This article first appeared on Jeffrey Towson’s blog.
At the CES conference in Las Vegas this year, it was the exhibit by Alibaba that really blew my mind. Yes, all the robots and drones were cool. But what Alibaba.com, their B2B business, is doing really sent my mind reeling. Unless I am mistaken, they are building what could be their biggest initiative yet.
Some background on Alibaba.com, their B2B business that nobody talks about
Launched in 1999, Alibaba.com, a B2B platform, was actually Jack Ma’s first e-commerce product. It was a platform connecting 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–and they began Alibaba’s focus on consumers. Ironically, the move into B2C was apparently a defensive move to protect their B2B business against eBay. And as we now know, these consumer marketplaces quickly rocketed upwards. It turns out scalable software businesses are an awesome way to capture the spending of rapidly rising Chinese consumers.
You have to give Jack Ma credit. He (or someone on his team) has an uncanny ability to spot the largest opportunities out there, typically ten years before they manifest themselves. Chinese online retail reached USD 1 trillion in spending in 2015. And today, Alibaba is mostly thought of as a consumer e-commerce giant, with a market capitalization of approximately USD 480 billion.
- They 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 USD 150 billion.
- They also moved into entertainment, with Alibaba Pictures, Youku Tudou and other plays. Also huge.
- And now they are focused on “new retail,” yet another crazy big idea. New retail, in theory, could expand online retail from 20–25% of Chinese retail to 30–50%. That makes it an opportunity in the trillions of USD. Note: In 2019, total Chinese retail reached USD 5.5 trillion, surpassing US retail at USD 5.4 trillion.
Alibaba 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, Alibaba is a platform builder that uses data technology to reshape markets.
That brings me back to Alibaba.com and B2B.
Alibaba’s next really, really big idea: Digitizing and democratizing global trade
Alibaba.com (and 1688.com) have not gotten much attention relative to the consumer platforms. But they have been making some interesting moves in the past one to two years.
- Jack Ma has been active in the eWTP and the working group on SMEs at the G20.
- Alibaba has been bringing trade ministers from around the world for training at their Hangzhou HQ.
- Alibaba.com has announced a new partnership with Office Depot in the USA.
- Management has been crisscrossing the globe, meeting with governments and trade bodies.
It’s kind of weird. You see their senior people spending a lot of time with governments around the world. My take is Alibaba has been bringing more foreign merchants onto their B2C platforms—but they have also been laying the groundwork for a massive e-commerce platform which will digitize and democratize global trade. It’s a really big idea. More on this shortly. First a bit of platform theory (yes, I like the theory side).
On platforms and transaction costs
Alibaba is in the digital platform business. They mostly build marketplaces. But they also have audience-builder and payment platforms. And they generally don’t operate stuff. They don’t buy and sell things. They are a digital creature that seems allergic to most aspects of the physical world.
They mostly create platforms and data technology tools that empower and connect user groups. So they connect merchants and consumers with Taobao. They connect content creators and viewers with Youku. They connect manufacturers and retailers with Alibaba.com. They are all about connecting different user groups—and generally, the more users and activity on a platform, the more valuable it becomes. The value of a platform increases directly by transactions and demand aggregation—and indirectly by data produced and new use cases discovered.
There is some important economics behind all this. Marshall Van Alstyne of the MIT Initiative on the Digital Economy has great thinking on all this. Here is a quick summary.
- Per Ronald Coase (Nobel Prize 1991) and Oliver Williamson (Nobel Prize 2009), the total cost of a sale is the production cost plus the transaction cost. And transaction costs are usually from search, coordination, negotiation, and information asymmetries (includes the risk of being cheated). Their insight was that when the production plus transaction costs are high, transactions and activities are usually done within a firm (i.e. you do it yourself as a company). But if total production plus transaction costs are small, then a company can do things through a marketplace via contracts.
- So what marketplace platforms, like Taobao and Tmall, are really selling is reduced transaction costs. They are enabling firms to do things out in the marketplace that they would otherwise have to do internally or not at all. So Alibaba’s Taobao platform lowers transaction costs (search, coordination, negotiation, and information asymmetries) and this enables small and medium enterprises (SMEs) in particular to do things in the marketplace. They can perform transactions with consumers across great distances. They can do transactions with other businesses. All via a marketplace because the transaction costs have been reduced so much.
- So if you are looking to build a marketplace platform, you don’t want to connect KFC or Walmart to consumers—or help them interact with their suppliers better. These are large companies that can build internally, create supply chains and open stores themselves. You want to create a platform and digital tools that enable small companies (a much bigger user group) to do transactions in the marketplaces they could never take place otherwise. That’s Taobao. And that has really been Alibaba’s mantra: to develop digital tools that empower small merchants and brands—and that level the playing field with big companies. It’s a really powerful approach. Note: SMEs typically make up 50% of a country’s GDP.
Platforms are mostly about lowering transaction costs. And generally, the best marketplace platforms connect small, differentiated sellers to small buyers in fragmented markets. So you can see companies like Meituan enabling transactions between Chinese consumers and local restaurants (SMEs in services, not products). Upwork enables transactions between small businesses and international freelancers. Trulio, a real estate marketplace, enables transactions between individual home buyers and individual real estate brokers.
Could a platform digitize and democratize global trade?
I think this is the big opportunity Alibaba.com is going after. They are trying to build a platform that lowers the transaction costs between all the world’s SMEs. That’s a really big idea.
B2C Chinese e-commerce is a big opportunity because Chinese retail is USD 5.5 trillion per year, with about USD 1 trillion of that happening online. But global trade (not counting services, commodities, and large products like airplanes) is probably above USD 20 trillion per year. So if you could digitize 10–20% of that, you are talking about a USD 2 to 5 trillion opportunity.
But it is actually even a bigger opportunity that that. Because you wouldn’t just be digitizing existing trade, you’d also be democratizing and increasing it. So much of global trade today is done by large companies with big distributors and supply chains—because they are the only ones that can overcome the cross-border transaction costs and difficulties. But if you lower the transaction costs, SMEs could start to do the same. If you democratize global trade, it could become a much bigger number.
What if Alibaba’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 an MNC?
This story continues on Monday in “How Alibaba.com is turning SMEs into multinationals (Part 2 of 2)”.
Jeffrey Towson is a private equity investor, Peking University professor, best-selling author, and speaker. He writes and speaks about Chinese consumers and digital China.
This article is part of KrSAIA’s contributor opinion series, where experts share their views on technology and innovation. The author represents his own views, not KrASIA’s.