What Alibaba Is
If innovation is so necessary for capitalist economies, it must be even more important to China today. China has firmly aligned itself with the “international track” of development. The moment you step onto an international track, you have someone opening the way before you but also someone following right behind.
China is squeezed in the middle and has no time now for regrets. In terms of the majority of its population, however, China is still agrarian. In terms of technical levels, China has not yet fully completed the first industrial revolution.
Luckily, China has a large population, and optimism runs high. If the state-run business is not working out, we have people-run businesses.
If the Central Committee is not coming through, we have local governments. If our technology is backward, we enjoy the advantage of later-to-develop countries, and we can leapfrog over whole periods as we develop!
In this fashion, we have been able to foster a group of companies that represent international levels of advanced technology and quality services on behalf of China, companies such as Xiaomi, Huawei, and Tencent.
More important, however, we now have Alibaba, a platform that has unleashed the grassroots entrepreneurship of millions of people. Alibaba is the product of a world that has entered a digital age.
It is a modern enterprise that represents a classic example of Internet technology and big-data analysis based on information and communications technology (ICT). Nevertheless, it is not, in fact, an enterprise so much as it is what Professor Baumol has called an “innovation machine.”
Privately operated entities in China have by now created numerous commercial successes despite the fact that they operate under the shadow of the planned economy, do not enjoy equal access to resources, do not work in an environment of consistent and reliable policies, and do not have any precedent they can look to as a model.
They have made outstanding contributions to the growth of China’s economy and to China’s social progress.
Alibaba is one of these privately operated entities. As a new kind of Diaoyutai, Alibaba has taught people how to fish rather than just giving people fish. Alibaba’s innovation machine has enabled those who are unwilling to remain poor to step up onto that fishing platform, take action, and fulfill their wildest dreams.
Some have learned to fish, others have learned to make fishing boats, and some have even learned how to trawl the distant oceans.
The Astonishing Way in Which Alibaba Grew
The Alibaba Group began with the stated intention of being in business long enough to straddle three centuries. It started as a grassroots enterprise with 18 people and 500,000 RMB in the capital, scrounged from wherever people could find the money.
In the short space of some 12 years, it has “grown up” to become a world-class e-commerce empire. Today Alibaba has 35,000 employees and a constantly growing number of subsidiaries.
Alibaba’s business-to-business (B2B) enterprise was established in 1999. Taobao was created in 2003 and Alipay in 2004. In October 2005, Alibaba began to cooperate with Yahoo in setting up China Yahoo.
AliSoftware was established in January 2007 in Hangzhou and Shanghai. These five separate spheres of business have long since become outstanding subsidiaries of the Alibaba Group.
They represent five main aspects of the group’s structure, its integrity systems, and market, search, software, and payment components. Each subsidiary is in itself a subsidiary platform.
Each of the platforms links together an unimaginable number of grassroots factories, retail businesses, and services. Alibaba’s rapid growth as an e-commerce business entity has by now become an indispensable part of China’s economy.
In addition to these five subsidiaries is the Alibaba Group’s Research Institute. This Research Institute was established in April 2007 with the mission of forging a new form of business civilization that will change how business operates throughout the world. It concentrates on creating a strategic vision for such a civilization. It has an extremely active and highly professional research team.
No innovative company can be without research and development (R&D) team, but most such R&D teams are focused on technology.
Alibaba’s innovative concepts drive the Research Institute to take a global stance and to focus on both the theory of the information age and its existing practicalities, developments, and trends.
Its purpose is to gain insight into how e-commerce is overthrowing traditional commerce, and it is to build an “ecosystem” and a “civilized order” for new-age commerce.
For years, the Alibaba Group’s Research Institute has cooperated closely with institutes and universities, government departments, and public institutions. It has published large quantities of research results with topics ranging from the social sciences, economics, finance, and computer sciences to information sciences.
In addition to contributing to specific areas of study, research has contributed to the creation of various economic indicators by the constant use of the database embodied in the Taobao platform. This supplies data that can be put to effective use in the formulation of policy.
Given the support of the data platform, the Research Institute has made contributions in many areas of government policy in China.
Among other things, it has contributed to understanding how micro-sized Internet merchants affect issues of consumption, labor, employment, production, regional economies, and the “three agriculture.”
In its conceptual approach and its applied research, the Research Institute has far surpassed the level of China’s other specialized research centers. Previously called a “Research Center,” the name was changed to reflect the greater reach of its activities, so the entity is now called the Alibaba Research Institute.
Small Is the New Big
In his book, Small Is the New Big (Penguin, 2006), marketing guru Seth Godin points out that big-box companies such as Walmart and The Home Depot, which had been forcing small businesses out of the market, are now themselves facing intense competition from niche markets and high-efficiency e-commerce.
Today, he notes, success will no longer belong to large enterprises that are closely allied to Wall Street or to those that enjoy a completely globalized supply chain.
Instead, latter-day arrivals that make use of platforms and that run two-sided markets, such as Google, Amazon, eBay, and Alibaba, are the new model for success. He notes that there are two secrets to using a platform successfully.
The first involves amassing a sufficient number of creative entrepreneurs who are operating at the most basic levels and doing it at the lowest cost. The second involves providing the highest-quality service on the platform so that businesses on the platform can create their own commercial space for themselves.
In today’s information age, specific production characteristics determine the viability of small enterprises. The marvelous thing about platform businesses is that whoever “owns” the most creative grassroots participants is the one that can occupy the entire space, who can “take the field.”
Faced with a competitive environment that changes constantly, small enterprises that are nimble and creative have the ability to prosper in a moment of time, but they also can disappear in a second. The creative intent and the capabilities of a small enterprise may be successful, but they also may fail.
Nevertheless, through dynamism and innovation, the mass of entrepreneurs proliferates and creates a spillover effect, thus creating the positive energy field for building a prosperous and strong society.
One reason “small is beautiful” is that people matter. The U.S. Small Business Act puts it simply and clearly: “Only through full and free competition can free markets, free entry into the business and opportunities for the expression and growth of personal initiative and individual judgment be assured.
The preservation and expansion of such competition are basic not only to the economic well-being but to the security of this Nation. Such security and well-being cannot be realized unless the actual and potential capacity of small business is encouraged and developed.”
Alibaba is precisely this kind of company. It has been able to create an infinite number of “small is the new big” types of companies.
Classical Model of Economic Growth
Economic growth refers to growth in the market value of goods and services of a given economy over a specific period of time. The traditional way of measuring this was to calculate the percentage increase of real gross domestic product (GDP).
The classical (Ricardian) growth model was described in terms of production and increases in production in an agricultural economy.
As the theory went, if anyone production factor increased, it would cause overall production to increase, but at a progressively lower rate. (This assumed that other factors did not change, including technology.
It defined production factors as being labor, capital, and land.) Ultimately, given diminishing returns, the rate of overall increase would decline until it approached zero.
New Economic Growth Model
Edmund Phelps, Nobel laureate in economics in 2006, has declared his belief that only sustained grassroots innovation can ensure the prosperity of a country.
He does not believe in the explanatory powers of classical models of growth based on resources, nor does he believe that the neoclassical model is sufficiently persuasive, with its focus on human resource capital and technological change.
He feels that the wellsprings of sustained economic growth are to be found in economic dynamism, that is, in people’s desire, ability, and intent to be innovative.
Phelps cites the results of a McKinsey study: among every 10,000 ideas for new businesses, 1,000 companies are actually founded, receive venture funding, 20 go through an initial public offering (IPO) and raise funds from the stock market, and 2 become market leaders.
Given these odds, having broadly based grassroots participation in innovation is the key to fostering more market leaders that can make a contribution to economic growth.
Phelps’ ideas with respect to how dynamism stimulates economic growth have been systematically tested and verified. He divides the time that an entrepreneur puts into his or her work into two different categories. The first is time put into producing enough to ensure the ongoing necessary aspects of life.
The second is time put to innovative production, the kind that provides individuals with the pleasure of success. Entrepreneurship has three constituent parts.
First, it involves the entrepreneurs themselves, who are working not only to sustain their livelihoods but also to grow. The second involves the social institutions that bestow on the entrepreneur the ability to carry on unencumbered business operations.
The third involves a government that has organized its systemic framework so as to protect the innovative abilities of individuals and their ability to create startup companies.
Ying Lowrey has gone a step further in developing her own theory about entrepreneurs, with a focus on innovative labor.
This challenges the dogma of the neoclassical school that maximizes the effect of humans as rational agents. Moreover, she borrows from the classical theory of the entrepreneur in the tradition of Max Weber and Joseph Schumpeter.
From this classical tradition and from empirical data, she feels that creative labor and vitality are what most characterizes entrepreneurs.
She hypothesizes two categories of labor, one that is engaged in producing subsistent goods and one that is engaged in creative production, and she assumes that an entrepreneur would prefer to engage in creative labor as a rational agent and not just “work” to support himself or herself.
The necessary conditions for maximizing personal satisfaction, therefore, require that the marginal value of necessary-goods production must be greater than or equal to the marginal value of creative production.
Lowrey has designed a dynamic model that incorporates the two types of labor, two periods, and two products. She injects initial capital into the equation of maximizing the happiness of this rational entrepreneur.
The model predicts that an additional unit of initial capital generates a substitution effect in the first period but then a complementary effect that is positively associated with an initial capital.
Lowrey (2005) asserts that people’s economic well-being relies on the strength of the economy and that behind a robust and balanced economy must be a vibrant market system in which private business ownership is pervasive, small, and local.
Using business and macroeconomic data from all states in the United States, she introduces the concept of business density.
A spatial economic model and statistical testing demonstrate a significant correlation between business density and economic well-being at the state level. Results also indicate that a higher business density is associated with lower poverty and the lower disparity between rich and poor.
Lowrey (2011) differentiates between two different types of employment in the process of starting up a company. One type uses a contract to confirm the employment that the employer provides to employees.
It is therefore defined as contractual employment. The other is the startup employment that the entrepreneur provides for himself or herself. Only a small percentage of the startup employment is included in (any country’s) official employment statistics.
The U.S. Census Bureau distinguishes business into two categories: employer firms that hire employees versus nonemployer firms that do not hire employees.
Using data from three databases regarding the situation in the United States, namely, the Panel Study of Entrepreneurial Dynamics, the Kauffman Firm Survey, and the 2002 Survey of Business Owners the research shows the following results.
On average, each new startup employer firm can generate 5.8 job positions, including 4.4 contractually employed jobs and 1.4 startup jobs.
Each startup nonemployer firm can generate an average of 1.2 startup jobs. On average, each company founder puts 33.1 hours per week into entrepreneurial or startup labor.
According to estimates derived from these three databases, between 1997 and 2008, in addition to creating over 1 million contractually employed job positions, another 2.5 million people were at the same time creating their own startup job opportunities in the United States.
This is significant in terms of China’s own government policy: policies clearly should promote entrepreneurial activity that results in startup companies. Entrepreneurs not only generate contractual employment for others but also—and even more important—they create jobs for themselves.
In this regard, it may well be that Alibaba’s greatest contribution has been to provide millions of ordinary people with the chance to start their own companies.
Alibaba’s Success Stems from Grassroots Entrepreneurship
Alibaba’s great innovation was to base its own growth and development on the unleashed entrepreneurship of grassroots enterprises.
Previously in China, an individual’s creativity, capabilities, and ambitions were inhibited by social institutions that did not guarantee the rights of free enterprise and by a government that did not protect individuals’ creative ability to start companies.
When we now champion grassroots entrepreneurship, we include not only individuals among the public at large but also primary-level communities and primary-level government organizations.
By adhering to the concept of the customer first and the motto, “Make it easy to do business anywhere,” Alibaba has used the dynamism that has been gestating within the public at large to create one astonishing feat after another.
The company set its sights on being in business for 102 years and being “China’s greatest and most unusual major company to span three centuries.” To achieve this, it had to institute a sustained and routinized form of innovation.
The value concept of the customer first is not built on the basis of altruism. Instead, it is determined by the ecosystem needs of the platform economy of e-commerce in the digital age.
This value concept and its positioning require unusual comprehension and long-term vision. The concept of the customer first enabled Alibaba to build a platform based on the digital age.
Highly effective hardware and software enabled it to develop a massive customer base, both of which then enabled Alibaba to employ the scale effect of technological innovations.
All this counted toward what the company did itself and so was only one side of the story. On the other side, Alibaba bestowed enormous capabilities on grassroots entrepreneurs, which allowed them to unleash their own entrepreneurship.
In this process, Alibaba and millions of small companies formed a digital-age mutual interdependency that allowed the “stars and the moon” to reflect light off one another.
There are 7 million extremely active merchants on Alibaba. Not only have they created their own business turf, from which a large number of outstanding enterprises have emerged, but in the process, they have catapulted the growth of Alibaba.
Jack Ma is the chairman of the board of the Alibaba Group. In 2009, on the tenth anniversary of the company’s founding, he described the secret of the company’s success: “We have been willing to do what others were not willing to do but also what they could not do.
Over this past decade, we have written our script solely for micro and small enterprises, that is, for the ‘forsaken daughters’ that no-one else wanted.”
Orders and cash flow are the lifelines of companies. Through Alibaba’s e-commerce platform, by participating in the formation of a sturdy supply chain, micro and small enterprises have discovered a way to exist and to grow in a manner that represents a completely new path.
By now, the Alibaba Group has entered the ranks of global Internet giants. The real power behind it, however, lies in the tens of millions of astonishingly dynamic small Chinese companies.
Alibaba’s mission is to create a situation that “makes it easy to do business anywhere.” Before making any decision, Alibaba first takes into consideration how any action may contribute to increasing benefits to its customers, by allowing them to make more money, save on costs, or manage employees better. As Jack Ma says,
After we came up with this phrase about creating a world that makes it easy to do business anywhere, it became the sole criterion by which we judge the launch of any service or product. When our engineers and designers design new products, I always try them out first.
If I can’t use them myself, 80 percent of the world’s people won’t be able to use them either and I immediately toss them out.
As a result, we make the products extremely simple. We make it easy for the customer and put all the trouble of doing so on ourselves. Our aim is to enable micro and small enterprises to truly make money.
