Can Jack Ma win the looming war between Alibaba and Amazon?

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Can battle-tested and awe-inspiring Amazon and Jeff Bezos beat Alibaba and Jack Ma?

A “historical” turning point is seemingly at hand: Alibaba could soon top Amazon in market value.

On August 24, by the time the stock market closed, Alibaba’s market value was $445.5 billion, only a limit up away from Amazon’s $455.2 billion. Since 2017, the gap between these two companies quickly narrows: on the one hand, Alibaba’s shares have surged more than 80% this year, making Alibaba the first Asian public company worth over $400 billion. On the other hand, after Amazon’s second-quarter report was released, its stock declined. Amazon’s market value, which just hit the $500 billion milestone, was on a downward course.

Wall Street investors have not decided which will be the the largest e-commerce company in the world.

Some analysts pointed out Amazon might become the first company whose market value could pass $1 trillion. Others who grew sick and tired of hearing Amazon’s continual loss thought Alibaba’s profits showed it outperformed Amazon in sustainable growth.

In fact, both Amazon and Alibaba has long since expanded into other businesses. More business branches derived from their online retail business. This expansion does not set them apart, instead, it brings them closer. In the words of a report in the New York Times, a war between Alibaba and Amazon is “unavoidable”.

Can battle-tested and awe-inspiring Amazon and Jeff Bezos beat Alibaba and Jack Ma?

 

Neck and neck competitors

There is no denying that Alibaba is neck and neck with Amazon.

Both started from e-commerce. The data released by Analysis International showed that Tmall composed 57.5% of market share in China’s online retail B2C ranking, while Amazon.cn 0.9%. In the U.S, Amazon, an online retailer which was established in 1995, indisputably captured 34% online retail market share. Needham, a wall street company, reported that by 2021 Amazon might increase the market share to 50%.

The quarterly report of both companies with the cut-off date on June 30 showed over the past three months Alibaba’s ecommerce generated $43 billion, increasing by 58% year on year, and Amazon’s retail business generated $39.2 billion, among which 23.8 $billion from product sales and the rest from service for the third party membership.

Albeit the wide revenue gap between the two giants, Gorden Lam, a top-notch equity fund manager, made a strong case that Alibaba is now a better investment than Amazon because the former has higher profit margin during an interview with Forbes. Actually, since its founding, loss has been all too familiar to Amazon. Profits, if there were any, are insignificant.

Up till now, Amazon’s annual report still starts with the beginning of a letter written by its founder Jeff Bezos to shareholders to the effect that Amazon should make bold investments regardless of short-term profits. Thus, once Amazon made a handsome profit, it hurried to invest in new businesses, such as cloud computing, Prime membership, and smart logistics.

In these domains, Alibaba followed suit several years ago. For example, for cloud computing service, Amazon re-launched AWS in 2006. By the second quarter of 2017, the revenue of AWS cloud service reached $4.1 billion dollars, increasing by 42% year on year. Alibaba launched cloud computing service in 2009, the quarter before June 30 has seen CNY2.4 billion revenues from this service.

Though Alibaba has not surpassed Amazon in cloud computing, it has clearly become a potentially strong rival to Amazon. Goldman Sachs released a report pointing out AWS’s real opponent is Alibaba whose cloud computing branch—AliCloud would get $5 billion revenue and have a valuation at around $42 billion. By then, the valuation of AWS will stand at $178 billion.

Moreover, Alibaba launched “Tmall Global”, a business that intends to allow Chinese manufactures and brands to dovetail with overseas market. Compared with Alibaba’s global blueprint, Amazon began the “global selling” program more than a year ago.

However, in exploring new retail, Alibaba, a long-time follower of Amazon, has a good chance to take the lead. A typical example is “He Ma Xian Sheng”, a whole foods market. It is sad that Amazon sent people to visit this place. Foreign media commented that Amazon learned from Alibaba by buying the whole foods market.

Looking back, new retail undoubtedly narrows the gap between the two companies, bringing them to the same starting line. When Amazon just opened Amazon Go, a new physical grocery store without checkout lines, Alibaba’s self-service store “Tao Cafe” followed closely. The former can only receive 20 customers at a time, the latter 50. DeeWin Financial Leasing pointed out in its analysis report that Alibaba’s new retail strategy is ahead of Amazon.

Competition strategies

Alibaba has become Amazon’s biggest threat in every aspect, yet Amazon is a battle-tested enterprise.

