24 Jan 2017 Alibaba’s Expansion in the United States
Jack Ma, CEO of the Alibaba Group, recently met with President Trump to discuss the Chinese company’s expansion plans in the United States. Mr. Ma indicated the focus of the meeting was on supporting small U.S. businesses to sell their goods to China and Asia on the Alibaba e-commerce platform, with initial emphasis on goods like garments, wine and agriculture goods from the U.S. Midwest. A company statement said that “Alibaba will create 1 million U.S. jobs over the next five years by enabling 1 million American small businesses and farmers to sell American goods to China and Asian consumers on the Alibaba platform”.
The Alibaba Group is the leading e-commerce business in China. It had the largest IPO in history in September, 2016 on the NYSE, raising about $25 billion. Sales on its marketplaces make up more than 80% of all online purchases in China. The Alibaba Group generates most of its current revenues from its retail e-commerce marketplaces in China, which consist of Taobao.com and Taobao Mall (Tmall). The former is a C2C platform which enables small businesses and consumers to sell goods and the Tmall is a B2C marketplace that allows larger businesses to sell direct to consumers. The company also owns Alipay.com, the Chinese equivalent of Paypal. Although the company is not as familiar a brand outside of China, Alibaba has been primarily known in the U.S. for its initial business, Alibaba.com, a business-to-business wholesale marketplace that connects Chinese suppliers and global buyers.
The Alibaba marketplaces in China are like the eBay marketplace rather than like Amazon. Like eBay, Alibaba enables third-party sellers to sell goods on-line but doesn’t sell goods directly to customers. Alibaba hosts and manages its e-commerce platform and charges a commission on sales but doesn’t hold inventory or sell any goods. This is similar to a sales representative relationship which is often used in international sales. The Amazon marketplace does both. In the Amazon marketplace, goods are sold by third party sellers but Amazon is also a dealer that stocks inventory and sells goods directly to customers. As a dealer, Amazon has all of the costs and business and legal risks of having inventory and the logistics and other requirements for order fulfillment.
It is not yet clear exactly what path Alibaba’s U.S. expansion will follow. The stated business goal is to make it simple for U.S. sellers to complete a sales transaction through its e-commerce marketplaces in China and other parts of Asia. Alibaba would team with banks, freight forwarders, customs brokers, and other business partners (“platform partners”) to provide a full service, one-stop e-commerce platform for U.S. sellers. This is a big opportunity for both Alibaba and the U.S. sellers if such a marketplace can be created. If the marketplace creates more demand for U.S. goods then jobs would be created in the United States in order to produce such goods.
China is the largest market in the world but also one of the most difficult markets to penetrate. Transactions on the Alibaba platform will need to be simple, low cost and no hassle for US sellers. There will be lots of competition for sales in China including among the U.S. sellers. Historically, small businesses in the U.S have been deterred by the high transaction costs and complexities of international sales, particularly in China. The International Sales Transaction Checklist published by the International Bar Association, for example, is over 40 pages long.
Language and cultural sensitivity are a starting point in trying to sell goods into China. Legal considerations such as export controls, tax planning, intellectual property rights, the Foreign Corrupt Practices Act, the Uniform Commercial Code versus the United Nations Convention for International Sale of Goods, performance warranties, letters of credit, applicable Incoterm trade terms and dispute resolution have perplexed many small businesses. There are greater levels of regulation in the food sector in China and this will be a challenge for the platform partner that handles these issues. For an Alibaba marketplace to be successful, the business and legal issues that make international sales difficult for small businesses have to be solved. The Alibaba platform needs to be supported by platform partners to provide a trading platform that addresses these problems for U.S. sellers.
This is not Alibaba’s first initiative to assist foreign sellers in selling their goods in China. In December, 2015 Alibaba announced the launch of a similar e-commerce platform in India named SMILE. SMILE stands for Small and Medium Industries Leveraging Export. The platform provides Indian sellers with trading support to facilitate the global sales of Indian goods. Through the one-stop trade services platform, Indian SMEs have access to platform partners for education on the international sales process, export and import services, shipping, financing, currency exchange, customs clearance, and other logistics as well as technology. The platform for Indian sellers also offers trade assurance, which provides buyers with refunds of up to 100% if an order is not completed as promised by a supplier.
Probably the most value-added feature of the platform for U.S. sellers would be to standardize many of the commercial terms in international trading. The platform can provide sellers and buyers a set of form contracts to select from to assure that key terms are addressed and that there is consistency in commercial terms to administer in possible disputes. For example, the sales contract forms can prompt the parties to carefully and fully define the description of goods being sold to try to avoid disputes before they happen. Buyers and sellers could also provide feedback on a transaction which, over time, can help parties decide whether to enter into a transaction with a particular buyer or seller.
Alibaba’s current trade assurance program for Alibaba.com can also be refined to be more balanced to protect both buyers and sellers on the U.S. seller’s marketplace. Alibaba.com offers buyer protection (trade assurance program) to make buyers more comfortable in using the platform. Each supplier that participates in the program is pre-approved by Alibaba based on the supplier’s trade history and qualifications. Based on this review, each supplier is assigned a monetary trade limit under the program. A buyer’s payment for a transaction is held in escrow by Alibaba.com until the buyer confirms delivery of and satisfaction with the goods. If the supplier doesn’t ship the ordered goods according to the agreed delivery dates or if the goods are materially different than described by the supplier, the escrowed funds are returned to the buyer.
The Chinese people like authentic U.S branded goods. The Alibaba e-commerce platform for U.S. small businesses must be a full service, one stop shop which is user friendly and has low transaction costs. While implementing such an e-commerce platform will not occur overnight, there is opportunity in this initiative for both the United States and China. It is in the best interests of both countries to cooperate to make it work and Alibaba has the resources and clout to carry it out successfully.