Zeng Ming, Alibaba Group’s deputy CEO, who is also a chief strategic officer, echoes this approach:
For the past ten years, we have focused exclusively on micro and small enterprises, and exclusively on e-commerce. Our mission is to create a world that makes it easy to do business anywhere. Our own existence and growth lie [sic] in how well we are able to support the existence and growth of small companies.
Given the number of occasions on which Jack Ma has reiterated that the company puts the “customer first, employees second, and shareholders third,” he has encountered some resistance on this front from shareholders. Unperturbed, he continues to hold that customers must always be the very lifeline of Alibaba.
The best customer service is the key to Alibaba’s long-term growth. “The situation that micro and small enterprises within China have to cope with is intimately related to Alibaba’s own future.” He also confirms that Alibaba will continue to “write its script” for micro and small enterprises in the decade to come.
Despite the shock of the financial crisis, Alibaba was able to build a substantial customer base of small Chinese companies, and Jack Ma believes that this is something that cannot be duplicated in any short time.
“Our micro and small enterprises have formed a relatively complete production chain. This is the advantage of a ‘later-to-develop’ manufacturing country and is something that would be hard to duplicate.”
On a number of occasions when traveling abroad, Jack Ma has heard people express views to the effect that the Chinese government actually controls the market economy. He feels that this is a biased opinion and has refuted it many times by saying that people are “looking at but not actually seeing the mainstream in China.
… To this day,” he continues, “Alibaba has never asked for one penny in bank loans. Even more to the point, it does not have any kind of so-called ‘complicated background.’”
In Jack Ma’s eyes, some people in Western countries seem predisposed to misjudge the reason some privately owned high-tech businesses are flourishing in China. These people feel that the “life histories” of such businesses are complex. He says, “Not Alibaba.
Alibaba can announce with all integrity that we are in complete alignment with international standards, and we are not, as some Western people have said, ‘a product of policy.’”
He adds that the emergence of Alibaba proves to the world that “China’s market economy has developed to the extent that its ‘soil’ can support the growth of world-class companies.”
Many young people idolize Jack Ma for his entrepreneurship but assume that he was given a helping hand, boosted by things they don’t have access to. He responds to this by saying that many young people make excuses for not starting a company, for instance, by saying, “My father doesn’t have any money” or “Our family doesn’t have any guanxi. ”
He says, “We at Alibaba want to provide a role model for China’s youth. You can start a company even if you don’t have parents with money or family connections.”
As noted earlier, the data show that there are several tens of millions of merchants on the different Alibaba platforms, people starting up companies, trading, and providing both real and digital products and services—and this is the best confirmation of his statement.
Alibaba has done a great number of things that the Chinese government should have been doing but has not done in terms of unleashing creativity, encouraging people to start companies, and supporting the innovative efforts of small entities.
Meanwhile, Alibaba’s “star-moon relationship” with countless grassroots enterprises is something that the United States has put enormous effort into for 60 years and not been able to accomplish.
In 1953, America passed the Small Business Act, which explicitly stated that 23 percent of the enormous quantity of the federal government procurement must be done by small businesses—that is, large corporations must find small entities with whom to partner to do the business.
Congress hoped that this would ensure fair competition and would stimulate large companies to foster cooperative relationships with small companies. While still enabling economies of scale in large enterprises, it would encourage the sound growth of small enterprises.
What happened, however, is that this kind of “quota” approach to business instead spawned all kinds of rent-seeking and fraudulent behavior. A minority of large enterprises still monopolizes the great majority of the trillions of dollars of purchasing done by the American government every year.
Other than a very few years, the 23 percent quota has never actually been achieved. Despite this, however, given its protections for fair and equal competition, the Small Business Act does, in fact, stimulate greater initiative on the part of small businesses.
Alibaba’s Job Creation
Existing enterprises generally do not contribute to new employment—in fact, their contribution is often negative. Because of this, the United States depends on newly established enterprises to generate jobs. Statistics from the U.S.
Department of Labor shows that between 1997 and 2009, new employment generated by newly founded enterprises dropped precipitously from an average of 6 (fourth quarter of 1997) to an average of 3.5 (after the first quarter of 2009). New jobs created by newly established companies went from a total of 2 million in the late 1990s to 1.2 million in the most recent figures.
At the same time, the number of enterprises with no hired employees at all went from 5.44 million in 1997 to 22.5 million in 2011. This represents an annual increase of 500,000 enterprises.
Every year in the United States, roughly 300,000 employing entrepreneurs create more than 1 million new job positions, but in addition, there are another 2 million entrepreneurs who do not hire employees who are starting up all kinds of commercial activities and providing goods and services to the market (According to a conservative estimate derived from a recent study of the big data behind Alibaba’s platform.
Alibaba has directly created 9.72 million jobs (including hired employment and startup employment), and it has indirectly created 2.04 million jobs. Not only has it become necessary for the millions of merchants on Alibaba’s platforms to “found and also operate their own companies,” but it also has become the prevailing mode of operation.
In 2011, Alibaba’s Research Institute published a study entitled, “Lighthouse: Lighting up the Path of Business on the Internet.”
This is a collection of 100 case studies drawn from global Internet businesses in 2011. It records the way in which 100 of the most successful enterprises got started and grew.
Alibaba helped to resolve the job difficulties and basic survival of these people, but it also amassed a very powerful force of entrepreneurship and positive energy in the process.
Quite a few university students are returning to their rural roots after graduating these days and using their knowledge as well as their awareness of the outside world to start up Internet shops in their hometowns.
Spillover Effect of Alibaba
On July 3, 2014, the first summit ever held to discuss the subject of China’s county-level economies and e-commerce was held on Alibaba’s Xi Xi campus in Hangzhou.
This was yet another expression of how Alibaba has unleashed the forces of grassroots entrepreneurship over the years. In 2004, the company had started a contest to choose “the ten best e-commerce merchants in the world.”
This annual contest became a “Star-Light Pathway” encouraging millions of startup entrepreneurs for personal achievement. While chasing their individual dreams, these outstanding entrepreneurs could have role models to follow. Meanwhile, the 2014 summit displayed how Alibaba exercised its spillover effect by exercising positive energy in the form of community development.
In the eighteenth and nineteenth centuries, Jeffersonian ideals in the United States created the foundations for small businesses, entrepreneurial startups, and community development. In the twenty-first century in China, the 2014 summit indicates that the dynamism of entrepreneurial startups is now irreversible.
The summit first presented a report on China’s county-level e-commerce developments. Areas with a relatively high density of e-commerce are also areas that are already fairly well developed. At the same time, the report revealed two important discoveries.
As the Internet, startups penetrate into other parts of the country, and as the density of online vendors increases, regional economies begin to be supported by the Internet advantages of decentralization displaying their own unique regional qualities and characters.
Zeng Ming, a chief strategic officer of the Alibaba Group, summarized the speeches that had been given during the summit, and in the course of his talk, he noted that “[w]e have discovered that China’s counties may become the important core of China’s future e-commerce.”
China is divided into more than 2,800 county-level units, that is, separate government administrations at a county level. Many of these counties contain over 1 million people.
Grassroots entrepreneurship starts with individuals opening up Taobao shops, which then converge into Taobao villages and coalesce into Taobao counties. This kind of dynamism is currently in the process of creating the mass flourishing in twenty-first-century China.
An Entrepreneurial Economy and Its Social Attributes
Entrepreneurs are the allocators of scarce resources, but they also represent a resource that is itself being allocated.
As a term derived from the French, entrepreneur refers generally to a businessperson who both founds and then operates a company. Joseph Schumpeter is regarded as one of the main scholars who studied entrepreneurship in the early twentieth century.
He defined entrepreneurs as those who use creative approaches or new methods to do things that are already being done in other ways. More important, entrepreneurs “can get things done.”
William Baumol pointed out that while entrepreneurs have a twofold role in innovation (both the allocators of scarce resources and a resource that is itself being allocated), mainstream economics as based on neoclassical theories not only does not focus on this twofold role but also has no consistent and standardized definition of entrepreneurs at all.
The twofold role of entrepreneurs may well not have been very pronounced in the age of major industrialization, but this is not true in the digital age.
Cheaper transaction costs are dividing up large industrial production into smaller components, whereas the constant increase in labor costs is making enterprises that employ others try their best to outsource production processes or to substitute machines for human labor.
For example, Apple has outsourced a portion of its products to the e-commerce manufacturer Fushikang. Once labor costs became a problem for Fushikang, that company then purchased 1 million robots to replace most of its labor force. By now, robots are responsible for such daily tasks as spray painting, welding, and basic assembly.
Substituting robots for human labor is merely another indication of how history moves forward. Unfortunately, though, the recent financial crisis has made this particular stage in the process far more tragic.
People do not have much choice: either they are a resource that is to be “allocated” and they wait to be replaced by machines, or they begin to exercise their own ability to allocate themselves as a limited resource. They stand on their own two feet and found a company—create new endeavors in the new age.
As the development history of Western countries shows, when the use of machinery in manufacturing led to a severe surplus of labor, entrepreneurs began to develop such service industries as finance, logistics, education, and healthcare. Such service industries became the engine driving economic growth after World War II.
Service industries grew the fastest in the United States, which entered the ranks of the world’s economic powers as a result.
As America enters the digital age, whether or not it can yet again transition smoothly to a human-machine substitution—and emerge from the problems of high unemployment created by the financial crisis—will depend on whether or not a new engine for growth is sufficient to bring into being a large number of new entrepreneurial startups.
Since 2013, the Defense Advanced Research Projects Agency (DARPA) in the United States has been focusing its R&D efforts on the development of robots (DARPA is part of the U.S. Department of Defense Department that functions as a platform to encourage scientific R&D).
It is providing college students, professors, and professionals in virtually all fields as well as entrepreneurs with business opportunities. It is enabling them to allocate limited science and technology resources in ways that they themselves are free to determine.
In China, the question now is how the country can use Alibaba’s platform to similarly stimulate science and technology, to serve the unleashing of entrepreneurship, and to encourage innovation not only in the fields of B2B, retail, logistics, and microfinance but also in other spheres of science, technology, and services.
For example, opening up the Alibaba platform to community hospitals and clinics of all kinds could enable people to use (their own) medical big data as a valuable resource.
Similarly, Alibaba could share the big-data resource with medical personnel to develop the best preventative and treatment methods for large-scale infectious diseases as well as the most difficult and complicated cases of illness.
Or another example: if the Alibaba platform were opened up to universities, small high-tech companies, and venture investors, funding could flow directly to science and technology.
People with human resources and those with financial resources not only could use the platform to allocate resources but even more significantly could be the scarce resources themselves that were being allocated.
Attributes of Social Entrepreneurship: Productive, Unproductive, and Destructive
William Baumol has pointed out that the entrepreneurship of a society can be productive but also unproductive and potentially also destructive.
The attributes of a society’s entrepreneurship are determined by society’s social institutions and incentive mechanisms. Alibaba has done a great deal of experimentation in coming up with ways to build productive types of incentive mechanisms and platform “institutions.” It has made credibility the corporate culture of the platform.
At the same time, it has turned this into an important resource in the digital age by making it a quantifiable “integrity capital.” Based on the record of credit of 7 million active online vendors, Alibaba Micro Financial Service Group has extended credit to 4 million online vendors.
These people can make loans from Alibaba without a large amount of deposit in banks, collaterals, or third-party guarantees. This single fact alone is somewhat phenomenal in the history of finance in the West.
Small businesses face tremendous difficulties in getting loans given their lack of any kind of collateral or credit record and without anyone to guarantee repayment.
This has been a problem in China but also around the world in the financial sphere, and many individuals, as well as international organizations, have tried to deal with it in creative ways.
Mohammad Yunus is one such individual.
He is a financial scholar from Bangladesh who has created a microloan service within the traditional realm of finance that offers loans to impoverished entrepreneurs who otherwise would not be able to receive traditional bank loans.
In 2006, Yunus and the Grameen Bank were honored with the Nobel prize for their work in promoting economic and social progress by working at the lowest levels of society.
This demonstrates a global recognition of how microloans are an important factor in helping to alleviate poverty by funding startups. Through efforts similar to those of Yunus, Alibaba’s microlending has taken an even more creative approach.
The reason is that Grameen microloans are built on the foundation of a banking system that is post-industrial revolution, whereas Alibaba’s microloans are built on the basis of the Internet after the digital revolution. They are built on the foundation of a big-data-based financing service.
Compared with the methods employed by the Grameen Bank, Alibaba has lower financing service costs, less risk, and much greater coverage, plus it is open, transparent, effective, and accountable. As a financial innovation, it is historically significant and highly constructive.
The concepts behind it and its application will in the future overturn the traditional way in which impoverished people at the grassroots level have been denied entry into the “great gate of finance which faces only toward the riches.”
Microfinancing services will be a gate that is open to all. It will provide the liquidity, the bloodstream as it were, for all kinds of startups as well as ongoing operations.
In moving into a whole new age of commerce, the unproductive, and destructive behavior is bound to occur among online vendors.
In recent years, e-commerce platforms in China have all been embroiled in issues relating to fraudulent practices, including such companies as Jingdong, Taobao, Dangdang, and Suning. Malicious ordering, unqualified merchants, and lawsuits regarding orders and other unlawful activity have been a frequent occurrence.
The design of an Internet-based credit-rating system must involve an evaluation system that protects the rights and interests of buyers, vendors, and third-party online vendors.
It may be that when this evaluation system was set up, however, it focused on the “hoped for” results too exclusively and did not analyze the unexpected consequences that also might occur.
As a result, destructive innovations have severely damaged the reputations of blameless vendors and done tremendous damage to their businesses.
Although e-commerce platforms themselves can adopt measures to guard against and counterattack all kinds of fraudulent and criminal activity, the force of government action is extremely important. An e-commerce platform is not after all an enforcement agency.
Such platforms can devise incentive mechanisms in scientific ways, but the key to guiding all social innovation in a productive direction lies with the government. Not only must the government set up better legal institutions, but it also must increase the severity of enforcement.
Alibaba has taken major innovative steps on the human resources side of this whole issue to ensure the productive entrepreneurship of staff as it sets up internal management systems and incentive mechanisms.
It has taken a number of actions to pull together positive energy. These include setting the principles of recruiting staffs, encouraging competition for innovation, and even extending to bulletin boards in restrooms for collecting good ideas and information about the employees’ moods.
