Alibaba

Infrastructuring Global China

Hong Shen

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000452051
• Edition: 1
• Topic: Política y relaciones internacionales
• Subtopic: Proceso político

This book examines the political-economic dynamics in the development of a leading global Internet giant: Alibaba.

As both a prominent example of, as well as providing the basic infrastructure for, China's outward expansion, Alibaba demonstrates the complex interplay between different state agencies and units of capital in the context of the rise of global China. Hong Shen investigates the development and expansions of Alibaba and discusses how Alibaba has not only become a leader of China's increasingly globalizing internet but has also increasingly served as a basic infrastructure model for other Chinese companies to go global. Shen also addresses how this process has been constantly shaped and reshaped by complex state-capital interactions along the way. This book shows how different units of capital, both inside and outside of China, have interacted with Alibaba's developmental strategies and illustrates how different state agencies, both domestic and international, have enabled or constrained the company's development, especially its global expansion.

This book will appeal to students and scholars of critical political economy of media, global media and digital industries, communication, technology and society, and internet studies. It will also be relevant to policy-makers working in the arena of global internet and trade policies.

1 History

DOI: 10.4324/9781003169055-1

This chapter offers an account of Alibaba’s business development through the lens of state–capital interactions. It delineates, documents and assesses Alibaba’s evolution in the past two decades – from its inception in Hangzhou in 1999 to its debut on the New York Stock Exchange in 2014 – and situates this history in a broader political–economic context. It does not claim that Alibaba’s development reflects a coherent corporate strategy. Rather, the historical analysis shows that it is both strategic and opportunistic. Indeed, it is likely become more strategic as the company becomes bigger and cultivating more close ties with the state.

“Export from China” (1999–2008)

In March 1999, Alibaba launched its first business, Alibaba.com, in Hangzhou, a city close to the east coast of China, only about a year after the first Internet commerce transaction had been conducted in the country, in early 1998.¹ Alibaba.com is a business-to-business (B2B) e-commerce platform that connects small and medium-sized Chinese manufacturers with transnational buyers. In the words of the founder Jack Ma, it differed from many B2B websites in the United States that primarily served large companies, in that Alibaba’s target is the “shrimp.”² This was not a random choice. Indeed, the then emerging Chinese market differed from the US market, which was already dominated by a group of big businesses, by being characterized by many smaller companies.³ This proliferation of small businesses came about as a result of economic development itself and of government policy. The reintegration of China into global capitalism since the “opening up” of the late 1970s transformed the country from self-reliance in the Mao era into an export-oriented economy.⁴ China’s export industry experienced dramatic growth in the two decades from 1990: its share of total exports in the global market rose from 1.8% in 1990 to 9.1% in 2008.⁵ Meanwhile, the concurrent market reforms led to the rapid growth of small and medium-sized enterprises (SMEs) in China’s domestic economy – first through the development of town and village enterprises in the 1980s and then through the restructuring and privatization of the state-owned enterprise sector in the 1990s; in 2002, the government promulgated the SMEs promotion law, indicating its determination to nurture the role of SMEs in its exported-oriented economy.⁶ By the end of 2001, there were around 2.4 million SMEs in China, accounting for the majority – 99% – of all registered corporations in the country.⁷ Unlike large-sized state-owned enterprises, many SMEs lacked access to state-operated trading companies and some could not afford to travel long distances to attend national trade shows like the China Export and Import Fair (also known as the “Canton Fair”) in Guangzhou, southeast China.⁸ Connecting this large and diverse group of enterprises to the global market had become a prime concern for the Chinese leadership.

At the same time, in the 1990s, the emergence of the Internet as the global “information superhighway” greatly shaped China’s developmental strategies. The then-emerging information and communications technology (ICT) sector was not only touted as a “pillar industry” in China’s economic development but was also regarded as a critical tool for the restructuring of Chinese political economy and its global reintegration, including trade and commerce.⁹ In 2000, the state launched an “Enterprise Online” initiative, aiming at using network technologies to connect Chinese businesses more closely to the global market, with a special emphasis on the growing sector of SMEs.¹⁰

Alibaba was established in this supportive policy environment. The state’s promotion of e-commerce among SMEs established a fast-growing customer base for Alibaba. According to iResearch, a China-based market research and consulting firm, while the number of Internet users in China increased from 59 million to 137 million from 2002 to 2006, the number of SMEs that traded on third-party platforms also increased over the same period, from 1 million in 2002 to 8.8 million in 2006.¹¹

The Chinese state, however, was not the only architect of Alibaba. Transnational capital played an equal, if not more important, role in the inception of the company – with the tacit consent of the state. In its domestic Internet services and applications sector, the Chinese state demonstrated a complex and ambiguous attitude toward transnational capital: Impeding or even prohibiting foreign-operated enterprises – despite its World Trade Organization (WTO) promise – but tacitly allowing foreign portfolio investments.¹² This ambiguous policy has given rise to a highly convoluted business structure entwining Chinese Internet companies and their foreign investors – the Variable Interest Entity or VIE.

