The 2020 Mid-Year Economic Update_long

Alibaba Sets Sights on Diverse U.S. Markets

Knowledge of what customers want will play a big role in future success.
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Beyond Alibaba Group’s initial public offering that raised a record $25 billion and its sales of $248 million in the quarter ended June 30 (more than Amazon and eBay combined), the Chinese e-commerce company is not especially well-known or understood in the U.S.

Alibaba Group grew more than 50 percent in volume terms between 2012 and 2013. The company owns both B2B and B2C sites, as Amazon does, and Alibaba’s reach into both markets will affect distributors if it isn’t already. Alibaba doesn’t own massive warehouses like Amazon does – one reason that some are saying it operates on a much, much larger profit margin. Its business model is based on simply connecting suppliers with customers, and Alibaba has no hand in managing the movement of products, as Amazon does.

It also had different inception drivers than eBay did, most certainly a driving force in its takeover of Chinese consumers from eBay’s Chinese e-commerce business, EachNet. EBay acquired EachNet for $150 million in 2003, looking to access China’s business-to-consumer markets. With the acquisition, eBay controlled 85 percent of the Chinese market.

But Alibaba’s B2C site, Taobao, shifted everything that eBay was counting on. Taobao offered free services where EachNet required users to pay to use the platform. Alibaba simply knew Chinese customers better and was able to gain their trust. In two years and despite eBay’s millions in investments, EachNet fell from 72 percent market share to 36 percent, while Taobao grew from 7 percent to 59 percent.

The methods used in this takeover are important to consider now, as Alibaba moves in on North American markets – although the exact direction it will take is still unclear. It has invested $8 billion in several different U.S. startups in the past six months, reaching into growing markets such as mobile messaging and gaming, according to Forbes and the New York Times.

But the tactics that worked with Taobao may not work here; Western consumers are different and expect different things from online shopping outlets. Providing a buying process that customers trust is important, and many recent consumer reviews of Alibaba indicate a disconnect.

In many ways, the B2B market is more complicated than B2C. Is a website that got its start as what NPR called a dating site for manufacturers and buyers, really going to make a difference in the U.S. B2B market?

Investors seem to believe that it will have a large impact on e-commerce, based on the company’s hugely successful IPO. It does open the global supply chain a bit wider, according to a Planet Money podcast, providing smaller companies with access to Chinese manufacturers, for example. And it has provided Chinese startup manufacturers with a trusted platform to compete against the established companies.

The total impact, however, remains to be seen.

Jenel Stelton-Holtmeier contributed to this blog.

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