#1. E-commerce in China
The (almost) biggest financial IPO in the world, a failed imported business model in China and a bridge between the European businessman and understanding of business in China
Welcome! In Issue #1 Emerging Markets explorer 🧠will cover stories on the e-commerce scene in China, of today and the past, questions for the future, and lessons to understand the Chinese consumer better.
If you wonder what Emerging Markets explorer 🧠is, start here.
Ant Group IP-NOPE. What happened
I had to make the pun and don’t have half a regret. This story was my first rabbit hole, which I analyzed in a longer form article. Below, the essentials.
Ant Financial Services Group, a fintech company within the Alibaba conglomerate, was set to IPO in November 2020. It was going to be the biggest in the world for $34.4BN. But it was suddenly halted by the Chinese regulators, imposing Ant Group to fulfill new legal requirements, new license applications, and capital requirements. Ant Group had to change.
Ant Group has been classically the engine of Alibaba. It started off as Alipay, the escrow means of payment that first enabled the e-commerce transactions and attracted users to Taobao. Today, Ant Group’s consumer credit offering Huabei is a contributing factor to the massive sales on Alibaba’s single’s day.
The Alibaba conglomerate is highly relevant in the Chinese economy, and thus, its relationship with the government goes way back. On the one hand, the positive relationship of Jack Ma with Chinese regulators facilitated the implementation of Alipay. On the other, Alibaba has historically fostered domestic consumption and domestic entrepreneurship; and nowadays is a company that the Chinese government takes pride in.
This is an inflection point between each other and poses questions on Alibaba’s future. To dive deeper, you can read the long-form analysis here.
Overcoming the survivorship bias: eBay failure in China
By only looking at Alibaba, we are never going to understand how to really succeed in the Chinese e-commerce scene. eBay China did not succeed, but it did learn how not to operate in the Chinese e-commerce market.
If an image is worth more than 1000 words, this one is shouting at us: how eBay went from 70% of the market share of the fledgling industry in 2003 to 8% market share in 4 years.
The case for eBay China is a failure story teaching lessons on the importance of having a local approach when serving the Chinese customer; and on how to strategize competition, because eBay was facing no less than Alibaba’s Taobao, led by Jack Ma back in the day.
The main factors to focus on in this story:
Monetization. The way eBay approached this represents the dichotomy of choosing growth vs profit. eBay was concerned that being unprofitable would threaten the continuity of its business. The local startup it had acquired to enter the market, EachNet, had struggled to become profitable having only advertising revenues, and eBay did not want to risk the sustainability of its business model. And so, they charged the same service fees that were implemented worldwide: insertion fees, final value fees, and feature fees. Its direct competitor, Taobao, chose growth by making the pledge to offer the service for free for 3 years since 2003. This was a winning tactic that succeeded for the Chinese consumers, who are particularly price-sensitive.
Brand image. eBay pursued a heavy marketing strategy, with partnerships in the major websites to exclusively display their ads (and not those of their competitors), and adapted the UI of the site to how eBay looked worldwide. Taobao, on the other hand, used grassroots marketing in bulleting board services, created the UI as a Chinese department store, and allowed the community to have forums and discuss, creating a brand image of more relaxed and friendly in the consumers.
Operational obstacles. eBay had to confront issues with payment systems, bureaucracy, and cases of counterfeit goods. For payments in the platform, eBay created An Fu Tong as an escrow service, heavily related to PayPal China, which confused the Chinese customer. The entrance of PayPal to China also faced a number of institutional barriers, delaying it and limiting the services it could offer. As per counterfeit goods, both Taobao and eBay faced cases against brands, but eBay was considerably more harmed from them.
eBay China announced its retreat from the Chinese market in 2006. Prior to it they had reportedly tried to invest in Alibaba, with no success.
If you want to explore this more, read this case study.
Recommended source: Chinese Characteristics
In a world with plenty of Silicon Valley/startup/technology sources for information, it is remarkable how few sites offer relevant information for doing business in Emerging Markets. Today I bring you a substack to understand business in China better.
Chinese Characteristics is written by Lillian Li, who does not define herself as someone defining the state of technology in China. But she can make you interesting and cutting-edge.
As a VC member (the VC which took part in the investment of SoftBank in Alibaba), Masters in International Development with a Dissertation on Chinese governance, and having lived in Europe for many years, she can successfully act as a bridge between the two and bring to our understanding of doing business in China.
She has written about the Ant Group IPO, before and after it was halted, and it will give you a deeper perspective in it, in a very understandable long-form writing.
Substack: https://lillianli.substack.com/
Twitter: @lillianmli (she was doing January threads on business in China.)
That’s it from me! If you like this, please consider sharing it. Furthermore, if you have feedback or interesting stories you’d like to learn from, do not hesitate to reply!