At the Consumer Electronics Show in Las Vegas this year, it was Alibaba.com’s exhibit that really blew my mind. Yes, all the robots and drones were cool, but what Alibaba.com – Alibaba Group’s business-to-business unit – is doing really sent my mind reeling.
Unless I’m mistaken, the platform is building what could be its biggest initiative yet.
Some background on the B2B biz that nobody talks about
Launched in 1999, Alibaba.com was actually Jack Ma’s first ecommerce product. It was a platform connecting mostly foreign companies with Chinese manufacturers back when China was mostly a manufacturing country. And at the beginning, it was little more than an online bulletin board, a place where manufacturers and companies could find each other online and then work out a deal (mostly) offline.
Taobao and Tmall (originally Taobao Mall) were launched later in 2003 and 2006, respectively, and that’s when Alibaba Group began to focus on consumers. Ironically, the move into the business-to-consumer space was apparently a defensive move to protect their B2B business against eBay. And as we know now, these consumer marketplaces quickly rocketed. It turns out that scalable software businesses are an awesome way to capture the spending of rapidly rising Chinese consumers.
You have to give Ma credit. He or someone on his team has an uncanny ability to spot the largest opportunities out there, typically 10 years before they manifest themselves. Chinese online retail reached US$1 trillion in spending in 2015. And today, Alibaba Group is mostly thought of as a consumer ecommerce giant with a market capitalization of approximately US$480 billion.
The company followed this up with Ant Financial, a move into global financial services and another super big idea. Ant Financial did an investment round in 2018 that priced it at US$150 billion.
Alibaba Group also moved into entertainment with Alibaba Pictures, Youku Tudou, and other plays – also huge.
And now, it’s focused on “new retail,” yet another big, crazy idea. In theory, new retail could expand online retail from 20% to 25% of Chinese retail to 30% to 50%. That makes it an opportunity in the trillions of US dollars. (Note: In 2019, total Chinese retail reached US$5.5 trillion, surpassing US retail at US$5.4 trillion.)
Alibaba Group just seems remarkably good at spotting and then capturing truly massive opportunities, while remaining mostly a highly scalable software company (which means ridiculously good economics). At its best, it’s a platform builder that uses data technology to reshape markets… which brings me back to Alibaba.com and B2B.
Next really big idea: digitizing and democratizing global trade
Alibaba.com (and 1688.com) have not gotten much attention relative to the consumer platforms. But the company has been making some interesting moves in the past one or two years.
- Ma has been active in the Electronic World Trade Platform and the working group on small and medium-sized enterprises at the G20 international forum.
- Alibaba Group has been bringing trade ministers from around the world for training at its Hangzhou headquarters.
- Alibaba.com has announced a new partnership with Office Depot in the US.
- Management has been crisscrossing the globe, meeting with governments and trade bodies.
It’s kind of weird. You see the company’s senior people spending a lot of time with governments around the world.
My take is that Alibaba Group has been bringing more foreign merchants onto their B2C platforms, but it has also been laying the groundwork for a massive ecommerce platform which would digitize and democratize global trade. It’s a really big idea.
I’ll discuss this more shortly. First, let’s take a look some platform theory.
On platforms and transaction costs
Alibaba Group is in the digital platform business; it mostly builds marketplaces. But it also has audience-builder and payment platforms and generally doesn’t operate stuff. It doesn’t buy or sell things. It’s a digital creature that seems allergic to most aspects of the physical world.
It mostly creates platforms and data technology tools that empower and connect user groups. It connects merchants and consumers on Taobao, content creators and viewers on Youku Tudou, and manufacturers and retailers on Alibaba.com.
It’s all about connecting different user groups. And generally, the more users participate and the more activities are performed on a platform, the more valuable it becomes. A platform’s value increases directly by transactions and demand aggregation, and indirectly by data produced and new use cases discovered.
There’s some important economics behind all this. Marshall Van Alstyne of the MIT Initiative on the Digital Economy has great thinking on all this. Here’s a quick summary.
Per economists Ronald Coase and Oliver Williamson – Nobel Prize winners in 1991 and 2009, respectively – the total cost of a sale is the production cost plus the transaction cost. And transaction costs are usually from search, coordination, negotiation, and information asymmetries (which includes the risk of being cheated).
Their insight was that when the production and transaction costs are high, transactions and activities are usually done within a firm that is, you do it yourself as a company. But if the total production and transaction cost is small, then a company can do things through a marketplace via contracts.
So, what marketplace platforms like Taobao and Tmall are really selling is reduced transaction costs. They’re enabling firms to do things out in the marketplace that they would otherwise have to do internally or not at all. Taobao lowers transaction costs, and this enables SMEs in particular to do things in the marketplace. They can do transactions with other businesses and consumers across great distances all via a marketplace because the transaction costs have been reduced so much.
So, if you are looking to build a marketplace platform, you don’t want to connect KFC or Walmart to consumers or help them interact with their suppliers better. These are large companies that can build internally, create supply chains, and open stores themselves.
Instead, you want to create a platform and digital tools that enable small companies (a much bigger user group, by the way) to do transactions in the marketplaces they could never do otherwise. That’s Taobao. And that has really been Alibaba.com’s mantra: to develop digital tools that empower small merchants and brands, and to level the playing field with big companies. It’s a really powerful approach. (Note: SMEs typically make up 50% of a country’s gross domestic product.)
