May 19, 2014 (Chinavestor) On the verge of becoming the largest tech IPO in history, dwarfing that of Facebook’s (NASDAQ: FB) somewhat disgruntled IPO in 2012, Alibaba has a pending application in the US which will surely rattle the nerves of North America’s E-Commerce market – Amazon (NASDAQ: AMZN) in particular. However, this far east money making machine, which conjures up more in revenue than AMZN and EBay (NASDAQ: EBAY) combined, will need to please more than just the US investment bankers and will surely need to create a strong customer base in the US, which they cannot assume will work purely on ‘Reputation’ alone.
Open Sesame – Where to start now?
Now that the company has filed an IPO that is pending, Alibaba’s forward looking US strategy must now take precedence over their current fundamentals, for any prospective investor. True, profits have nearly doubled to $1.4 billion in their fourth quarter compared to the previous year’s Q4. Revenue surged 66% and Yahoo (NASDAQ: YHOO) also seems to be benefiting comfortably from their 24 percent interest in the E-Commerce giant. However, will they be able to penetrate the most efficient market in the world? Fraud, counterfeit products and transparency issues have plagued Alibaba previously in China, but their gargantuan cash reserves always seemed to prevail. This however will not be the case in the US where Jack Ma and Co will need to throw out their little black book and rewrite a new, legally constrained one. Assuming Alibaba have thought this through well and are approaching the market in a tactically clean way, will the US warm to the brashness of a a new online retail system?
A Foreign Exchange
If they expect to stroll into the US, park their pile of cash and make available their online retail platform to consumers, expecting profits to be replicated as it is in the East, Alibaba has another thing waiting for them. AMZN has a customer base that is huge and, let’s just say, they are ‘comfortable’. They go online, search, find and buy. Simple. From an investor’s standpoint, this could easily signal the end for any Chinese alternative. But that’s the thing; Alibaba is a ‘Chinese Alternative’. A supply chain of Chinese goods will undoubtedly be cheaper than their US counterparts. Whilst it could take some getting used to, something which modern mankind has always struggled with, one thing is for sure - adjusting ‘Cheaper’ is always better.
The Google Model
Jeff Bezos’ philosophy – ‘Low margins till the end’. How far till the end should be the statement as AMZN has been floundering on low margins since their inception. Whilst their business model has accommodated continuous years of stagnant, scraping it thin profits, this just does not seem sustainable. Their approach to innovation is first rate, with the Kindle, subscriptions and personal shopper services adding an inviting aura to the consumer experience. But the one thing that separates AMZN from Alibaba is the fact that Alibaba does not achieve their revenue through product sales, but by advertising. Taobao and Tmall, two operations owned by Alibaba, have enjoyed huge financial success, due in part to Alibaba creating an E-Commerce industry where the costs are effectively zero. The advertising and premium model has worked well for Google and in my opinion; it should work for Alibaba in the US.
Alibaba and the 40 Thieves from Amazon
We could either see Alibaba casually enter the US market and slowly establish a customer base, unravelling AMZN from head to toe in the process and crafting a new experience for online shopping. Another scenario that could pan out is one which surely has crossed the minds of AMZN, which is to create a separate unit, or mould ‘in’ an alternative division, based on Alibaba’s successful model. This approach carries a number of complexes. One, it’s not easy to adjust to change, as we discussed earlier. Given that this is a survival of the fittest world, it might be more of a necessity than an option. The second difficulty with spinning off a new division is that future profits may eat away their older, more established business. Once this happens, AMZN will surely need to balance the two and weigh up which one the consumers will value more. Amazon (NASDAQ: AMZN) has been good at balancing on thin profits up to now, but with regards to new business ventures, it looks improbable. However, there are more than strategies to be analysed concerning the pending IPO of Alibaba, which we will delve into.