China’s king of e-commerce goes for scale rather than profit – for now

Jack Ma – the CEO of Alibaba, the eBay, Amazon and Paypal of China – knows better than anyone how China’s middle class spends its money. What will he do with this information?

The Economist looks on with a mixture of admiration and uneasiness on the fortunes of Jack Ma, while sketching up a backdrop about the rising tide of internet services in China, in a highly recommended piece here.

In addition to Alibaba’s huge eBay, Yellow Pages and Paypal-like services with hundreds of millions of customers, “Mr Ma has also started a service called Ali-loan. He does not lend money, but works with banks, which typically have no idea if a small borrower is creditworthy. Mr Ma, in contrast, has a trove of data revealing whether small firms pay their bills on time. He can also bundle together firms that know each other, so that a seller can help guarantee a bank loan to a regular customer. According to Alibaba the proportion of Ali-loan’s lending that goes bad is a trifling 0.35%, which suggests that the service could be expanded fast.

The firm faces several obstacles. First, the Chinese internet market is cut-throat and evolving fast. Baidu, the country’s leading search engine, has not yet attacked Alibaba head on, but one day it might. Second, talent is in short supply. Wages for the best engineers and managers are soaring.

Third, in its rush to grow, Alibaba has neglected to make much profit. Its main services are free, with sellers paying only for extras such as being bumped to the top of a list of search results. Mr Ma says this is deliberate: size will eventually bring rewards. But investors will not wait for ever. Recognising this, Alibaba.com, the listed part of the group (most of which is private), promised in December to pay a special dividend of $140m in January.

Alibaba has a huge and barely exploited asset: the data it has gathered on the spending habits of China’s emerging middle class. The firm is cagey about what, exactly, it will do with these data, and insists that it will not violate anyone’s privacy.

Nonetheless, there are ways in which Alibaba could profit from what it knows. One idea might be to use customer data to identify trends and so help companies to anticipate what consumers want. Given the paucity of accurate data in China, this would be extremely valuable.”

Read more in The Economist.

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