At the same time, Alibaba has been firm in attacking any behavior that is detrimental to the culture of Alibaba as a corporation.
In 2009 and 2010, Alibaba investigated thousands of cases in which “China Suppliers” were suspected of being involved in fraudulent activity.
Evidence indicated that some Alibaba staff in direct-sales teams of the B2B company intentionally allowed certain companies to come onto the Alibaba platforms purely for the sake of improving their own performance ratings and thereby gaining more income.
Nearly 100 sales staff were directly involved. These people were then dealt with according to the company’s internal governance systems, including being fired. At the same time, Alibaba took steps to punish higher officials.
The CEO of the Alibaba B2B company, Wei Zhe, and the Chief Operating Officer, Li Xu Hui, were both fired.
In order to prevent such unproductive rent-seeking behavior, Alibaba set up disciplinary systems that are similar to those required of public servants in the United States—for example, staff may not receive any gifts or any other form of compensation from outside parties.
As Alibaba personnel conduct their research, they may well be offered various inducements, such as wining and dining and gifts from local governments and merchants, but they are not allowed to accept these.
Microfinance Based on “Integrity Capital”
Adam Smith’s The Wealth of Nations provided the solid theoretical system behind today’s mainstream economics, whereas the “invisible hand” of the market may well guide market economies. Moral integrity is still the foundation for human societies, however, as described in Smith’s Theory of Moral Integrity
The invisible hand has become the core of economics, yet, whereas moral integrity and an invisible moral standard are scarcely seen in mainstream economics at all.
Today’s economies employ extremely complex banking, virtual, and monetary transactions to accomplish the highly fragmented production of goods and provision of services. Because of this, personal reputations and mutual trust are of ultimate importance in maintaining normal business operations.
An effective financial market should be able to stimulate positive commercial activity and business creation. In an age of financial capitalism, however, if the microloan market is imperfect or not functioning properly, reputation and trust are also not functioning properly.
Three hundred years ago, the author of The Fable of the Bees extolled the virtues of being “rapaciously avaricious” and was severely criticized for this by Adam Smith.
Nevertheless, some professors and some people on Wall Street still take delight in this kind of distasteful story. To this day, the parable is taught in some MBA and executive MBA classes.
A great deal of research indicates, however, that avaricious behavior on the part of individuals can lead to large-scale financial crises, indeed to global economic crises.
On April 5, 2012, Reuters reported in a story that the head of the U.S. Treasury Department, Tim Geithner, made the comment, “Most financial crises are caused by a mix of stupidity and greed, and recklessness and risk-taking and hope.”
In 2014, a British scholar discovered while researching the annual reports and financial reports of five banks during the period 2004–2009 that the initial customer-driven culture of these banks had turned into a culture that was driven by sales and that during these five years, these five banks were dominated by a kind of rapaciously avaricious culture that disregarded consequences.
The financial crisis of 2008 swept aside the reputation of financial capitalism in Western countries. As a 2011 Gallup poll in the United States indicated, more than 75 percent of those interviewed no longer trusted banks.
The global crisis in the reputation of the financial world did not influence the reputation-based foundations of the Alibaba platform.
As a third party between buyers and vendors, Alipay only remits payment to vendors once buyers have received their goods. This payment innovation resolved a fundamental issue in e-commerce and spurred the establishment of a trust relationship on both sides of the platform.
At the same time, it gave individuals the chance to accumulate what is now being called integrity capital. Ali-Loan, now renamed as Ant Microloan) is an Internet microloan service that is based on integrity capital.
A separate service called Yu’ebao provides the economic decision-makers themselves with the opportunity to make choices regarding their consumption and their savings in the most transparent of all markets.
Alibaba Group’s financial branch now is renamed as Ant Financial Service Group. It provides micro financial services including Alipay, Yu’ eBay, Sesame Credit, and Ant Financial Cloud.
The appearance of these financial services and tools has filled a gap in global microfinance markets. They have fundamentally changed a situation in which small businesses were unable to get financing, and they have made a historic contribution to unleashing grassroots entrepreneurship.
One of the Nobel prizes in economics in 2013 went to Yale University’s Robert Shiller, who emphasized two key concepts in his book, Finance, and the Good Society. First, the essence of finance is to provide funding for economic activity.
It is not done to maximize profit for itself. Second, financial systems should be democratized.
These two concepts may be regarded as a provocative challenge in the age of big industry, but openness, transparency, high efficiency, and an orientation toward grassroots are not only possible in the digital age but also imperative.
Since the 1980s, the financial industry in Western countries has been controlled by a small number of oligarchs.
Politicians are manipulated by them, and policies provide them with open sailing. People in finance have devised all kinds of ways to maximize profits—to the extent that countless people have lost their life savings and many have lost their homes.
Only when information technologies develop to a sufficient degree can they eradicate the problem of asymmetrical information. Only then can they turn around the monopoly situation in the financial sector, and only then does it become possible to set up this kind of microfinance market.
As for China, the severely negative spillover effects of the financial crisis in America and the West are currently spreading within the country as its own economic growth rate slows. China’s unemployment rate has been rising, and its exports have dropped precipitously.
China’s highly centralized financial sector is simply unable to resolve the recession now hitting enterprises. It certainly cannot address the lower levels of economic dynamism in the country.
As a result, microfinance has emerged to meet the need. Its existence and sound development depend on ongoing updates of information technologies and powerful and effective regulatory systems.
Even more important, microfinance, as based on information technologies and regulatory systems, in the future will force people who are engaged in economic activity to comply with a form of invisible moral standard, namely, reputation. Microfinance services in the new age should come from the grassroots, and they should serve the grassroots.
During a lunch that Edmund Phelps had with the deputy editor of the Financial Times, Martin Wolf, Wolf asked Phelps what he thought about the bank rescue that had such a “bad odor” to it in the 2008–2009 period. Phelps admitted that American banks were a problem. If banks were going to be “too big to fail,” there should be a firm bottom line.
Nevertheless, every bank tries to get as big as possible as it takes advantage of a flourishing real estate market, and there is less and less of a bottom line as a result.
Phelps said, “Part of my vision is that the big banks should be broken up. I would like to see the American economy go back to small banks rooted in communities where the bankers know something about the local startups.”
Through open, transparent, efficient, and accountable microfinance services that are based on Internet technologies, not only should we be able to realize Phelps’ vision—and realize Jeffersonian ideals that are centered on community development—but we also should be able to lower the costs of innovative startup activity and thereby increase returns to investors.
Alibaba’s Next Decade
Chris Anderson, author of Makers: The New Industrial Revolution has said that “over the last ten years, through jointly using the Internet, we invented new paths via our exploratory innovations.
Over this next ten years, we will be taking these paths out into a new real world.” The new age has brought new challenges as well as opportunities to businesspeople.
Not only do “makers” have the professional ethics of craftsmen, but they also have the high-tech tools of the new age, tools that enable creativity and low costs and that therefore can keep production small scale while allowing it to coexist in a globalized world.
“Killer” applications and 3D printing are a good example of things that begin in small places and grow to affect large areas. Who can say that the Taobao network, Alipay, Ali-Loan small loans, and Yu’ebao will not be the killer app of e-commerce and online payment? Tens of millions of “makers” are linked to one another on the Taobao platform.
They use Alipay to carry out online transactions. Those with good credit are getting loans through Ali-Loan, those with extra cash are handling their personal finances via Yu’ebao. Alibaba is definitely not going to rest on its laurels and remain at this level, however.
The United States is the leading force in e-commerce in the world, the bellwether of the industry. By 2011, U.S. e-commerce held 49.3 percent of all sales volume in manufacturing industries, 24.3 percent of all wholesale business, 4.7 percent of all retail sales, and yet only 3.0 percent of all services business.
At present, China’s e-commerce enjoys the great advantage of being later to develop in the areas of retail and service industries.
When the previous chief operating officer of Alibaba’s B2B business, Wei Zhe, was recently interviewed by a CNN reporter, he pointed out, “Unlike, in America, many retailers and consumer products have not yet penetrated China’s smaller cities.
This provides an opportunity for the growth of e-commerce in these cities. Indeed, e-commerce will become the mainstream method of retailing.”
In the process of realizing the “new fabrications,” we can anticipate that the force of China’s e-commerce growth in other industries also will be unstoppable.
China’s financial markets have not developed to a point of creating unproductive and indeed damaging types of financial vehicles, as the industry in the United States has done. I refer to certain kinds of derivatives and hedging that are far removed from the real economy.
In a similar fashion, China’s retail industry has not been taken over by countless numbers of middlemen. On the contrary, China’s retail e-commerce is well grounded in the real economy; that is, it is backed up by the processing industry.
The success of e-commerce platforms depends on winning over grassroots online vendors so that they position themselves on your platform. As Wei Zhe observed, “Behind the millions of merchants [selling on Internet platforms], you can find tens of millions of Chinese factories. In America, in contrast, it is very hard to find any real factory.”
Similarly, right now, many Chinese have idle cash in hand that they do not immediately need. Through e-commerce, an open, transparent, highly efficient process, they do not need to go through middlemen, and certainly, they do not need to go through underground banks or credit unions.
Their funds can flow directly to short-term forms of liquid capital (e.g., money markets) or to longer-term investments.
Microentrepreneurs who came into being on the Alibaba grassroots platform, and whose thinking has never been subject to the usual constraints, will without any doubt whatsoever create new and unprecedented forms of supply and demand in the world for new products and services.
As we work to develop e-commerce service industries, we should think quite dispassionately about how to avoid so-called innovations that do not provide any socially redeeming value. I refer, for example, to the kinds of financial innovations that are in fact opportunistic and damaging.
Alibaba still has a long road ahead of it. Microsoft has entered middle age, and the ills of larger companies have begun to afflict this company that was once so full of dynamism. A company that generated such revolutionary innovations in its youth has begun to get a little paunchy around the middle.
In contrast, Alibaba is only 14 years old. Not long ago, however, an incident occurred that came to be called the “security brother incident.” In order to reduce costs and strengthen controls, Alibaba decided to outsource its security.
As soon as the news got out, it stirred up an enormous furor on the internal network. Alibaba was then caught in a dilemma, namely, the conflict between fairness and efficiency. Which should it choose?
Meanwhile, starting in 2013, the company has decided not to continue the practice of holding the annual event that elected and celebrated outstanding online vendors. This event had played an important role in unleashing entrepreneurship and pulling together energies. Did the great commander-in-chief really have the interests of only grassroots startups at heart?
Many other platform companies had begun to copy Alibaba’s business model and were now taking away some of the vendors previously on Taobao and Tmall. Faced with competition, Alibaba was being confronted with the problem of how to balance the traffic flow between large and small vendors. The question for the company increasingly became one of defining its winning model.
In the past, China’s retail industry was marginalized in the overall economy, and it remained underdeveloped. Alibaba took smooth advantage of this to unleash grassroots entrepreneurship as a growth model for the retail arena.
It turned itself into a giant in the realm of e-commerce in the process. How Alibaba will grow its microfinance service platform in the future remains to be seen.
Two powerful forces are influencing Alibaba’s financial platform strategy. One is the way the government strongly controls the financial industry in China. The other is the financial capital of the West.
The government of China, as a party with de facto interests at stake in the traditional financial system, is unwilling to see the growth of a powerful privately operated enterprise in this area. Meanwhile, Western financial capitalism has enormous seductive power.
Alibaba could make use of its powerful platform to grow into a Goldman Sachs in a very short period of time. But, does the world need another “Goldman Sachs” that serves the “big guys”? If Alibaba is to succeed in the financial area, it, therefore, must go up against pressures from interests in the existing Chinese financial industry.
It must continue to establish a strong market in the microfinance area, something that had been lacking for a long time, and it must continue to provide services that unleash grassroots entrepreneurship.
In the United States, 4 of every 100 enterprises are providing financial services. In China, the ratio is 4 of every 10,000. Alibaba should withstand the temptation to be a financial capitalist. It should continue to explore platform models that enable both sides of a microfinance market to flourish.
That is, the platform can meet the huge demand for microfinance services such as microloans and personal financial management. On the supply side, it can enable more grassroots entrepreneurs to enter into the financial services industry as small businesses that can provide all kinds of micro financial services.
ALIBABA’S EFFICIENCY AND THE ALIBABA ECOSYSTEM
The “Holy Land” of China’s e-commerce is located on the western side of Hangzhou. Near a small village, tall office buildings appear to have grown out of the earth—this is Alibaba’s Taobao Town.
The “Town” encompasses 300,150 square meters and is covered by 250,000 square meters of new buildings. The cost of designing and constructing these came to 1.36 billion RMB.
This new campus formally began to welcome its owners to their new home in the second half of 2013. Companies and employees under the banner of the Alibaba Group began moving in—people from the various business groups of Taobao, Tmall, eTao, Alibaba Cloud Computing, and others.
Taobao Town now holds the core of Ali’s businesses. It is where the Alibaba “miracles” are created and where the business of the entire ecosystem of Alibaba is managed.
Alibaba’s Big Move to New Quarters (2013)
The design of Taobao Town is highly original. Not the traditional bricks and mortar, it has grassy slopes, wetlands, fields, and even a small village. The environment is open and quiet, full of poetic and painterly aesthetics. Six buildings have been completed.
Their glass-sheathed sides come down to the ground, making them seem transparent as they reflect the nearby trees. Perhaps this peaceful scene is intended to soften the impact of the kinds of winner-take-all battles that go on in the e-commerce world, a fierce competition that determines life or death.
This is not the first time Alibaba has moved. Four years earlier, the Alibaba business-to-business (B2B) company made a sensation as it conducted what was called “A-niu crosses the river.” As a group, Alibaba moved into the new campus situated on the Bin River.
At the time, the 6,000 people who were part of this earlier move turned Hangzhou’s traffic into complete gridlock. This time, the Alibaba Group set up a temporary command center within the traffic section part of Hangzhou’s police department.
This approach enabled 10,000 people to move smoothly into the new campus. At the same time, Alibaba made sure that the move was done in groups and conducted mostly on weekends.
Each group was composed of around 2,000 people. Alibaba staff had to undergo training in how to move, instructions in how to package and label all their belongings, and so on.
