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Business News/ Opinion / No open sesame after Alibaba
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No open sesame after Alibaba

The firm is no role model for start-ups seeking to embrace free markets

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

Alibaba’s record-breaking $25 billion listing on the New York Stock Exchange, the largest initial public offering (IPO) in US history, should be a moment to celebrate the spread of the free market system. There could be no better testimony to the spread of US-styled capitalism than the hysterical thumbs up American investors gave to the Chinese company’s public offering. This, after all, is a company built not by a Silicon Valley whiz kid, but by Jack Ma, a man who was born in, went to school in and started his business in Hangzhou, the coastal Chinese city much loved by tourists but almost unknown on the global business map.

Alibaba’s success since it started operations in 1999—gross margins have grown between 66% and 73% in the last three years while revenue growth slowed to 65% last year—make it seem like the perfect role model for start-ups from erstwhile socialist economies seeking to embrace the capitalist system of free markets rewarding entrepreneurial energy.

Sadly, for all its success, it falls short of being that model. Between 2010, when the Agricultural Bank of China Ltd set the previous global IPO record raising $22.1 billion and Alibaba’s listing, there remains the sobering truth that both are products of a system where the government controls people and businesses. Exuberant investors may be betting on the consumption spree of the Chinese middle class but the fact is Beijing controls the Internet in the country and could turn off the tap any time it deems fit.

The Communist Party that runs the country prefers neat jingoist arrangements. Thus, the Chinese search engine space is dominated by a Chinese company, Baidu, its e-commerce market by another Chinese company, Alibaba, and the social networks by a third Chinese company, Tencent. It is an arrangement that is tailor-made for creating dominant national champions, that great relic of the socialist era. Sample this: Alibaba’s 279 million active users buy goods worth almost $300 billion a year, a number that accounts for 80% of China’s online retail sales. Even Amazon, which virtually invented online commerce, has no more than 13% of global e-commerce sales.

But while Alibaba’s custom lies in China it needs the markets of the US to realize its financial value. The millions in fees and commissions that the IPO generated for Western institutions such as Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase and Co. and Morgan Stanley, the joint bookrunners and for Rothschild, the independent financial advisor on the deal, helped smoothen any nerves that might have been frayed by Alibaba’s unusual corporate structure of a dual share class. The dual sharing means the 27 partners effectively control Alibaba’s board, even though they only have a minority stake in the company—the kind of structure which fund manager Mark Mobius has dubbed “quite risky".

In a report in June, the US-China Economic and Security Review Commission highlighted the legal risks for potential investors of China’s Internet companies on US stock exchanges, due to what it called China’s highly restricted financial markets as well as the Chinese government’s requirement that Internet companies be majority-owned by Chinese nationals. There is precedence for that fear: in 2010-2011, accounting debacles at US-listed Chinese companies had cost US investors an estimated $18 billion.

But even allowing for a bit of old-fashioned Third World murkiness in Alibaba’s ownership structure, there are many ifs and buts before investors who sent the stock soaring on the day after its listing, start celebrating a blue-chip holding in their portfolios. The first, of course, is whether it will continue to dominate China. Part of the answer is in Chinese politics. And there, the whispers of some princelings having earned a few billions over the weekend, may well provide all the assurance needed.

Beyond that however, the real issue may be whether Alibaba can become a conduit for outsiders buying Chinese goods online. The products listed and the prices offered on AliExpress are tempting but there is a question mark around the trust factor particularly given the knock-off copycat products that litter the site. If small and medium Chinese businesses reaching out to end consumers directly, cutting out all middlemen along the line, works for the company, it could well hit all the circuits Ma is talking of—including beating Wal-Mart. Finally of course, there is Ma’s dream of non-Chinese businesses selling to non-Chinese buyers through his B2B site which looks like a pie in the sky at this point.

The bottom line is that Alibaba is an out and out Chinese success story, emerging from the peculiar Chinese economic ecosystem. In the absence of a similar benevolent environment, emulating its numbers may be a tough call for other wannabe entrepreneurs.

Can Alibaba succeed at the international stage? Tell us at views@livemint.com

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Published: 23 Sep 2014, 05:48 PM IST
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