Alibaba’s engagement with transnational capital offered a typical example of this specific business path. In June 1999 – only three months after the launch of Alibaba.com in Hangzhou – Alibaba Group, the offshore holding company, was incorporated in the Cayman Islands in order to “ready Alibaba’s corporate structure to receive venture capital investment.” Four months later, in October 1999, the first round of overseas capital arrived. This totaled $5 million of venture capital, consisting of $3.3 million from American investment bank Goldman Sachs and $1.7 million from smaller venture capital firms, including US-based Fidelity Capital, Swedish-based Investor AB and Singapore-based Transpac Capital and Venture TDF. The speculative and relatively short-term nature of venture capital investments indicated the need for continuing fund raising, as well as for IPOs in the future.¹³ Indeed, among the early investors, only Venture TDF and Fidelity held on to their stakes all the way through Alibaba’s 2014 IPO. Goldman Sachs sold off its entire 33% stake in 2003.¹⁴ In January 2000, Japan’s telecom and investment firm SoftBank led a second round of $20 million in financing, taking a 30% control of Alibaba, which helped the company survive the subsequent popping of the dot.com bubble.¹⁵ In 2005, Alibaba and Yahoo announced a strategic partnership: Yahoo invested $1 billion and handed over its Chinese business Yahoo China to Alibaba, in exchange for a 40% ownership stake.¹⁶

Drawing upon both the supportive policies of the Chinese state and the growing appetite on the part of foreign investors to take stakes in China’s digital market (propelled by the rise and fall of the dot.com boom in the West), Alibaba has since expanded in a spectacular fashion. The company reported a nominal profit for the first time in 2002, mainly based on popular value-added marketing services on its B2B websites, such as the “Gold Supplier” status, which offered Chinese exporters a presence on its English-language website, and “Trust Pass,” providing authentication services for the vendors. It also introduced both Alimama – an Internet advertising and marketing platform – and Alisoft – an online business management solution provider – to better serve the needs of e-commerce companies listed on its platforms.

Apart from B2B services, Alibaba also started its second business, the consumer-to-consumer (C2C) service, Taobao, in 2003, to combat eBay in the Chinese market. A few months later, Alipay – an online payment tool – was launched to facilitate transactions on Taobao. The battle did not last very long. By the end of 2005, eBay’s market share had decreased to less than 30% and Taobao’s was approaching 60%.¹⁷ In 2006, eBay shut down its Chinese portal and entered into a joint venture with Hong Kong-based Tom Online.

The success of Taobao notwithstanding, up to 2008 Alibaba’s B2B division remained the company’s most valuable asset. In contrast with Taobao, which was still losing money, its B2B business reported a steady profit growth, increasing from RMB 297 million in 2004 to RMB 612 million in 2005, and to RMB 1,126 million in 2006,¹⁸ which firmly anchored the role of the parent company as a digital broker between Chinese suppliers and transnational buyers. In 2007, for the purposes of continuing fundraising and also of finding ways its early venture capital investors to cash in, Alibaba listed 17% of its B2B platform on the Hong Kong Stock Exchange, further “internationalized” its assets and raised a substantial $1.5 billion. As might be expected, the deal was jointly underwritten by a group of transnational financial firms – US-based Morgan Stanley, Germany-based Deutsche Bank, and one of Alibaba’s early investors, the American investment bank Goldman Sachs.¹⁹ In this regard, Alibaba’s early global journey presents an important case to support Wojcik and Camilleri’s observation that global financial networks played a foundational role in the construction of China’s “national champions.”²⁰

“Export to China” (2008–2014)

The 2008 global economic crisis brought about a turning point for China, forcing the state to speed up its long-planned restructuring from an export-oriented economy to a domestic demand-driven one. The central government, under the Hu-Wen leadership, launched a series of structural adjustments to redirect its 1980s–90s foreign direct investment (FDI)-driven and export-oriented developmental model. In November 2008, a RMB 4 trillion ($586 billion) investment plan was announced to boost the economy and prevent mass unemployment, including loosening monetary policy and providing bank credit to support small business.²¹

The economic crisis, meanwhile, also precipitated a shift for Alibaba. If Alibaba’s B2B business – its core business before 2008 – was a manifestation of China’s export-oriented economy, which benefited from favorable government policies to nurture the role of SMEs in international trade, then the 2008 economic crisis, which significantly damaged China’s export industries, did the same for Alibaba’s B2B business model. The stock market soon reflected this trend. In September 2008, the share price of Alibaba.com plummeted on the Hong Kong Stock Exchange, dropping to an all-time low – only one-third – of its IPO price a year before.²²

In response to this crisis and to take advantage of the state’s new policies, Alibaba changed its business strategy, turning its focus from connecting Chinese businesses to the global market back to exploiting China’s domestic consumer market. In other words, Alibaba’s role was transformed from being a broker between Chinese manufacturers and global buyers to becoming the gateway back into China. In rebranding itself...