Founded only 14 years before this move, in 1999, Alibaba had already left a deep impression on the ancient city of Hangzhou.
As a small example, rents went up steeply after the earlier move to the Bin River as well as this move to Taobao Town. All of Hangzhou’s streets and alleyways were buzzing with news of Alibaba and Jack Ma.
Those who were unacquainted with the full story would never have been able to connect this mighty army of the Internet industry with a dozen hotheaded youth who gathered in an apartment in 1999 and scraped together enough money to start a company.
In fact, the strong pulse of this enterprise was being felt not only in Hangzhou but also in all of Zhejiang Province, all of China, and even much of the rest of the world. What follows, therefore, does not just tell the story of a successful startup.
It also narrates the story of innovation and determination, how innovators fight to realize their ideas and are unyielding in their efforts to find a way forward.
The Great Attraction of Taobao Is that It Enables Others to Be Creative
Unlike China’s other Internet entities, illustrious companies such as Tencent, Baidu, and Sina, among others, the Alibaba Group’s greatest and most unique appeal lies in its incomparably huge e-commerce ecosystem. Within this ecosystem, millions upon millions of people have found their own individual value and created their own work.
To give one example of Taobao’s pull effect on job creation: by the end of 2012, the Taobao platform had been directly responsible for creating 8.6622 million new jobs, whereas the total number of people engaged in Internet startups in China is 9.625 million.
Being a “Taobao vendor” has become a whole new occupation that the public is gradually recognizing and embracing. Many of the guests on a highly popular television show describe their occupation as Taobao vendor, for example.
Over this past decade, in line with the swift growth of e-commerce, the Taobao platform has generated countless new occupations. In addition to Taobao vendors, other occupations that nobody has ever heard about are springing up like mushrooms after a spring rain.
These Internet-based stores offer products ranging from fashion modeling to advice on how to negotiate prices when purchasing and from consulting services on how to market on Taobao to consulting services for finding the best delivery people. Among occupations, the fastest growing new occupation is providing online services.
As the number of Taobao online stores increases, many shop owners, working on their own, are unable to deal with handling all the daily transactions. A new business that deals in customer service for online stores, therefore, has sprung up. Statistics show that 2.84 million people are already engaged in providing customer service for online stores.
From the perspective of someone who works within Alibaba, I can say that Taobao is also a highly creative platform. In 2004, Alipay, previously an operating unit within Taobao, was spun off and made into an independent company.
It has since gone on to become the leading company in the third-party payment industry in China. In 2008, Taobao Shopping Mall was spun off and made independent from Taobao. Its name was later changed to Tian-mao.
Today, this company is known in English and online as Tmall. It has become the largest platform in China’s business-to-consumer (B2C) market, having left Jingdong, Dangdang, and Amazon far behind.
The eTao, Juhuasuan, and other lines of business also have been spun off from Taobao. It is the base area for spinning off companies on the retail side of the Alibaba Group’s Internet business.
Holidays in China have always been considered festivities at which one is allowed to consume a lot, so consumption peaks at such times.
There had always been a dearth of opportunities for stimulating mass consumption in the period between the end of Golden Week (Chinese one-week holiday to celebrate the National Day on the First of October) and the Christmas season, however.
Taobao, therefore, proposed what it called the 11.11 Shopping Festival, which filled this need precisely.
In an entirely new way, it galvanized tremendous growth in domestic demand. Taobao linked this event with the use of online credit card payment. This made China’s consumers, who had been burying their savings in bank accounts, turn toward unprecedented consumption. The combination opened up a whole new round of economic growth.
Alibaba’s E-commerce Services Business
A Newly Emergent Business that Has Broken Through 100 Billion RMB
A key indicator of the emergence of an e-commerce ecosystem is the rise of e-commerce services businesses. These businesses have accompanied the growth of e-commerce itself. Based on information technologies, they are able to integrate a variety of industries that serve e-commerce activities.
By operating at different levels of activity and coordination, e-commerce services have been able to generate highly promising prospects for the new types of industry groups that are now vigorously emerging. Vendors want to meet the individualized needs of an ocean of buyers. The multitude of vendors, therefore, concentrates on e-commerce services platforms.
They have effectively hastened the birth of a professionalized division of labor, creating a network effect that comes with the interactions between the industries that support e-commerce and the industries derived from e-commerce.
The numbers are impressive. According to calculations by the Alibaba Research Institute, operating revenues generated by China’s e-commerce services industries came to US$40.3 billion in 2012 (246.3 billion RMB).
This was a 72 percent increase over this figure in 2011. Within this figure, income from e-commerce transaction services industries came to US$11.26 billion, an increase of 56 percent over the previous year.
Income from e-commerce supporting services industries came to US$19.21 billion, an increase of 113 percent over the previous year.
Income from derivative e-commerce services industries came to US$9.84 billion, up 150 percent over the previous year.
The total volume of e-commerce transactions in 2012 exceeded US$818 billion— which includes transactions that went through e-commerce trading platforms supported by e-commerce services. Within this amount, the total volume of retail transactions exceeded US$164 billion.
The Alibaba Research Institute predicts that e-commerce services will enter a period of expansion in the next three to five years. E-commerce services are expected to maintain a steady growth rate of 60 to 70 percent per year and therefore are expected to show growth that is even faster than the applications or use of e-commerce itself.
According to a survey conducted by Alibaba Research Institute, it predicted that by 2015, operating revenues from e-commerce services are expected to break through 1 trillion RMB.
These services will support e-commerce transactions that are on the scale of 13 trillion RMB. The research is not updated, but e-commerce retail services have been growing rapidly.
As the foundation for the information economy, e-commerce services are becoming a global leader in strategic emerging industries. China, meanwhile, has the world’s largest e-commerce services industry in the world and is, therefore, leading the way.
The strong growth in this industry will propel greater adoption of e-commerce, especially among traditional industries as they shift to e-commerce to take advantage of the growth prospects.
A New Kind of Ecosystem Is Being Formed by the Rich Diversity of Product Types
E-commerce trading platforms form e-commerce services ecosystems by combining with a diversity of service companies that provide logistics, payment, software, and agenting services. Together they provide online stores with a rich combination of information, knowledge, and customers themselves.
These ecosystems, in turn, provide a strong stimulus for upgrading the level of services of the entire system and expanding the scope of services. The process is calling forth a diversification of product offerings in the system while creating ever-deeper integration among the ecosystem’s products and services.
In the retail sphere of the Internet, transaction services platforms universally practice a strategy of open data.
This greatly enhances the coordinated expansion of service-type groups. When a multitude of professional services vendors enters the services ecosystem, each one constantly creates value for the entire network of vendors.
Take the Taobao services market as an example: in 2012, there were 490,000 individual third-party service providers, servicing more than 9 million free-of-charge customers and 1 million paying customers. Operating revenues based on the derivative services of Taobao’s platform came to roughly 15.2 billion RMB.
By now, more than 1.56 million sellers are paying to purchase services within the Taobao business circle. Of Taobao Town’s online stores, 75.6 percent have chosen 23,000 models from among the network, and the modeling market does business on the order of 396 billion RMB per year.
Of providers of traditionally branded goods, 52 percent are considering the use of an agenting service to market their brands online. At present, 0.5 percent of online stores already use an agenting method to operate. These contribute 5 percent of Alibaba’s total sales volume.
Innovations in the Dynamic E-commerce Services Sector
The fact that innovation is highly valued in the Internet world is amplified many times over in the specific sphere of e-commerce services.
E-commerce services providers generally try to differentiate themselves, and they embed their services in the vehicle of differentiated products. Providers have short research and development (R&D) turnaround times and diverse pricing strategies.
Their responses have to be quicker than those of the competition to meet a constantly changing competitive environment. Speed and flexibility determine success.
The coordinated innovations of the e-commerce services ecosystem are mainly divided into three levels: (1) coordinated innovations based on the user entities of e-commerce, that is, coordination among different enterprises that are using the same service but as it relates to different parts of the business chain,
(2) coordination that is based on innovation of the e-commerce services ecosystem itself, which requires achieving cross-industry and cross-regional connections that relate to the same project, and (3) coordinated innovations that are based on the interaction between the services ecosystem and its environment.
This allows for an outwardly expanding ripple effect, raising the value of the business ecosystem. It influences and changes the external natural, economic, and social environments.
Alibaba’s E-commerce Ecosystem
In the field of biology, an ecosystem is formed when different species come together to form an organic system that is organized in a certain way. Maintaining the proper functioning of such a system depends on how energy is cycled through its various components in a beneficial way.
Making use of this concept, theoreticians as well as people actually doing business have come up with the idea of what is being called a commercial ecosystem .
This so-called commercial ecosystem happens when related interest entities mutually construct a value platform . On top of this platform, the capabilities of all participants bring into being and add to existing value , which serves the interests of the entire body. The platform is similar to an organic system, whereas the various interests on the platform are similar to species.
The joint partaking of value, as well as the dividing up of value, is similar to the transmission of energy. The platform system of commerce is therefore similar to an ecosystem in biology, which is why it is called a commercial ecosystem .
By improving strategic choices and upgrading organizational capacity and value creation, Alibaba has gradually formed an eco-community made up of e-commerce entities that are engaged in e-commerce.
Within this Ali eco-community, certain things such as Alipay, Alibaba’s search engine, post boxes, and pay for performance (P4P) are like a liquid system.
They are resources used by all in the Ali eco-community. Alibaba’s B2B company Taobao, Yahoo-China, AliSoftware, Ali Mama, and koubei.com are like fields of green grass. Small and microenterprises, individual entrepreneurs, and consumers are the three “tribes” of the Ali eco-community.
What Alibaba does is to provide a constant stream of services to improve the ecosystem environment so as to expand its own domain and enable the existence, growth, and prosperity of the three tribes of the ecosystem.
Right now, Alibaba is putting all its efforts into making the already existing ecosystem into an open environment so as to allow more partners to enter into cooperative relationships and serve the three Alibaba tribes.
Openness endows the Alibaba ecosystem with greater dynamism and more powerful energy and allows greater room for imagining a future that is more worth thinking about.
The Alibaba Group’s eco-community is basically divided into two parts. One is formed by the mutual intereliance that is generated among all the companies, an ecosystem that is mutually supportive.
The other is an eco-group that allows for common “glory” with third-party participants. Prior to the establishment of the new “Seven Swords System,” these two groups were not coordinating and sharing mechanisms in the most ideal way.
As the Alibaba Group accelerated its efforts to move this eco-community toward an ecosystem, in July of 2012, it restructured its subsidiary system into a system of various business groups.
After this reorganization, Alibaba included or contained “seven swords,” which were Taobao, eTao, Tmall, Juhuasuan, Ali International, Ali Small Business, and Ali Cloud Computing.
The Seven Swords community intends to create the kind of e-commerce ecosystem that enables Alibaba to become the basic infrastructure platform for e-commerce, including all its services, its “water, electricity, and heating.”
Through unified data, security, risk-prevention, and ground-floor technology, the aim is to construct the Alibaba Group CBBS community of consolidated markets (CBBS stands for consumers, business channels, business manufacturers, and e-commerce services providers).
This will open up one channel that links the whole process—from providers of raw materials to producers to consumers.
The CBBS community of markets is composed of the “C” stores on the Taobao platform, the “B” stores of retailers and channels, the large “B” stores of large producers and manufacturers, and the “S” stores of services providers.
In the entire production chain, the ultimate provider should be small businesses on the B2B platform that are linked to one another via “S” services producers.
The consumption demand of consumers, therefore, drives the products and quantities of sales, while the purchasing demand of platform vendors also drives the product types and quantities of small businesses that are involved in the production.
Given that small businesses are the fountainhead of the Ali ecosystem, Alibaba has divided its original B2B business into Ali International and Ali Small Business depending on the attributes of each business group.
After this division, the new business communities were able to grasp the best of China’s production enterprises—the best of its raw materials, purchasing, industrial production, spare parts manufacturers, and services providers—and to integrate each of these with other business groups to open up a platform that accesses all platforms on the Taobao system.
Because of this, the Alibaba ecosystem has become a more truly cooperative e-commerce platform based on the Internet. The new Seven Swords business communities will be spurring greater cooperative innovation in the CBBS community.
Alibaba’s Innovative Efficiency
The United States has consistently dominated innovation in the Internet domain and is way out ahead of everyone else. Since the 1950s, the United States has instigated and led several revolutions in the information technologies industry and has been able to consolidate its own global economic hegemony each time.
From the PC revolution and the Internet revolution to the cloud computing revolution, the United States has played a key role in driving the information economy on a global basis.
The reason the country has been able to maintain its long-term position of leadership is mainly the result of the way it has sustained ongoing innovation through conscious development of systems and capacities. It has thereby kept its hold on the central hub of the Internet and kept a clear-minded and forceful national strategy.
However, in the sphere of e-commerce, the strength of China as represented by Alibaba is not in the slightest inferior to companies on the other side of the Pacific when it comes to innovative capacity.
Over the past 30 years of reform and opening up and the past decade of the Internet revolution, China has created an astonishing sort of miracle that can be attributed to its enormous enthusiasm, determination, and investment.
It has applied itself to constant research, change, and development. Unlike the great majority of other countries, the leaders in almost all spheres of the Internet in China are native-born companies. A number of Internet companies in the country are beginning to be among the global front ranks and to be internationally competitive.
The way in which China’s e-commerce enterprises have developed so rapidly and have caught up with and in some cases even surpassed those in other countries can be attributed mainly to three things: the country’s massive base of “netizens” and huge consumer market, the high-speed growth of its economy, and its advantage of backwardness.
China’s Advantage When It Comes to Innovation
China’s consumer market potential is extremely large. The country, therefore, has what is known as a large-country effect. Given its size, enterprises can enjoy economies of scale through cost as well as competitive advantages.
From basic necessities to high-end consumer items, China is the globe’s largest market. On November 11, 2014, in just one day of the Alibaba Group’s 11.11 Shopping Festival, Internet sales came to 57.1 billion RMB (US$9.3 billion).
In contrast, the comparable event in the United States, held on a Monday in November 2014, racked up sales of US$2.04 billion. In 2014, China’s Internet retail sales volume overall came to a total of 2.8 trillion RMB, which was 10.6 percent of all retail sales of consumer goods in the country. In 2008, the percentage had been just 1 percent, with 100 billion RMB in retail sales via the Internet.
