they do in the US?
- Basically, what if an SME could operate like an MNC?
That’s the big opportunity. And one a digital platform may be able to capture.
In Part 2 (How Alibaba is Turning SMEs into Multinationals), I’ll go through some of the tools they are offering to try to make this happen.
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
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