Platforms are mostly about lowering transaction costs. And generally, the best marketplace platforms connect small, differentiated sellers to small buyers in fragmented markets (e.g., Meituan-Dianping, Upwork, Trulio).
Could a platform digitize and democratize global trade?
I think this is the major opportunity that Alibaba.com is going after. It’s trying to build a platform that lowers the transaction costs between all the world’s SMEs. That’s a really big idea.
B2C ecommerce in China is a huge opportunity because Chinese retail is worth US$5.5 trillion per year, with about US$1 trillion of that happening online. But global trade (not counting services, commodities, and large products like airplanes) is probably above US$20 trillion per year. So, if you could digitize 10% to 20% of that, you are talking about an opportunity that’s worth US$2 trillion to US$5 trillion.
But it’s actually an even bigger opportunity than that because you wouldn’t just be digitizing existing trade but also democratizing and increasing it. So much of global trade today is done by large companies with major distributors and supply chains because they are the only ones that can overcome cross-border transaction costs and difficulties.
However, if you lower the transaction costs, SMEs could start to do the same. If you democratize global trade, it could become a much higher number.
What if Alibaba.com’s digital tools could enable an SME in Texas to both source from and sell to other SMEs all over the world? What if such a company could source their products in the Philippines and China as easily as they source in the US? What if they could sell as easily in Brazil and France as they do in the US? What if an SME could operate like a multinational company?
Turning SMEs to MNCs
From my discussions with Alibaba.com’s management and a visit to its exhibit at CES, I learned that the company is starting to enable SMEs to act like MNCs in terms of cross-border transactions.
All platforms start with one to two core interactions. From there, they can build in lots of crazy ways. For Taobao, it’s consumers and small merchants buying and selling physical products. And to enable these core interactions, Alibaba.com provided the marketplace platform and the tools required. These tools include proven identities, reviews and trust, payments and escrow, as well as logistics and delivery.
So, if the goal is to create a marketplace for cross-border trade, what tools are needed to enable core interactions?
At the CES exhibit, Alibaba.com was showing the early versions of some of the tools it’s developing. Here’s what I saw.
A mobile app that lets you search for products globally
One of the most important transaction costs, especially for a global platform, is the search cost. If you are a one- or two-person business – say, a table designer in Texas – how do you confidently find the right manufactured product in China or India?
Well, now you can download the Alibaba.com app on your smartphone, and you can start searching for the manufactured product you want (e.g., iron legs for your custom tables). The app will then show options from China and eventually from around the world. The results will be based on what you say you want, what you have bought before, and what the app knows about you.
It searches not just the major manufacturers but also hundreds of thousands of SMEs. You can view the ratings and reviews of these suppliers, just like any other ecommerce search.
The app also lets you do this with the camera. Just point your smartphone at a product you like (in person, at a photo, etc.) and the app will search manufacturers for something similar.
A video conference tool with simultaneous translation
The next step is typically to talk with five to 10 companies you like, but communication can be a big issue in cross-border purchases. It means flying to China, having a staff that speaks Chinese do a meeting, or faxing documents.
However, the Alibaba.com app has a video call tool with simultaneous translation feature. When I tried it at CES, the person I called showed up on my screen and the spoken Mandarin was translated to English text on the screen.
Virtual factory tours
In many situations, you would do a factory tour (or have someone do it for you). Alibaba.com is working on applying virtual reality for this.
Contracting, logistics, and payments
OK, now you have the products you want to buy and the manufacturer you want to contract. This is where we hit significant problems for SMEs trying to do cross-border trade.
- What kind of agreement do we need? In what language? Do we need a lawyer?
- What are the regulations for importing this? Are they different for China vs. Vietnam vs. India vs. Brazil?
- How do we send the money? Do we need to have the money held in escrow?
- Who does the shipping? How do we get it through customs?
- What if the goods are damaged? What if they just take the money but don’t send?
These concerns are all pretty complicated. It’s not surprising that SMEs don’t really do much cross-border stuff. But this is where Alibaba.com is offering some amazing solutions:
- Provides standard contracts for both parties in appropriate languages and in compliance with appropriate regulations
- Handles government services (this is important)
- Handles all the logistics (basically the door-to-door aspect, including customs)
- Handles payments with escrow (Alibaba.com is also beginning to offer credit services)
- Offers dispute resolution services
In theory, you can find the item you want on your smartphone. You can trust the legal, government, and payment aspects. You can click, buy, and get your items in about five to seven days.
The idea is to connect SMEs all over the world. A very small company in Texas could one day source from suppliers across Asia, India, Latin America, and so on. And it could also sell.
The same SME that just bought iron table legs from China could use the app to sell its customized tables internationally. That’s how an SME becomes an MNC.
But the idea is actually even bigger than that.
As mentioned, platforms start out with one to two core interactions and scale them up. But once the core users are active on the platform, new user groups and interactions start to emerge. For example:
- Tencent went from QQ to online gaming, and then to WeChat and payments.
- Alibaba Group went from ecommerce with Taobao to payments and entertainment with Youku Tudou. Today, content creators are an increasingly important user group.
- Didi went from taxi-hailing and ride-sharing to bicycles.
- Grab started with ride-sharing and then expanded to payments. It’s currently expanding into multiple areas, including health care.
A platform that has digitized and democratized global trade could expand dramatically from its one to two core interactions. Other user groups could join the platform.
The current US-China trade situation notwithstanding, this is all pretty exciting.
That’s my take. All thoughts on this would be appreciated.
Date: July 04, 2019
Source: Tech In Asia