Fast economic growth could be called the wings on which China’s e-commerce has taken flight. Growth has moved at high speed ever since 1978. Between 1979 and 2007, the country’s gross domestic product (GDP) grew at an actual average annual rate of 9.8 percent.
Not only was this notably higher than the country’s 6.1 percent average growth rate between 1953 and 1978, but it also was much higher than the 3 percent average growth rate of the global economy.
When Japan’s economy was in the takeoff stage, its GDP was growing at an average annual rate of 9.2 percent, about the same as Korea’s average of 8.5 percent. In 2010, China overtook Japan to become the second largest economy in the world, after the United States.
The World Bank predicts that China will become a high-income country at some point in the 2030s when the size of its economy will surpass that of the United States.
This is true even though the speed of China’s economic growth will be one-third lower in the future than it was over the past 30 years; that is, the economy will grow at an average rate of 6.6 percent per year.
The strength of China’s overall economy and the speed at which its per capita GDP is increasing will bring unprecedented prosperity to all industries in the country, including the Internet industry. The Boston Consulting Group forecasts that the scale of China’s Internet sector will be on a par with that of the United States by 2016.
At the same time, we should recognize that China also has a very clear advantage in being a “backward” country because it took up e-commerce later than the United States.
In contrast to developed countries, the basic infrastructure for China’s Internet is not yet well developed, and there are major imbalances between urban and rural areas and the eastern and western parts of the country. Meanwhile, the traditional industries and logistical systems in China are underdeveloped.
It is precisely the underdeveloped nature of these things that provide such new commercial value to China’s Internet and tremendous opportunities for growth.
The development of new forms of industrialization, “informatization,” urbanization, and agricultural modernization will be done in tandem with the growth of the Internet. This will provide enormous imaginative space for a leapfrogging kind of growth of China’s productive forces.
In contrast, America’s modern retail sales industry is highly developed. Before entering the Internet age, the United States had already realized a fairly high level of “informatization.” In creating new value on top of this existing foundation, the U.S. Internet industry faces greater obstacles and has less room to grow.
Alibaba’s Innovative Pathway
To someone in the Internet industry in the United States, the success of Alibaba is rather peculiar. Although one can vaguely see some traces of American Internet companies in what Alibaba has accomplished, the overall shape of its innovation has been totally different. Alibaba’s success has taken a different path.
1. A B2B Business with Chinese Characteristics
As the global Internet sector heated up in the late twentieth century, e-commerce began to seep into China from the United States. In the course of this “heat wave,” Jack Ma accepted an invitation to attend an e-commerce conference in
Asia, at which he discovered something that surprised him. In every industry in the United States, which is a mature market economy, the top three companies actually dominate that industry’s market and resources. Basically, all (business) e-commerce in the United States is servicing these large companies.
By way of contrast, 99 percent of all enterprises in China are small and medium-sized entities, and the market-economy environment is totally different. This was a determining factor in how e-commerce had to develop in China—it had to service small business.
It could not resemble the kind of B2B e-commerce in the United States, which was “business to business” or “enterprise to enterprise.” Instead, it had to be “businessperson to businessperson.”
In the end, this conceptual difference created a Chinese model for B2B that was totally different from that in the United States. B2B was the basis on which Alibaba was founded. Alibaba’s original B2B business, therefore, was divided into a domestic form and an international form—two different market segmentation.
Alibaba’s market for international transactions was created to allow small and medium-sized enterprises around the globe to expand into foreign markets on the basis of an English-language cross-border trading platform.
By December 31, 2012, Alibaba’s market for international transactions had 36.7 million registered users and 2.8 million foreign companies’ online storefronts. Its services covered more than 240 countries and regions.
Alibaba’s market for domestic transactions was based on the already existing ways in which enterprises exchange information within China—issuing purchasing orders and carrying out large wholesale business. The company decided to provide improved e-commerce services to small and medium-sized companies that were carrying on domestic trade.
By the end of 2014, Alibaba’s China-based online market, called 1688.com, had become the world’s foremost business platform, with over 120 million registered users, more than 12 million visitors every day, and generating more than 150 million online every day. The platform has 10 million business storefronts that sell items that range from clothing to furniture to industrial products.
In both these market segments, Alibaba charged membership fees in order to earn income. Small and medium-sized enterprises could have their own self-operated space on Alibaba’s platform by paying a certain fee.
Within that space, they could conduct their own business. Sales were mostly generated via the Internet, but the actual transactions were executed offline, in the old manner.
Between 1999 and 2007, Alibaba gradually took this B2B model to a higher level of excellence. In 2007, Alibaba’s B2B company was listed on the Hong Kong Stock Exchange and raised US$1.7 billion in funding. At the time, this was a record for an Internet company.
2. The Omnipotent Taobao
Taobao’s tremendous capacity for innovation was apparent from the time the company came into being. When Taobao was set up in 2003, it was dedicated solely to being a consumer-to-consumer (C2C) website, and eBay/Eachnet stood in front of it like a massively imposing mountain. At the time, eBay’s former CEO, Meg Whitman, said that Taobao would last 18 months at the most.
Eighteen months later, Eachnet’s chief operating officer said, “It’s going to be a protracted war—we’ll be fighting for some time.” At present, Taobao is pretty much calling the shots, while eBay/Eachnet has basically been forgotten.
How did Taobao conquer eBay/Eachnet? The question has been asked by many people with considerable surprise. A simplified analysis shows that Taobao’s main innovations included the following:
1.The way in which AliPay serves as a guarantor of transactions eliminated the doubts and distrust that Chinese customers had felt about online payment.
2. eBay/Eachnet did everything it could to prevent buyers and sellers from linking up with one another and conducting business directly in order to ensure that it could keep its own transaction fee revenue. Taobao instead encouraged buyers and sellers to negotiate prices directly. This allowed Taobao to be a free market.
3. While believing that the time was perfect for grabbing the e-commerce market, Taobao put considerable investment into expanding its market, that is, into market promotion. By the time eBay/Eachnet “woke up,” China’s e-commerce market was already occupied by others, with little left for eBay/Eachnet.
4. Taobao’s flexibility in dealing with regional and local markets completely beat the strategy of treating global markets as one entity. Eachnet’s platform was linked up to eBay’s global platform, and the customer account system of both was one unified system worldwide.
This came up against opposition from essentially all Eachnet vendors. In contrast, Taobao could develop functions that were unique to its local native markets.
After beating out eBay/Eachnet, Taobao went on to grow in a way that was basically unobstructed. Guided by correct strategies, the company moved step by step to becoming the bellwether of China’s Internet retail business.
One of Taobao’s major innovations was called the greater Taobao strategy. In September 2008, the Alibaba Group announced and formally launched the first step of this strategy. Under the banner of a merged Taobao and Alibaba development effort, they created the largest e-commerce ecosystem in the world.
This greater Taobao strategy would enable Taobao to surpass itself on the basis of its own foundation and, by means of an unconventional way of developing, would create a unique form of worldwide commerce. The goal was to surpass the global sales figures of Walmart within 10 years.
In January 2010, the Alibaba Group announced that it was investing 5 billion RMB into the Taobao platform over the next five years as part of its focus on developing the greater Taobao strategy.
The virtue of this greater Taobao strategy lay in expanding the value that Taobao itself provided to each individual company. Instead of providing simply the Taobao value, each company now was leveraged up to becoming part of an ecosystem and a whole industry.
The reason Taobao was able to form e-commerce services valued at 100 billion RMB was closely related to this greater Taobao strategy.
Another of Taobao’s major innovations was that it constantly segmented and spun off new businesses. As a highly creative businessman, Jack Ma’s tactic with respect to Taobao was to grow the company at exponential speed and then, at the appropriate time, split it up into business segments.
Alipay, Juhuasuan.com, and Taobao Commercial City (later renamed Tmall.com ) were all the result of this. The most thorough occasion on which Jack Ma played out this strategy, however, was in January of 2013, when he split the entire Alibaba Group into 25 separate business units, a move that astonished everyone on the outside.
Constantly differentiating businesses was, in fact, a manifestation of Alibaba’s proactive strategy of constantly changing and improving itself. “Embrace change” is one of Alibaba’s Six Sacred Swords.
It is an extremely important part of the company’s code of values. An even higher-level principle, however, is “Create change”—repair the roof before the rain, make arrangements well in advance.
The benefit of this is that even though business units multiply, the core stays the same—all revolve around the backbone of e-commerce. Moreover, each change consolidates and strengthens that backbone.
At the same time, the subsidiary businesses that have been differentiated take on a new horizon for growth, a new market space. Each becomes the leader in its own differentiated domain.
For example, once Juhuasuan was spun off and made independent, it became the largest online group-purchasing marketplace platform in China. Once Alipay was made independent, it became the leader in the third-party payment sphere in China.
3. Alipay: An Accidental Offspring of Alibaba
When it was spun off from Taobao and made an independent company, Alipay did not anticipate that it would be what it has become today.
From being Taobao’s earliest “tool” for guaranteeing online transactions, Alipay has now become the leader in third-party escrow services for online payments in China. In the fiscal year 2014 (by March 31, 2014), total transactions through Alipay had reached US$623 billion (approximately 3.9 trillion RMB).
By the end of 2013, Alipay had close to 300 million named customers, and 12.5 billion transactions had been executed via Alipay’s services. What’s more, in the course of this, more than 100 million customers had shifted their primary payment site toward the Alipay Wallet, Alipay’s mobile service.
These customers had completed in excess of 2.78 billion transactions valued at more than 900 billion RMB, making Alipay the largest mobile phone payment service in the world.
From the time it was established in 2004 until the present, Alipay and Alipay Wallet have become the primary method of both online and offline payments for many businesses.
They provide basic cash-flow services for millions of customers and commercial entities. During the 2014 11.11 Shopping Festival, orders reached 278 million, and turnover was valued at 57.1 billion RMB.
The peak number of transactions handled in one minute was 2.85 million, which was more than three times the figure in the preceding year. The highest monetary value of mobile phone transactions in one single day was 11.3 billion RMB.
More than 460,000 businesses routinely use Alipay services to handle payments. Such payments incorporate a wide range of business areas, including Internet retail sales, virtual games, digital communications, commercial services, tickets, and public service endeavors.
Alipay is no longer a simple payment tool. It has become a “helper in the daily affairs of life” for people in the Internet age. It is putting its efforts into constructing a “life circle” on the Internet, providing ways to make all of life more convenient, faster, and easier in terms of such daily affairs as eating, dressing, housing, and so on.
For example, Alipay already has tens of millions of customers using its services to pay utility bills, make credit-card payments, accomplish online remittances, and so on.
The Spring Festival of 2014 can serve as an example. Most banking locations were closed in the course of this seven-day holiday. As a result, 2.2 million person-times used Alipay Wallet services to make payments from 38 different kinds of bank-issued credit cards. In this one instance, payments made by mobile phones came to 7.1 billion RMB.
This was 10 times the amount transacted in this manner in the Spring Festival of 2013. The number of credit-card transactions that used Alipay payment services during the Spring Festival of 2014 came to over 100 million separate transactions. Credit-card transactions came to 52 percent of all Alipay-serviced transactions.
In these seven days, without ever leaving their homes, Alipay’s more than 50 million customers could use their mobile phones to purchase goods, pay for daily needs, pay off credit cards, use the YuEbao service to organize personal finances, and so on.
From this, it can be seen that the starting point from which Alibaba unleashes grassroots entrepreneurship is Taobao.com. The Taobao platform is also the foundation and the platform for unleashing grassroots innovation. Numerous beautiful and small e-commerce businesses converge here.
Alibaba’s Innovations with Respect to International Trade
Since the start of this opening-up process, China’s implementation of such opening strategies as welcoming foreign investment and developing foreign trade has propelled high-speed economic growth and social prosperity. China has become one of the fastest-growing and most accomplished emerging economies in the world.
Behind this appearance of economic prosperity and expanding exports lies a hidden crisis, however, owing to uncertainties about the ongoing stability of the country’s exports.
Indications of this lie in the overly concentrated structure of China’s exported products. This compromises the ability of trade to withstand volatility. It can be seen in the way processing industries are the main engine for export growth, whereas the target countries for these exports are insufficiently diversified.
Given that China’s exports hinge on the economic growth of developed countries, external shocks can easily create volatility. This current global economic crisis is a good example of how lower global growth can have a negative impact on China’s exports.
One of the more controversial topics among policy makers and among economic theorists, therefore, is how to ensure the stable growth of China’s export trade. As a company that develops Internet and mobile platforms, Alibaba is being very proactive in exploring its own role.
Its open-style big-data system on the international trade platform has blazed a new kind of Silk Road for the new age. It is helping conventional trade, as well as the trade in services, to find a sustainable path of development.
Alibaba Forges a Silk Road for the New Age
The fundamental reason for the tightening of China’s foreign trade environment and the ongoing spread of an intensification of trade frictions is that export products are not yet sufficiently diversified, whereas target countries for exports are not yet sufficiently multilateralized.
The fundamental ways to change this are to increase the percentage of new products among exports and to shift from selling primarily to America, Japan, and Europe to selling to most developing countries.
As China’s largest online trading platform, Alibaba has been proactive in exploring ways to do this. The Internet-based Silk Road that it has created is intended to help achieve faster export growth for China.
In evaluating the future of China’s export trade as it faced the economic crisis and the post-crisis period, Alibaba became convinced that confidence in purchasing Chinese goods was recovering.
It did this by using its overseas purchasing inquiries and indexed search engine data. It correctly forecasts a rapid rebound of Chinese exports in the first quarter of 2010.
This was so because, in the fourth quarter of 2009, Alibaba’s platform data indicated that consumer markets in developed countries were warming up again at faster-than-expected speed, with the United States taking the lead. The fastest rise in inquiries related to purchases of Chinese food and beverages, beauty products, and personal caregiving (nursing).
Purchasing inquiries made to Chinese suppliers also were increasing dramatically from such countries as Germany, Russia, and the Middle East, countries that, in the future, will make a major contribution to increasing China’s exports.
