How Alibaba works and rise of Alibaba as the largest eCommerce company in China

With Alibaba IPO in 2014, Alibaba became the largest ecommerce company in China and one of the most valued company in the world. Alibaba raised $21.8 Billion making Alibaba IPO one of the biggest US listed IPO in history (Second only to VISA IPO in 2008). With massive internet adoption in China, ecommerce in China is led by Alibaba dominating all three B2B, B2C and C2C online space in China. This blog discusses business how Alibaba works, structure of Alibaba,its numerous market places and how Alibaba makes money.

Business Structure

Alibaba Group Holding Ltd was established in 1999 by Jack ma, and operates Taobao Marketplace, China’s largest online shopping destination in terms of GMV and provides platform for C2C retail to small businesses and entrepreneurs, Tmall, China’s largest third-party B2C platform in terms of GMV and launched by TaoBao for brands and retailers and Juhuasuan, a group shopping website launched by TaoBao which is also
China’s most popular group buying marketplace by its MAUs.

These 3 market place comprises Alibaba group’s Retail Market Place and generated a combined GMV of RMB1, 542 billion (US$248 billion in the twelve months ended December 31, 2013) from 231 million active buyers and 8 million active sellers in the twelve months ended December 31, 2013 and accounted for 82.7% of Alibaba’s revenue in 9 months ending December 2013.

Apart from these 3 market places, the group also operates, Alibaba.com, China’s largest global online wholesale marketplace in 2013 by revenue, 1688.com, wholesale marketplace for the group, and AliExpress, group’s global consumer marketplace and a cloud computing service provider. The group provides payment and escrow services for buyers and sellers through Alipay. The group has a platform approach to shipping and delivery and works with third service provider through China Smarts Logistics (48% affiliate) as central information service provider.

Apart from these 3 market places, the group also operates, Alibaba.com, China’s largest global online wholesale marketplace in 2013 by revenue, 1688.com, wholesale marketplace for the group, and AliExpress, group’s global consumer marketplace and a cloud computing service provider. Aliexpress is focussed on B2C and C2C retail and consists mostly of small Chinese businesses offering products to international online buyers. Alibaba provides payment and escrow services for buyers and sellers through Alipay. The group delivers merchandise using third service providers through China Smarts Logistics (48% affiliate) as central information service provider. Alimama is group’s proprietary online marketing platform, which provides online marketing services to the group.

The UCWeb acquisition by Alibaba Group will leverage UCWeb’s expertise in mobile web browser to offerings beyond e-commerce such as mobile search, location based service, app store, mobile gaming, mobile reader operations etc. Alibaba ecosystem

Buyers and sellers are at the heart of Alibaba ecosystem. Buyers and sellers discover, select and transact with each other on Alibaba platform. The Alibaba ecosystem can be summarized as following:

Network Effect in Alibaba’s Market Place

The interactions between buyers and sellers create network effects such that more merchants attract more consumers, and more consumers attract more merchants. In addition, marketplaces are interconnected making buyers and sellers on one marketplace also participate in activities on Alibaba’s other marketplaces, thereby creating a second-order network effect that further strengthens Alibaba’s ecosystem.
The below chart depicts network effect dynamic in Alibaba’s ecosystem:

 

The buyers, retail sellers and whole sellers are placed in Alibaba’s ecosystem as follow:

Buyers

  • Chinese consumers buy on Taobao Marketplace, Tmall and Juhuasuan
  • While browsing or searching on Taobao Marketplace, consumers see product listings from both Taobao Marketplace and Tmall
  • Global consumers buy on AliExpress
  • Global wholesalers buy on Alibaba.com

Retail Sellers

  • Small sellers in China sell on Taobao Marketplace and AliExpress
  • Chinese brands sell on Taobao Marketplace, Tmall, Juhuasuan and AliExpress and global brands sell on Tmall Global
  • Sellers source products on 1688.com

Wholesale sellers

  • Chinese wholesalers and manufacturers supply retail merchants in China on 1688.com and global wholesale buyers on Alibaba.com
  • Chinese wholesalers and manufacturers supply directly to global consumers on AliExpress
  • Global wholesalers and manufacturers supply global wholesale buyers on Alibaba.com

Revenue Stream

Alibaba group’s revenue is primarily generated from merchants through online marketing services (via Alimama, our proprietary online marketing platform), commissions on transactions and fees for online services. Group also generates revenues through fees from memberships, value-added services and cloud computing services. In the nine months ended December 31, 2013, the group generated revenue of RMB40.5 billion (US$6.5 billion) and net income of RMB17.7 billion (US$2.9 billion).
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