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Alibaba

Sep

19

Alibaba

(CNN) — Internet giant Alibaba will soon go public, and its IPO is likely to be one of the largest the world has seen. Alibaba, which achieved more than $240 billion in gross merchandise volume last year — more than that of Amazon and eBay combined — has become one of the major technology companies in the world.That Alibaba is a Chinese company has significant implications and implores the question: Will China be the next Silicon Valley, a proliferation land for the next generation of technology giants?

Silicon Valley has extensively led the world in the quality, quantity and diversity of technology startups it incubates. Companies like Google, Facebook, Twitter and WhatsApp have flourished under Silicon Valley’s mature and complete startup ecosystem, with its open and free market and culture and novel environment.The picture is pretty different in Asia where so far, only a few big technology companies have come forward. Alibaba,Tencent and Xiaomi were not reared in a Silicon Valley type environment, nevertheless they are flourishing examples from the unique Chinese market.

Prospects

With over 1.3 billion people, China is not merely the world’s largest country, but also its principal consumer market. Abode to a vast number of factories, producers, suppliers and customers, China is also called the “World’s Factory.” This exceptional demand and supply atmosphere helps diminish businesses transaction costs and, indirectly, retail prices, generating a world of opportunities for entrepreneurs from China and abroad.

Amazon of China

Often called the “Amazon of China,” Alibaba’s business model is in fact entirely different from that of the online retail giant. Alibaba’s Taobao is not in itself an online shop but an open eCommerce platform where millions of tiny businesses and suppliers can trade directly to individual or business customers.Unlike Amazon, which charges commissions on transactions, Alibaba does not incur administrative charges on sellers or buyers; in its place, it offers sellers paid advertising opportunities that will permit their products to stick out amid thousands of others on the platform. Alibaba’s achievement stems from its huge traffic and competitive retail prices.This viable mace piggybacks on one more factor: Chinese customers are the most active online shoppers in the world, shopping an average of 8.4 times online each month, far outpacing American customers, who shop 5.2 times.Frequent transactions by these patrons add significantly to a steady sales volume and to Alibaba’s success in China.

Challenges

Opportunities come with challenges. The supreme test for entrepreneurs in China is the safety of intellectual property. Taobao is swamped with faulty and fake products: 82% of products labeled with the Columbia brand on Taobao are bogus, and the brand has had to get up to 3,000 listings taken down a month.This is a rather unique problem in China, unlikely to be found in other parts of the world.

China is a separate world where one can flourish only with a superior knowledge about the rules of the game.

Devoid of a sturdy legal system, copyright infringement is becoming a usual propensity. Unless merchandise is very hard to duplicate, it is liable to be copied in China. These dexterous and competent perpetrators make such persuasive cloned products that they often outshine the original on many levels. In a way, this is stifling originality and modernism innovations are being copied, rather than cherished and protected.In addition, government policies such as taxation and embargoes may possibly be changed or forced at anytime, without rational explanation and without channels or methods of reverting the verdict. Any such unanticipated policy changes might have significant impact on businesses, and are interpreted as one of the biggest risk factors of doing business in China.Despite ample talent and resources, the closed market prevents local businesses from competing globally. Business owners who are not Chinese or do not have local associations face a much greater risk of failure.Because of the reasons above, I don’t believe it is realistic to compare China to Silicon Valley. To a certain extent, it can be described as “a separate world” where one can flourish only with a good understanding about the rules of the game. Alibaba is an model of a company that has attained a “artistic fit” in China. But whether Alibaba or other domestic Chinese technology companies can cling to their place in the cutthroat global market, or outshine the Silicon Valley-bred giants, remains to be seen.

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