As former Chief Operating Officer of Alibaba’s B2B company Wei Zhe has noted, “The confidence of foreign buyers in Chinese goods is coming back, and it is possible that the overall level of foreign-trade exports may get close to the level of early 2008. At the very least, the recovery of Internet-based trade is surpassing the recovery of traditional markets.”
In fact, under the joint stimulus of fiscal-stimulus policies and budgetary spending, the economies of the United States and Western European countries began to recover in the third quarter of 2009.
What’s more, this recovery should be ongoing. GDP in the United States has been growing above 1.5 percent since 2011, while economic recovery will remain slow.
The leading indicator of the Purchasing Managers’ Index (PMI) also suggests that manufacturing industries in the United States, Europe, and Japan are beginning to recover.
After being depressed for 17 months, for the first time, the Eurozone broke through a PMI of 50 in October 2009, which implies that the economy is strong and that people’s expectations are positive.
Based on the 4.5 million global registered users that Alibaba commands, the data of its supplied goods, and the way all countries are putting greater investment into stimulating their own trade, Alibaba holds fast to a low-barrier-to-entry model of e-commerce.
Using services and technology, it intends to help small and micro enterprises to get over a “turbulent springtime” and realize a situation of stable export trade growth. Alibaba’s cooperation with the authorities in Macao is a good example of this.
Alibaba’s Cooperation with the Bureau of Trade Investment and Promotion in Macao
During the economic crisis, in the first eight months of 2009, Macao exported roughly US$64 million in total value (in Macao’s currency, 5.11 billion), with exports targeted mainly at the United States and the European Union.
Depressed economies then led to a constant slide in export figures, however, causing Macao’s Export Department to take proactive measures to expand trade and seek new markets.
To do this, the Trade and Investment Bureau in Macao established a cooperative relationship with Alibaba in October 2009. Its purpose was to work together in promoting e-commerce to more small and micro-enterprises in Macao.
In its initial stages, this cooperative endeavor included setting up a plan to encourage Macao’s smaller enterprises to open up new international trade markets.
To do this, exporters in Macao could apply for a maximum of roughly US$2,500 in assistance from the Trade and Investment Bureau to be used in purchasing Alibaba’s support services for e-commerce.
The cooperation between Alibaba and Macao authorities will help to strengthen Macao’s exporting ability, but through the use of e-commerce, it also will help it to expand its customer base and improve its purchasing processes and improve its competitiveness in global markets in general.
Alibaba is also cooperating with 22 Arab countries, acting as a go-between and a bridge to finding Chinese opportunities in the Arab world.
It is helping to create the underlying conditions for China to be a new trading partner with Arab countries, successfully forging what it calls a “modern Alibaba Silk Road.”
Many trading partners from Arab countries now exist on Alibaba’s global purchasing platform who not only are helping China’s e-commerce break into the massive market of the Arab world but also are themselves finding Chinese products that help them make money.
For example, raw meat in Arab countries is three times the price of China’s raw meat. Given this large profit margin, with Alibaba’s online trading platform acting as a go-between, some Arab customers are realizing that China can provide them with massive profits.
They are now thronging to buy things in China, to the extent that some Chinese suppliers cannot handle all the business.
Given the profit margins on importing Chinese beef and mutton, Arab traders have been able to put Chinese meat in essentially all markets in the Arab world. Some 85 percent of all mutton and beef consumed in Arab countries is now imported from China.
By threading their trade through the fabric of Alibaba, many Arab businesspeople are doing very substantial business. Not only meat, but such things as petroleum, electronics, and the export of physical labor are now large-scale businesses.
As a matchmaker between the economies of China and the Arab world, Alibaba provides commercial opportunities to Arab businesspeople every day. At the same time, it provides the Arab world with the price and quality advantages of Chinese exporters.
The result is a win-win model that works. This development concept of win-win solutions has enabled Alibaba to successfully establish a new Silk Road between China and the Arab world that enhances economic and trade relations and enriches economic activity.
In terms of trade, this Silk Road is just getting started, but there are certainly more “treasure troves” waiting to be found by Chinese and Arab businesspeople via the Alibaba online trading platform.
Alibaba’s Big-Data System Helps to Develop the Trade Both in Goods and in Services
Alibaba’s big-data system is helping to expedite the growth of the regular business as well as the trade in services. Looking only at small and microenterprises, only 5 percent of China’s suppliers hold 20 percent of all export volume conducted by these enterprises.
Despite the highly demanding export situation, suppliers on Alibaba’s platform are maintaining their ability to keep up fast-paced growth. The context for this is the backing provided by the big-data system of Alibaba’s international trade platform.
Use of this system allows for more effective matching of buyers and sellers because purchasing conducted directly on the platform is based on a massive quantity of data analysis.
The survival ability of cross-border e-commerce companies is much higher than that of traditional foreign trade enterprises. This effectively promotes the much faster development of China’s trade in goods as well as its trade in services.
Looking first at the trade in goods, in the post-crisis period, global purchasing demand has not actually changed but has shifted in the direction of smaller quantities and more frequent purchases. To take Europe and America as representative of traditional developed-country markets, the number of buyers has risen dramatically.
In the past three years, American buyers on the Alibaba website have gone from 2 to 7 million, whereas European buyers have gone from 360,000 to 1.6 million.
Meanwhile, every single transaction is for a much smaller amount of money. Most orders for any single transaction do not exceed US$30,000 (roughly 200,000 RMB), and transactions are concentrated in consumer products industries.
This global trend, toward smaller amounts and more frequent purchases, means that buyers have to link up with suppliers more efficiently. This gradually allows the new form of e-commerce services to display its pronounced advantages over traditional forms of foreign trade.
Based on the accumulation of big data and analysis of those data, purchasing on Ali can be direct to market. Overseas buyers can directly issue detailed purchase requirements, and suppliers then quote prices on a voluntary basis.
The two conduct online negotiations and conclude the business. In the past two years, the scale of buyers engaging in the direct purchasing markets has gone up 7 to 10 times per year.
Statistics supplied by Alibaba show that there are currently 80,000 Chinese suppliers who are active on its platform, which is roughly 5 percent of the number of enterprises engaged in foreign trade in China.
However, the results of third-party surveys and research indicate that this 5 percent of Chinese suppliers is creating 1.3 trillion RMB worth of exports (including those that go through Alibaba).
This is roughly equal to 20 percent of the total value of exports carried on by China’s small and micro-enterprises. From this, it can be seen that Alibaba’s big-data system is playing a role in stimulating the fast growth of China’s commodity exports.
E-commerce is an important component of China’s trade in services, and it should open up a new territory for this business in the future. The reason for this is that e-commerce is closely tied to commercial trade at every link in the process, and commercial trade is the cornerstone of the e-commerce services business.
E-commerce includes not only large-scale industry, the logistics of commerce and trade, tourism services, and so on but also e-commerce applications for traditional enterprises. It includes Internet-based purchasing and Internet-based selling, as well as such innovative forms of business as mobile-phone-based e-commerce.
The new advantages that e-commerce brings to China’s services trade are as follows: first, e-commerce can dramatically reduce the costs of trading in services.
Because e-commerce reduces a great number of links in the chain of business, buyers and sellers can carry on business activity directly and thereby lower transaction costs.
Second, it can improve transaction efficiencies. Both buyers and sellers can adopt standardized, digitized contracts and so on. Third, it can reduce regional barriers to trade and expand opportunities for trade in services. Fourth, it can improve the international competitiveness of China’s companies that engage in the trade in services.
At the same time, e-commerce has developed in unprecedented ways on the Alibaba platform in terms of service industries. Not only has it galvanized greater development of logistics and e-commerce supporting industries, but it also has spawned an emerging industry of e-commerce services.
Right now, more than 170 million customers have purchased things via the Internet in China. E-commerce is already widely established in the country and is influencing the consumption behavior of both enterprises and individuals in profound ways.
E-commerce has become a key industry that China has decided to nurture in order for it to become a new nexus for economic growth.
I believe that China’s export of e-commerce-based services will make great progress in the future given the contributions of the rapidly growing Alibaba e-commerce services industry and the contributions of its big-data system.
Export of e-commerce services, in turn, will spur the upgrading and restructuring of China’s overall trade in services.
Alipay: The Foundation of the Ali Ecosystem
The curtain has already come down on the 11.11 Shopping Festival 2013.
A total sum of 35.019 billion RMB has been paid through Alipay, creating yet another record of sales in the e-commerce age. Although some problems appeared in the first hour after retail outlets began selling, with an inability to process payments, the Taobao and Alipay technical team swiftly restored operations.
They successfully met the challenge of dealing with 213 million Internet people processing more than 100 million orders on a single day and with the massive quantities of data that stand behind those numbers.
Accolades came in from around the world. The excellence of Alipay’s technology truly does deserve respect, but it is the impact of the thinking behind that technology that is profoundly changing our lives.
In recent years, Alipay has already become an indispensable part of many people’s lives. Alipay’s online payment system has made transactions safer, quicker, and easier—from consumers paying for things on Taobao to 460,000 businesses that receive the money.
The system has made people’s lives more convenient in many ways—from enabling people to pay their utility bills online to processing credit-card transactions.
Alipay’s real significance does not lie in its 800 million registered accounts, however, or in the 20 billion RMB in daily transaction volume that it can handle via some 100 million separate transactions in a day.
Despite these massive numbers, the real significance of Alipay lies in its being a critical link in the chain of Internet exchanges. This is more important to producing an Ali ecosystem and enabling it to grow.
Faced with Taobao’s Need, Alipay Resolves the Trust Dilemma
Ali-people often says that while they are innovating to solve problems, they cannot help but take a step forward and actually create something new.
Faced with an abyss before them, that is, they will face bone-crushing defeat if they do not make the leap. To understand the origins of Alipay, we have to go back to the year in which it was born. We have to see what the e-commerce environment was like back then and what Taobao faced in terms of major challenges.
The Taobao platform was established in May 2003. The main thing holding back the growth of e-commerce transactions than was a particularly fundamental problem—that of mutual trust between buyers and sellers.
Buyers did not believe sellers and therefore were unwilling to extend direct payments. Sellers did not trust buyers and were unwilling to risk shipping goods.
Alipay was born out of this opportunity. As Shao Xiaofeng, former CEO of Alipay, said, “In a certain sense, what Alipay did at the beginning was not so much online payment as online escrow—that is, serving as the guarantor of credit.”
This new financial innovation involved considerable risk, but it also reflected Alibaba’s confidence in e-commerce. Both the risk-taking and confidence appear to have paid off.
On October 15, 2003, Alipay put this guaranteed transaction model into effect on Taobao for the first time. The buyer first remitted funds into Alipay. Alipay then notified the seller to release the goods. Once the buyer received the goods, he or she confirmed the release of the payment, and Alipay paid the seller.
By serving as guarantor in the middle, Alipay was able to resolve the problem that had plagued e-commerce from the beginning—that of trust. Once this escrow system was set up, it ensured the formation of a consumer environment on the Internet.
In addition to resolving this issue of trust, the very existence of Alipay enabled electronic payment to become quick, easy, and effective. Alipay’s functions with respect to currency payment greatly facilitated the advance of Internet purchasing.
Looking back at the history of how “currency” developed, in primitive societies, people used such things as shells and hides as vehicles for embodying value. This simplified the trouble of exchanging goods for other goods.
The currency then went from being metal coinage to being pieces of paper as people constantly sought to create payment tools that were more convenient and more effective. In the age of electronic commerce, payment links that go via the Internet have replaced remittances at a counter.
Payment via the Internet and the ongoing development of e-commerce have contributed to each other’s growth.
The head of Alipay’s Science and Technology Department, Wan Gang, has commented, “When the Taobao platform launched Internet purchasing, it may have been supported by network technology, but Alipay was what enabled it to come out of its shell and stand above all of the many other Internet purchasing platforms.”
PayPal in the United States was a competitor of Alipay within China at the time. In contrast to Alipay, PayPal developed in a climate of excellent credit services in the United States, while Alipay grew up in the midst of primitive and rather wild credit conditions.
Undaunted in the face of certain risks, however, the pioneers at Alibaba forged ahead in the midst of this wilderness. Through hard work, they eventually were to enjoy the fruits of success in this particular realm.
That is, Alipay went from 0 customers to 100 million customers in the first five years. It then went from 100 million to 200 million customers in only 10 months.
After that, it “climbed on the express train” of both the Internet and e-commerce in terms of processing transactions. Between 2009 and 2012, the number of transactions processed via Alipay increased at 60 percent per year on average.
In 2012, Alipay handled 6.23 million transactions, including around 70 percent of all online credit-card transactions within China.
During this period, Alipay also launched various business solutions that greatly improved cooperation among commercial merchants so that its own business lines have developed as a result. At present, Alipay works with more than 200 financial institutions and with some 500,000 commercial entities.
It also has become a major tool in influencing the confidence with which consumers approach the Internet. In China’s e-commerce, it is playing the role of certifying and enabling credit.
According to the results of surveys conducted by the Zheng Wang Consulting Company, 88.3 percent of users feel that websites that provide Alipay services are more reliable than those that do not provide such services. Moreover, whether or not Alipay will accept a site into its system plays a direct role in that site’s degree of confidence.
As the very basis of Alibaba’s ecosystem, as the outstanding body enabling Taobao’s sustained growth in annual turnover, as the “bugler” calling the tune for millions of “netizens” who are marching toward the new consumer age—and as all the positive and pleasing figures tell us—Alipay fully deserves its praise.
Without Alipay’s ability to resolve the whole trust issue at the very beginning, customers would not have rushed to register on the Taobao site, and the habit of buying things on the Internet would not have become embedded into daily life.
Millions of sellers would not have taken up residence in the Taobao system. The multitude of businesses that evolved as a result of the ability to sell via Taobao would not have come to be, nor would Alibaba itself have such positive prospects for future growth.
A Service That Enables the Public to Have a Fast, Easy, and Safe Way to Make Payments
According to Alibaba’s own statistics, the success rate for people purchasing things on the Internet, from sending off an order to the seller’s receipt of payment, is only around 70 percent. Thirty percent of orders are lost, whether due to payment technology problems or causes relating to the purchaser himself.
Not only does this lead directly to lower turnover and loss of profits, but also it leaves consumers with unhappy purchasing experiences. This has a long-term negative impact on ensuing sales. Alipay has done all it can to elevate the success rate of payments and to ameliorate problems with payments for orders.
