Alibaba Isn’t the Amazon of China

October 18, 2013 Leave a comment

October 17, 2013, 11:23 AM

Alibaba Isn’t the Amazon of China

This post was originally published on Digits:

A comparison between the latest earnings from Alibaba Group Holding Ltd. and those from U.S. Internet companies offers some clues to understanding the Chinese e-commerce giant. Calling Alibaba China’s Amazon.com Inc.AMZN +0.09% is for the most part misleading, as the Chinese company’s business model is different from Amazon, eBay Inc.EBAY -4.00% or any other U.S. e-commerce competitors. In some ways, the Chinese company, which serves as an advertising platform for numerous entrepreneurs that rely heavily on Alibaba to generate traffic for their online retail operations, bears some similarities to Google Inc.GOOG -1.03%In the second quarter through June,  Alibaba’s net profit more than doubled to $707 million from $273 million a year earlier, according to a presentation slide from Yahoo Inc.YHOO -1.04%, which holds a 24% stake in the Chinese company. Yahoo on Tuesday reported its own earnings for the third quarter.

Alibaba’s revenue for the second quarter rose 61% to $1.74 billion from $1.08 billion a year earlier, while its operating profit more than doubled to $856 million from $372 million.

Alibaba’s revenue is much smaller than Amazon, because Alibaba itself doesn’t sell products. Alibaba doesn’t operate its own online store; instead the company runs websites where millions of merchants can sell products to consumers and business customers.

Amazon’s sales for the second quarter rose 22% to $15.7 billion from $12.8 billion a year earlier. But Amazon posted a net loss of $7 million in the same quarter. With an operating profit of $79 million, Amazon’s operating profit margin stood at 0.5%, drawing a stark contrast to Alibaba’s 49% operating profit margin.

EBay, meanwhile, saw its revenue increase 14% to $3.88 billion in the second quarter. But its net profit fell 7.5% to $640 million from $692 million a year earlier.

Like EBay, Alibaba’s online shopping sites are marketplaces where many merchants come in and sell their products directly to customers. But Taobao, Alibaba’s biggest shopping site with more than 7 million sellers and 800 million product listings, doesn’t charge any commission fees on transactions.

Taobao makes money because many merchants pay to advertise on the site as they try to stand out among several million merchants and attract consumers. Many of those ads are linked to Taobao’s own search engine. When consumers type in keywords in the search box to look for certain items, the site shows not only search results but also ads for products related to the keywords. As Taobao, launched in 2003, has grown exponentially over the past decade, the site’s revenue has grown with merchants spending more on ads to secure page views for their item listings.

While many U.S. online shoppers search items on Google, many Chinese shoppers go directly to Taobao and run a search for whatever they are looking for, instead of using more general search engines like Baidu Inc.BIDU +2.42% For millions of Chinese entrepreneurs trying to start an online retail business, Taobao is the best platform because of the site’s ability to attract consumers, and also because the initial cost of setting up the business is low.

Still, even though merchants can list products on Taobao free of charge, they are unlikely to generate any meaningful sales unless they spend money to advertise on the site, according to some Chinese sellers who use Taobao.

Other than Taobao, Alibaba also runs another site called Tmall, a marketplace for larger merchants and major brands like Nike Inc.NKE +0.03% and Gap Inc.GPS -0.24%, where each seller pays a deposit as well as a commission fee on each transaction.

Last year, combined total volume of merchandise handled by Taobao and Tmall surpassed 1 trillion yuan, or about $160 billion, according to Alibaba. That figure was larger than Amazon’s $86 billion, according to RetailNet Group, or eBay’s 67.8 billion.

In the U.S., Alibaba is best known for its Alibaba.com trading website, which connects Chinese manufacturers with domestic and foreign businesses looking for Chinese suppliers. But Alibaba.com, which was the company’s first business when it was established in 1999, now accounts for only a small part of its sprawling business portfolio. Last year, Taobao and Tmall accounted for the majority of Alibaba’s group revenue.

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Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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