Business Breakdowns from Patrick O'Shaughnessy is one of the best ways to learn about new businesses.
This episode was released on April 9, 2021 which was before all of the recent tech regulation coming from the Chinese government so there isn’t any discussion regarding this.
The discussion revolves primarily around Alibaba’s history and what the company does.
Alibaba was founded by Jack Ma and 20 other co-founders in 1997 as an online bulletin board that allowed small Chinese manufacturers to tell buyers around the world that they were open for business.
Alibaba then expanded over the ensuing years into many other businesses such as food delivery, financial services, e-commerce platforms, cloud computing and logistics.
Here is a picture of Alibaba’s business and services from their 2020 annual report:
Alibaba is mostly compared to Amazon, but according to Ram Parameswaran, there are differences in these two businesses. Since Alibaba monetizes mostly through advertising their business is more like Google in many ways.
Also, with $500 billion gross volume sold in 2015, $1.2 trillion in 2020 and an estimated $2.5 trillion in 2025 for Alibaba, their scale is expected to be bigger than Amazon.
"[Alibaba] is a utility at every scale where every Chinese consumer that effectively goes on the internet, buys Alibaba products first, and then also uses other stuff... They had 800 million active customers in 2020. Each person on average bought something on Alibaba twice a week, 2 times a week. This does not include groceries and food. This does not include living. This includes discretionary buys on Alibaba, twice a week.”
- Ram Parameswaran
Ram says that Alibaba's cloud business makes 40-50% of revenue for every dollar that Chinese enterprise companies and small-medium-sized-businesses pay to transition their on-premise infrastructure to the cloud.
Alibaba’s ethos is to reduce the friction as much as they can and then let everybody have a chance to enter their ecosystem and create an option.
Alibaba built a Shopify in China before Shopify built one in the US.
Alibaba had lots of suppliers working for them. Then they took equity stakes in them and built software layered on top of all these suppliers' delivery systems.
There are 3 relevant e-commerce companies in China:
1. JD which is most similar to Amazon's business
2. Pinduduo which has an advertising model just like Alibaba
Alibaba had 80% of e-commerce market share at one point in 2015 which Ram says isn’t good because it's not healthy for the economy. Even Walmart at its peak only had 15% market share of commerce.
According to Ram, just because an ecommerce company like Amazon may lose market share to Wayfair, it doesn’t mean it is a bad thing. He says it's about how many incremental dollars a company collects, how big that company gets over scale and how many dollars are created when that company is at scale, in terms of EBITDA, to apply to other products to further strengthen the company's moat.
Ram says that China is a battle of user mindshare. I am assuming that this relates to the value of a company's brand name. Like when we want a cola, we say Coke or when we want to search on the internet, we say Google.
Ram says that the number one way for an internet company to scale is to reduce friction.
It's very competitive in China and companies have a mission to win. There is a concept called 996 where people work 9 am to 9 pm six days a week. There are always new competitors coming so the incumbents, like Alibaba, can never rest. They must always be aggressive otherwise the new companies will destroy the incumbent’s business.