At present, Alipay has cooperative partnerships with more than 200 domestic banks, 4 overseas banks, and 5 international bank-card groups and third-party payment companies.
It cooperates with these companies very closely. In addition to the most basic kind of bank transfer of funds from one account to another, starting in 2010, Alipay gradually linked up with more than 100 banks to promote a fast and easy pay service.
In going through this kind of new technology, customers no longer need to connect with an Internet bank.
As long as they possess a bank card, they can complete online payment in a fast and easy way. The promotion of this fast and easy payment technology is lowering the threshold for customers who pay online. It has greatly reduced the procedures required to complete transactions and has strengthened the security of bank accounts.
In addition to the attractions of Alipay with which people already are familiar, including quick and easy and Trojan-free transactions, in April 2013, Alipay introduced a third-party insurance institution into its business, namely, Ping An Insurance, to ensure the safety of users’ funds.
If anyone’s account is fraudulently used by someone after using quick and easy to pay, Ping An insures them by paying for 100 percent of what they lost. Moreover, Alipay bears the cost of all insurance fees.
This cooperation between Ping An and Alipay has opened up another form of insurance that guarantees that an online payment will “cross the river safely.” At present, 150 million Alipay users are already making use of quick and easy payments.
As smartphones and other mobile technologies have become universal, and with the developments in Internet purchasing and applications software, the enormous wave of wireless payment is already on us.
The market research group Ipsos has jointly conducted research with Alipay that makes it clear that mobile payments and e-commerce are already relatively mature and that around 80 percent of users are willing to try such new payment products as Sonic Payment.
Already, 86 percent of users who have been surveyed have attempted to purchase things using mobile technology.
In the first quarter of 2013, the size of the transaction market for third-party payment in China reached 63.9 billion RMB, with mobile Internet payment transactions accounting for 47 billion RMB; within this figure, Alipay’s mobile transactions came to around 24 billion RMB, indicating that Alipay held a 50.1 percent market share.
According to Alibaba’s statistics, in 2012, the success rate of payments that were made through traditional cell phone banking channels was 38 percent. Despite this low success rate, however, Alipay’s wireless paying business is growing and becoming sizable at an extremely fast pace.
The number of times people used wireless to pay in 2012 was up 223 percent over the previous year, and the total sum of money transferred via this method had increased by 546 percent. The number of discrete transactions using Alipay via cell phone is now 9.2 percent of all payments made through Alipay.
In 2013, during the 11.11 Shopping Festival, Taobao Alipay payments made via cell phone reached 5.35 billion RMB, which was 5.6 times what the total had been in 2012.
The transaction volume of Alipay’s cell phone payments overall came to 11.3 billion RMB, in 45.18 million separate transactions, which was 24.03 percent of all transactions.
In the realm of mobile payment, Alipay’s product innovations keep streaming out. In January 2013, a new product was officially released called the Alipay Wallet. This is an all-new mobile customer end-user application. This so-called wallet provides an experience that transcends a real wallet.
It has a variety of functions including automatic recharging of money for a cell phone account, paying bills for credit cards, paying fees for daily living, Sonic payments, discount coupons management, hand-form payments, Quick Response (QR) code, access to YuEbao, and so on.
It can listen to commands spoken by a consumer’s cell phone and carry out “smart” transactions. Many scanning and information recognition applications that have been used in Western countries are also being used and are enabling offline transactions and payment to become much quicker and easy.
In all these innovations, including quick and easy payment, credit payment, and wireless payment, the starting point for Alibaba is to ensure that the consumer has a safe, fast, and easy way to make payments, a way that increases the success rate of payments as well as their efficiency. It is to ensure that payment problems are resolved in order to support the growth of e-commerce.
Furthering the Growth of the Payment Industry by the Use of Technology and Competition
Payment systems within China are divided into two categories, online and offline. Online payment is carried out primarily by three parties, Alipay, Cai Fu Tong, and UnionPay.
The Internet payment model involves having independent entities with sufficient material strength and reputable guarantees sign contracts with all large banks. The three primary partners supply the transaction payment platform that interfaces with the banks’ payment settlement system.
According to Enfodesk statistics, by the third quarter of 2013, third-party Internet payment platforms in China had received and transferred 1.6655 trillion RMB worth of transactions.
Alipay accounted for 40.3 percent of those. This was higher than the 28.1 percent handled by UnionPay and the other third-party Internet-based payment institutions.
In May 2011, the central bank of China announced the names of the first group of nonbanking institutions to receive permits to engage in the payment business. Alipay was among the 27 third-party payment enterprises on the list.
Offline payment is the traditional channel by which funds circulate and are paid in China. This method is divided into card-issuing institutions (i.e., banks), clip-receiving institutions (i.e., banks and third-party payment services), and UnionPay and settlement institutions.
Of these, UnionPay is the sole settlement institution that can both issue point-of-sale (POS) machines (a POS information-management system) and is a clip-receiving institution and receives slip- receiving market income.
By the end of 2011, the asset level of UnionPay had already reached 13.8 billion RMB, with operating revenue of around 6 billion RMB and net profit surpassing 1 billion RMB. In the four years prior to this, UnionPay’s operating revenue increased 2.5 times, whereas net income increased nearly 10 times.
With the swift development of the third-party payment industry, the many third-party payment institutions do not have to tie into settlement agreements, however, but can work directly with banks.
The cardless mobile payment business is also gradually progressing. The monopoly position of UnionPay with respect to payment settlement is therefore now constantly being challenged.
The role that banks play in this online payment system is very special, that is, the system composed jointly of UnionPay, third-party payment, and banks. On the one hand, banks are not willing to allow UnionPay to be a large-scale monopoly in the settlement.
They would rather see competitive resources available via multiple channels. On the other hand, the innovative products of third-party payment institutions form a competitive relationship with the payment settlement of banks.
Because of this, the banking industry is also accelerating its own transformation, looking for innovation.
More and more banks are beginning to focus on research and development (R&D) of Internet-based and mobile-based platforms and are speeding up their own individualized financial products to satisfy the financial needs of different customer groups.
For example, they are setting up platforms that provide financial services for e-commerce.
According to 2012 surveys undertaken by UnionPay, fees for actual payment made by a nonfinancial institution to a bank for online payment came to only around 0.1 percent of the transaction amount.
This is much lower than the 0.3 to 0.55 percent level within the UnionPay network. UnionPay calculates that the losses to all banks because of these low fees exceed 3 billion RMB.
The cost is substantial when UnionPay installs POS machines and when banks install automatic teller machines (ATMs). Moreover, these offline channels are mostly for payment settlement.
To prevent withdrawals from credit cards, clip-receiving institutions need to rigorously investigate the qualifications of merchants, and very small merchants generally do not come up to the standards required.
Moreover, it costs several thousand RMB to install a POS machine. Each time a card is swiped, there is another substantial handling fee.
In contrast to this high threshold and high-cost offline payment method, online payment adheres to the concepts of the Internet—open and shared by all. An online payment environment can be built on the existing Internet infrastructure.
At present, Alipay has already signed agreements with more than 200 financial institutions, forming an open payment and settlement channel. As the third-party payment market continues to develop and grow in size, the online payment environment will become even more transparent and open.
It is true that offline POS machines and ATM networks have an enormous customer base already and satisfy an enormous need. For a long period of time to come, online payment will not be able to replace these offline channels.
Nevertheless, the swift growth of the online payment industry has raised levels of technology as well as competition for the entire payment industry. The core reason is that the open network of the Internet allows for lower costs and higher efficiency.
In terms of payment settlement, in 2013, Alipay executed 12.5 billion transactions, which approached the offline consumption by card swiping of 12.7 billion transactions.
This swift increase in the application rate of Alipay not only reflects the fact that online payment is an effective way to supplement China’s existing payment systems but also that the appearance of third-party payment is aligned with the tide of the Internet age.
When third-party payment groups were in the midst of fierce consolidation, if one wanted to one had to rely on outstanding service and reasonable fees.
Current CEO of Alibaba’s Micro Domestic Business Group and former Deputy CEO of Alipay X. Yeming has noted, “Third-party payment enterprises cannot be in a competitive relationship with banks.
We are a payment services provider that works together with and supports banks in elevating the experience of the customer in online banking.”
As long as regulators do not lean toward any one side and as long as they ensure a fair and effective market, reasonable competition on the part of all will force competitors to carry out innovations and improve the quality and effectiveness of their payment services.
The tacit battle between third-party payment enterprises and UnionPay and the competition among third-party payment enterprises can help to build and maintain a kind of dynamic balance. This is beneficial not only to consumers but also to the society at large.
In March 2014, the People’s Bank of China (China’s central bank) issued a temporary restraining order calling for a stop to face-to-face payment services of Tencent and Alipay via virtual card products and Quick Response (QR) Code. For a while, opinions were voiced saying that the central bank was protecting vested interests.
However, at the same time, we do need to admit that there have been certain security problems in emerging payment methods, including those of the QR Code. These are greatly in need of being addressed. Nevertheless, mobile payment has been launched, and the overall situation cannot be stopped. On
April 9, 2014, Deputy CEO of Ali’s Micro Finance Group and Chief Risk Officer Hu Xiaoming revealed that Ali Small Loans, under the leadership of the central bank, is currently in the process of formulating and perfecting payment standards for the QR Code.
Whether it is the central bank, UnionPay, or Internet companies, all must find a way to protect the rights and interests of consumers through processes that are both cooperative and competitive.
Payment constitutes a necessary link among enterprises, merchants, and consumers. Only if the costs of this link are constantly lowered and its efficiency is improved can the productivity and the entire society’s ability to consume constantly increase.
Only then will entrepreneurship at the grassroots level continue to be sparked. This is one of the reasons Alipay and its payment links are so significant to grassroots innovation.
Ali Small Loans: Turning Trust into Wealth
After getting over one of the most fundamental barriers to entry for small business, namely, payment, Alibaba set its sights on the issue of how merchants within its ecosystem can get financing.
Given their small size and limited ability to withstand risk, and because of their lack of corporate governance structures and adequate collateral, many of the merchants on the Alibaba platform find it hard to get operating loans through normal channels such as banks. Their ability to grow and even survive is constrained by the lack of finance.
Recognizing this financing need of many Internet merchants, Alibaba began to provide financial services for online merchants via Ali Small Loans. This stemmed from its principle of doing all possible to serve the microenterprise.
It came up with a slogan to describe the approach: “Turn trust into wealth, and make it easy to borrow money.”
Difficulties of Small and Microenterprises in Getting Funding and Grassroots Entrepreneurship
As noted earlier, the slogan for Ali Small Loans is “Turn trust into wealth, and make it easy to borrow money.” However, turning this motto into reality is not so easy.
Anyone can recognize the vital contribution that microenterprises make to China’s economy. The best estimate is that small and microenterprises make up over 99 percent of the total number of enterprises in the country.
They provide close to 80 percent of all jobs in cities and towns and generate over 75 percent of all entrepreneurial innovations.
The value created by these enterprises comes to 60 percent of China’s gross domestic product (GDP), and the taxes they pay come to 50 percent of total national tax revenues.
Nevertheless, their inability to get funding has continued to hold them back. It is the main obstacle to their further growth, and indeed, it often threatens their existence.
Since the global financial crisis, China’s microenterprises have been in a very tough situation. They are facing reduced orders even as the prices of their raw materials and labor have gone up.
Intensified competition within industries is yet another challenge they face, which highlights the problem of scarce capital and the inability to get financing.
Microenterprises rely heavily on self-generated funds to pay for operations. Using one’s own funds or borrowing from family and friends cannot support long-term growth, however. External sources of funds are currently limited to one singular channel: loans from banks or similar financial institutions.
Barriers to entry are very high when it comes to using the stock market, debt markets, and private equity, and microenterprises basically have little hope of taking advantage of these channels for funding.
Despite the fact that they, therefore, rely primarily on bank loans, only 12 percent of microenterprises can actually get a bank loan.
Current Deputy CEO of Alibaba and head of its Innovative Finance Department Hu Xiaoming believes that the reason the other 88 percent misses out is either that they have no collateral to put up for a loan or that they cannot handle the complexities of the loan procedures. A third reason is that they are not the banks’ “cup of tea.”
Without funding channels, the inability to get capital often deals a death blow to grassroots entrepreneurs who have founded their own companies.
Imagine if all those Silicon Valley entrepreneurs had not been able to get that first “bucket of money.” How would the Internet have come about? How would companies such as Facebook have developed?
It may not be appropriate to compare high-tech companies and Internet enterprises with grassroots efforts in China. Nevertheless, we cannot deny the innovative forces of China’s grassroots, nor can we deny their potential to change China.
In trying to release further grassroots entrepreneurship, therefore, one step that must not be overlooked is resolving the problem these microenterprises have in getting funding.
Meanwhile, among the multitude of microenterprises, those that are in the business of e-commerce often do not have offline assets or even data on their operations, so they face the same problems, if not worse, in the real world when it comes to raising money.
On Alibaba, however, they have indeed amassed a large amount of data, including the number of goods they have shipped, their sales data, their supply-chain circumstances, and customer evaluations.
All of this information can be used as evidence of credit. Alibaba, therefore, decided to provide a financing service via the Internet using data from the Internet.
Cooperating with Banks in Providing a Bonded Insurance Loan Service
In 2002, Jack Ma launched something called Credit Access, which can be considered the first emerging sprout of an Alibaba financing service. After this, the Alibaba website amplified this by creating a Credit Access Index. This provided a quantified evaluation of the credit situation of both sides of a given transaction.
By creating a system around this, Alibaba incorporated a whole set of indicators into an index that described an enterprise in terms of basic conditions, years in operation, trading conditions, and any business disputes, lawsuits, and so on.
At the outset, Alibaba was not intending to be a loan provider on its own. Instead, it set its sights on the “big guys” in China’s financing industry, namely, the state-owned banks.
Starting in 2007, Alibaba allied with the Industrial and Commercial Bank of China (ICBC) and the Construction Bank of China to launch an Internet-based bonded-insurance loan service for member enterprises.
This opened up a credit service that conformed to the resources of both sides. Members were not required to put up any kind of collateral.
