Many will be familiar with Ali Baba and the Forty Thieves, the story of a poor woodcutter who discovers he can gain access to a cave filled with stolen treasure simply by uttering the magic words, “Open, Sesame”. It is perhaps the best-known fable from the classic collection of Persian folktales, One Thousand and One Nights.

In 1999, when former English teacher and fledgling internet entrepreneur Jack Ma (real name Ma Yun)—now the richest man in China, with an estimated net worth in excess of US$39 billion—decided to set up his own e-commerce company, he picked the name Alibaba. “Alibaba opens sesame for small-to medium-sized companies,” Ma told CNN’s Talk Asia in 2006[1]. Now, some 19 years later, Ma’s company is as famous as the tale that inspired its name and sense of purpose.

In September 2014, Alibaba Group cemented its place in the annals of business history when its IPO, priced at US$68 per share, raised US$25 billion on the New York Stock Exchange, making it the biggest in history. Its shares increased in value by 38% alone on their first day of trading.

The rise has continued to be meteoric, and in January 2018 Alibaba Group joined the likes of tech titans Amazon, Alphabet, Apple, Facebook and Microsoft when it achieved a market valuation in excess of US$500 billion, only the second Chinese company to be granted membership to this elite club, following in the footsteps of internet giant Tencent Holdings.

"Its IPO, priced at US$68 per share, raised US$25 billion on the New York Stock Exchange, making it the biggest in history."

“What Jack Ma has been able to accomplish is nothing short of astounding,” Gil Luria, Director of Research at DA Davidson & Co., told CNBC in November 2017. “It’s as impressive as, or more impressive, than the works of Messrs. (Jeff) Bezos, (Mark) Zuckerberg and (Elon) Musk.”[2]

Like Jeff Bezos’ Amazon, Alibaba Group’s success has allowed it to move into other fields. In China it is the market leader in cloud computing, with revenue for its cloud computing division hitting US$553 billion in Q3 2017, a 104% year on year increase. Other interests include YouTube-style video site Youku Tudou; ticketing agency Damai and film production company Alibaba Pictures, a partnership with Steven Spielberg’s Amblin Partners.

But the company has stayed true to its original goal, to facilitate access to the Chinese market for SMEs, in much the same way that Amazon has done in the West. Its main focus is still to connect buyers and sellers through its numerous platforms such as Alibaba.com (business-to-business), Taobao.com (consumer-to-consumer) and Tmall.com (business-to-consumer).

Like Amazon, Alibaba is offering a full service solution to SMEs, from the marketplaces to payment providers (Alipay, which holds a 53% share of China’s US$12.8 trillion mobile payment market) to fulfilment logistics (Cainiao) and cloud computing that reaches beyond China’s notorious firewall.

Amazon gets top billing on the global stage, but in China, Alibaba Group is the biggest player by far, with 60% market share and its platforms accounting for 11.8% of total retail volume[3] in the country. This dominance is in part due to innovations such as the annual Singles Day shopping holiday, which has become the biggest shopping event in the world. On Singles Day last year, Alibaba Group raked in a record US$25 billion.

"SMEs have already utilised Alibaba Group’s offerings to break into the Chinese market."

Many international SMEs have already utilised Alibaba Group’s offerings to break into the Chinese market. For example, Stadium Goods, a New York-based online marketplace for classic, vintage and rare trainers. Having started operations in late-2015, Stadium Goods joined Alibaba Group’s Tmall.com, a business-to-consumer online retail platform that allows both Chinese and international companies to sell brand name goods to the Chinese market, in mid-2016.

“Selling to China was a big early win for us. Our business grew exponentially as a result,” John McPheters, co-founder and CEO of Stadium Goods told Forbes.com in January 2018.[4]

"The only significant potential risk to Alibaba Group’s continued success seems to be the possible threat of new regulation being introduced by the Chinese government."

Singles Day 2016 saw a big spike in sales in China for Stadium Goods, and as a result the company improved tenfold on the previous year. Stadium Goods is now a US$115 million company, thanks in large part to its success in China, and of course, Alibaba.

The growth potential for e-commerce in China is strong. Online penetration increased from 4% in 2011 to 16% in 2017, while online shopping penetration stands at just 54% of users compared to 70% in Western Europe, meaning there is potential for it to grow significantly as infrastructure improves.

The only significant potential risk to Alibaba Group’s continued success seems to be the possible threat of new regulation being introduced by the Chinese government, but as Panos Mourdoukoutas highlighted in an article for Forbes.com in August 2017, Alibaba has so far enjoyed “good relations with the Chinese government”[5].

It is likely Alibaba Group will be saying “open sesame” to SMEs seeking to do business in China for years to come, and will only become increasingly important as companies understand how to crack what will soon become the world’s largest economy.

This story is designed to throw an everyday lens on some of the issues being discussed and debated by investors across the world; it is not research, so please do not interpret it as a recommendation for your personal investments. However, if something has piqued your interest and you would like to find out more or discuss what investments might be suitable for you, please contact one of our Investment Managers on 020 7337 0777.

[1] CNN, [2] CNBC, [3] eCommerce-Platforms, [4] Forbes, [5] Forbes

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