An alliance of three or more enterprises had to come together to go through Alibaba to apply to banks for a loan. Alibaba mainly played the role of a loan intermediary.
It also supplied the credit records of the companies to banks, and it was then up to the bank to do due diligence and decide on whether or not to make a loan.
What had looked like a beautiful blueprint turned out to have numerous problems in actual implementation, however. Alibaba’s cooperation with the banks was not as smooth as anticipated.
The banks’ traditional model for extending loans did not match well with the many small-scale, short-term loans required by e-commerce financing. There also was a huge gulf between the two sides in terms of loan concepts and review and approval procedures.
With respect to Alibaba’s cooperation with the Construction Bank of China, people inside Alibaba expressed the following during interviews: “Of 100 enterprises we recommend, the Construction Bank may wash out 97 and approve
3. In the end, only two or three actually get a loan. We feel that this is rather inefficient, and it also provides a bad experience for customers.” Hu Xiaoming has frankly admitted the differences:
Our average level of loans for customers right now is only some 60,000 RMB. When we talked to them, loans made by ICBC and the Construction Bank of China generally came to 2 RMB million.
In our eyes, this was not loans to microenterprises. The entities we prefer are smaller since they are the real innovators, one factory, a shop run by husband and wife, or the customer might even be a retired military person.
So long as he had credit, we were willing to loan him 2,000, 20,000, 100,000 RMB. This was the kind of thing we would rather do.
Although this original grand scheme came to nothing, cooperating with China’s commercial banks was to be of tremendous significance for Ali Small Loans. In the course of the cooperation, Alibaba drew more members into its Credit Access system and set up a complete credit evaluation system and risk-control system.
Even more important, Alibaba found the direction it wanted to take in the whole process. Through innovating, it decided to use its own methods to provide financial services to microenterprises.
In June 2009, “Ali-loans” was spun off from the business-to-business (B2B) service and Ali Small Loans was established.
On June 8, 2010, three separate entities established the Zhejiang Alibaba Small-Sum Loan Shareholding Company, Ltd., in Hangzhou. The three were the Alibaba Group’s Lian-he Fuxing Group, the Yintai Group, and the Wanxiang Group. This entity was China’s very first microloan company oriented toward making loans to e-commerce.
After this, a similar company was set up in Sichuan Province based on cooperation between Alibaba and the Chongqing municipal government. Alibaba then began to provide financing services for microenterprises and individual entrepreneurs on the B2B, Taobao, and Tmall e-commerce platforms that were both of an ongoing nature and favorably priced.
It used a data- and Internet-based operating model. Its core business was providing small-scale loans.
Ali Small Loans, separated out as an independent entity, constantly improved on its operations and became highly specialized in providing financing for more and more people.
At the same time, it kept to the marrow of the Alibaba mission, which was to unleash grassroots entrepreneurship. It constantly sought out new territory and resolved new problems, daring to be a sort of “hero on the front lines,” breaking the path for others.
Small Is Beautiful: Focusing on Microfinancing Services
There are many reasons that formal financial institutions lend little support to microenterprises. Among them is that bank credit is not suited to the specific characteristics of the small business.
According to the results of a survey undertaken in 2011, the operating and financing situation of 3,231 microenterprises in 36 cities could be characterized by the following four main features. First, their operating capital shortage was fairly low (64 percent had a gap of less than 100,000 RMB, 94 percent had a gap of less than 500,000 RMB, and 98 percent had a gap of less than 1 million RMB).
Second, their time frame for needing financing was high (82 percent needed financing within 10 working days, i.e., completion of the review and approval procedure within that time and 43 percent needed to get the loan within 5 working days).
Third, they could withstand quite high-interest rates (86 percent of those interviewed expressed the ability to accept rates that were four times the legally mandated rates).
Fourth, they generally lacked any collateral. Alibaba’s credit product was designed in a way to allow it to be targeted specifically at these characteristics.
1. The degree of Capital Gap Fairly Small: So Ali Small Loans Made Loans of Less than 1 Million RMB
Loans of 1 million RMB or less basically could satisfy the turnover rate of capital in microenterprises. It could meet their investment needs for internal bolstering.
In contrast, the standard financial institutions universally kept loans at a level of more than 1 million RMB owing to their need to control costs. They, therefore, were unable to meet the needs of micro enterprises on this front.
What’s more, based on the principle of fast-in, fast-out, a loan model that saw fast turnover of loans allowed Alibaba to use a relatively small amount of capital and yet create a relatively large cumulative quantity of loans. In 2013, the average amount of a single loan made by Ali Small Loans was 13,000 RMB.
The average amount made to a single customer was 36,000 RMB. This was far lower than the single-loan quantity that a traditional financial institution was able to make. Alibaba thus used its own advantages to make up for the shortcomings of banks.
2. Need to Get Loans Quickly: So Ali Small Loans Simplified Procedures and Sped Up the Process of Issuing Loans
Ali Small Loans operates 7 days a week, 24 hours a day, year round. It issues loans and takes in loan repayments all the time. If an applicant has his or her materials in order, the system can provide him or her with a loan within three minutes of completing the process of review and approval.
This is the shortest time an applicant has to wait; the longest time, if his or her materials are in order, is seven days. The entire process takes place on the Internet. The procedures are simplified, and the applicant does not need to spend money on transportation or other such links in the process.
3. Mostly Short-Term Use of the Money and an Ability to Withstand High-Interest Rates: So Ali Small Loans Adopted a Loan Model of Fast In, Fast Out
In contrast to bank loans, Ali Small Loans adopted a small-sum loan model that was fast in, fast out. In all of 2012, the average length of time that a customer “occupied” capital was 123 days.
Although the interest that customers could withstand and accepted was 18 percent at an annualized rate, the actual cost of the money was around 6.7 percent.
A good example is ordering loans. Ali Small Loans’ order loan product was priced at a daily interest rate of 0.005. On average, a customer would use such a loan for four days.
At an annualized rate, the financing interest-rate cost of the loan to the customer was only 6 percent, roughly equivalent to the officially approved standard interest rate for a one-year loan.
Difficulty in Supplying Any Guarantee or Collateral: So Ali Small Loans Did Not Require Collateral
The credit loans of Ali Small Loans did not require any collateral whatsoever, nor did any guarantor need to stand behind the customer. For the order loan product, the applicant had to supply either the orders or the shipping receipts (bills of lading).
This swept away what had been an important hurdle in making credit loans available to microenterprises.
It also went a step further in simplifying the applications and review and approval procedures, and it lowered the costs of the financing for microenterprises.
Alibaba’s small-sum credit loan product did fairly well in differentiating itself from standard bank credit products. It focused on a small segment of the market, namely, microfinance services, and therefore was able to extend benefits to more microenterprises that had been left on the outside of official financing channels.
Because of the need to control costs, and because of discrimination against the different kinds of ownership systems of small businesses, traditional banking institutions did not target the many small businesses on Alibaba’s platforms as potential customers.
These customers, therefore, were outside the range of vision of the official financing institutions.
When talking about how Ali Small Loans positioned itself, Hu Xiaoming has said, “In the entire financing ecosystem, we only make loans that are 1 million RMB or less. We leave anything bigger to the banks. We are ‘vegetarians’; we don’t eat this kind of meat.”
Given both cost and risk considerations, traditional banks are unwilling to touch the microfinance business, whereas Ali Small Loans explicitly declares that its upper limit is 1 million RMB.
By positioning itself in a very clear-minded way, based on cloud-computing technology and a large amount of data, Alibaba has carved out an entirely new path in Ali Small Loans.
By the end of 2013, 642,000 customers had received loans through this system. Ali Small Loans had issued a total amount of 172.2 billion RMB in loans.
Big-Data-Based Risk-Control System
The critical issue in providing funding for microenterprises lies in figuring out how to handle information asymmetries.
The field of information economics says that information asymmetries between buyers and lenders lead to higher costs, as well as creating moral hazard and adverse selection. This influences the equilibrium between lending and borrowing, supply and demand.
Why is it that banks find it so hard to make microloans? Microenterprises have particular qualities that ensure that information is asymmetrical, whereas the traditional loan technologies of banks ensure that returns are not able to cover the risks involved.
Alibaba, however, believes that it can use its big-data technologies and its cloud-computing capacity to resolve this asymmetry in information to a certain degree. By the end of June 2013, the nonperforming loan rate of Ali Small Loans was 0.84 percent, lower than the level of commercial banks in China.
The product called Ali Small Loans uses Alibaba’s core technology, namely, big-data technology, to improve the structure of information in an effective way and thereby maintain this relatively low rate of nonperforming loans.
The unique advantage held by Ali Small Loans is that it has access to over 10 years of accumulated statistics on microenterprises on Alibaba’s platforms. It uses these statistics to form a risk-control system, with preload, mid load, and post-loan links that tie into one another.
Before making a loan, Ali Small Loans abandons its broadly open-style method of operations and sales. It instead analyzes data that have been amassed on its platforms. It differentiates among customers, selecting those on the platform that has been operating for a fairly long time and that is more reliable or creditworthy.
It then bestows credit on these and issues an invitation to contract with its small loan product. Right now, more than 2 million merchants are being invested with such credit. This enables more micro-opportunities to enjoy the resources of funding and credit.
In applying for loans, customers do not need to provide any collateral or guarantees. All they need to provide is gross sales figures for the past year, operating costs, gross assets, gross liabilities, and other related financial data.
Alibaba’s trading platform has already accumulated a large amount of data on them relating to their volume of completed orders, volume of trades, inventory turnover, customer relations, credit record, and so on.
Based on its cloud-computing platform, Ali Small Loans then “mines” these data and carries out a “washing” process.
It uses big-data-handling technology, including rating cards and quantitative analysis to make a fairly accurate assessment of the ability of the microenterprise to pay back a loan and of its likely intentions of paying back a loan.
After a loan has been extended, Alibaba carries out a real-time form of regulatory control over data to do with the borrower, keeping track of the volume of business, evaluations of the entity, conditions of the industry, and so on.
If it discovers any unusual activity or violations of prescribed thresholds, it can automatically mobilize mechanisms that make deductions from the borrower’s Alipay account. Most of these supervisory controls are handled automatically via cloud-computing systems and computers.
Loan officers are only responsible for supplemental actions. With respect to loan term limits, Ali Small Loans encourages borrowers to pay back loans as fast as possible.
According to Ali Small Loans statistics, the term order-type loans generally do not exceed one week. Each individual loan generally comes to less than 10,000 RMB, but the frequency of loans is high. Some vendors take out order loans practically every day.
In addition, Ali Small Loans has set up a corresponding credit-restoration system that allows enterprises to restore a good credit rating. If they themselves encounter problems with people not paying for the product, as long as their credit numbers are good on the platform and they have future cash flow, Ali Small Loans provides them with supplemental assistance.
By means of operating measures on its e-commerce platform, it provides support to enable the enterprise to recover its ability to pay back its borrowed money.
Alibaba’s microfinance services group has used big data and cloud-computing platforms to prove that the data amassed on the Internet has value and can be used to provide evidence of the credit situation of its enterprises.
Through a combination of Internet technology and unique innovations in finance, Alibaba’s small loan model is truly achieving the motto, “Turn trust into wealth and make it easy to borrow money.” It is bringing benefits to ever-more microenterprises engaged in e-commerce.
The small loan system of Ali Small Loans is providing China with a feasible path toward funding microenterprises in the Alibaba ecosystem. It has provided the lifeblood for more than 300,000 grassroots entrepreneurs by providing the indispensable financial support for releasing their entrepreneurship.
YuEbao: Internet Ways to Manage Personal Wealth
YuEbao is a value-added service that was created by Alipay. Users shift funds from their Alipay accounts into YuEbao in order to invest in a wealth-management fund called the Tianhong Zenglibao Money Market Fund.
In shifting funds into YuEbao, they can gain relatively high returns from current deposits while still being able to use funds in their YuEbao accounts.
At any time, they can purchase goods on the Internet, use Alipay for payment functions, and so on. The advantage of YuEbao lies in the fact that funds shifted into its account not only earn higher returns but also can be used to pay for consumption in ways that are flexible, quick, and easy.
Collision Between the Internet Business and the Financial Industry
After YuEbao saw the light of day on June 13, 2013, it was broadly regarded by the public as yet another historic episode that changed the use of the Internet for finances following on the innovations of Alipay.
By January 31, 2014, this fund had already reached a scale of 350 billion RMB. More than 58.95 million people had YuEbao accounts. It had become the largest fund in the Chinese domestic market. It would have been impossible to realize such a magnitude by using offline sales methods.
Most users belong to grassroots classes of people. YuEbao guides this portion of users in learning to use new wealth-management products to make reasonable plans for their modest sums of money. In actuality, this is a powerful impetus to releasing entrepreneurship among the public at large.
The enormous attention that YuEbao is getting from the public and the debates going on about it naturally have attracted the attention of many others. Consumers who have never done any online purchasing now want to try it.
In the end, this has had a very positive effect on increasing the number of transactions going through Taobao. “Pull on one hair, and the whole body is affected,” as the saying goes. Every time Alibaba pulls another “hair,” the entire chain of e-commerce is affected.
If this very vital emerging industry, this sunrise industry, did not get refreshed by the morning dew all the time, it would not be as sparkling and lively as it is today. It can be said that innovation is its fundamental driving force for constant development, as well as the most effective route to growth.
At the current time in China, quite a few issues have become apparent in the way banks and securities firms market financial products. For example, they aim for short-term profits.
They promote high-risk products to a clientele that can only handle low risk. They engage in churning, make inappropriate recommendations, and so on.
In contrast, Internet sales platforms have the advantage of being able to tap latent customer demand among targeted customer groups and with targeted product designs. They can be more precise in marketing to appropriate customers. The powerful interactive nature of Internet technology and its precision can effectively lower the costs of service.
From the perspective of financial institutions, therefore, fund companies have for many years wanted to break out of their excessive reliance on banking channels. They want to move away from being forced into a passive position.
It is no exaggeration to say that Alibaba’s cooperation with the Tianhong Fund stirred up a “channel revolution” in the fund world. No longer do fund companies have to line up to go through bank channels to achieve distribution.
They can go through innovative forms of cooperation with Internet companies. With much less trouble, they can achieve an increase in customers and ramp up the scale of their business.