At its early days in 1995, Amazon is only “an online bookstore” insignificant compared with then deep-pocketed Barnes& Noble, yet it thwarted Barnes & Noble’s plan to use online bookstore as a counterattack against Amazon. Later on, Amazon which aimed to become “a grocery store that sells everything” became a thorn in Walmart’s side. By 2015, Amazon’s market value surpassed Walmart, the biggest retailer in the world. Due to its tireless exploration of new models such as the launch of Kiva robots and using drones to deliver packages, Amazon, as Jeff Bezos wanted, has evolved from a retailer to a technology company with more growth potential.

Among the battles Amazon has fought, it, with more flexible “Internet genes”, resisted and undermined the offensives mounted by large traditional companies. Meanwhile, it amassed enough capital to undercut the start-ups.

The Everything Store: Jeff Bezos and the Age of Amazon mentioned Amazon sniped at Diapers, a maternity & baby online store. Not until Diapers operated for over a year did Amazon begin to sell baby products. In an effort to defeat Diapers, Amazon launched a crazy price offensive: for instance, a box of diapers on Diapers was $45, yet Amazon’s customers who had subscribed and saved the goods can buy the same goods at a little over $20. People have estimated that three months later Amazon suffered a loss of $100 million in diaper category. However, Amazon did not only knock down Diapers but also caught Walmart unawares.

These measures might not contain Alibaba. These two internet giants run neck and neck whether in efficiency and innovation or capital needed in a “price war”. But from another perspective, both have their weak points.

Compared with Amazon, Alibaba’s payment business carries more promise. In as early as 2014 Alibaba established Ant Financial after integrating Alipay, Yu’e Bao, Zhao Cai Bao, Ant Micro Loan, and MY bank. The financial affiliate of Alibaba went public independently, but still it is an important part of Alibaba’s ecosystem. Amazon only started building its payment business since 2013. According to the data of Goldman Sachs, Amazon Payments only handled $6 billion deals. According to iResearch, a consulting company, the trading scale of the third party mobile payment in the fourth quarter of 2016 was CNY11.9 trillion, among which Alipay accounted for 61.5% indicating Alipay handled deals worth over CNY7 trillion just in one quarter.

Clearly, Alibaba is streets ahead of Amazon in payment business, yet Amazon has a stronger logistics system.

Information from Amazon showed that it doubled down on the self-constructing logistics system by building over 25 robots operation centers, deploying 100,000 Kiva smart robots for warehousing and order picking, and launching Prime Air program which uses drones to deliver packages. Alibaba sticks to “platform”, delivering its packages through logistics and express companies that cooperate with Cainiao, its logistics arm.

There are edges and flaws in both models. But Gorden Lam favors Alibaba’s model because he believes Amazon’s complicated logistics network involves expensive warehouses and quick delivery and Alibaba’s portal websites avoid such problems.

 

Competition comes down to business ideas

For Amazon, this is not a problem.

For one thing, self-building logistics save money. For another, it can solve user experience problems with faster speed and better service. This echoes Amazon’s “customer first”, the first principle for Amazon’s staff.

Similarly, it is the principle of all Amazon’s businesses. Jeff Bezos has faith in what Jim C. Collins, the author of Good to Great, referred to as “flywheel effect” and “self-managed reinforcement”. In Amazon, these two points work like this: cheaper price attracts more consumers, produces more sales, and thus attracts more third party vendors that pay commissions to Amazon. In this way, Amazon will make more profits from fixed investment including logistics and networks and improve efficiency through more investments in these areas. Higher efficiency can bring the price even lower. As long as the flywheels run smoothly, the whole circle process will be quickened.

In fact, Alibaba shares the value of “customer first”. However, given that it aspires to “removing all barriers in doing business across the whole world”, the word “customer” leans more to sellers than buyers. Jack Ma, the founder of Alibaba, said at the small and medium-sized enterprises (SMEs) conference that Amazon is a great e-commerce company, while Alibaba helps others to become e-commerce companies.

This difference originates from these two companies’ genes. On the first day of Amazon’s establishment, it sold goods to consumers. The earliest website of Alibaba focused on global wholesale trade B2B. Amazon has soured its relationship with suppliers because of its constant exploitation of suppliers to guarantee “low price”, and fake products have taken a toll on Alibaba in 2015.

Similarly, startup gene in the early stage also decided different business growth and innovation logic of the two enterprises.

Centering on customer system, Amazon, in 2005, launched a Prime membership service and integrated more and more new business and enabled its members to enjoy two-day free delivery and a free instant access to video streaming and songs. And Prime members also enjoy a special discount in its offline bookstore. Amazon plans to incorporate services of Whole Foods Market into its Prime service system. As a datum shown in 2016, Amazon owns 63 million Prime subscribers in the United States, accounting for 52% of the total number of its customers in the U.S.

In contrast, membership of Alibaba exists in each business, such as “membership points” of Tmall and Taobao, and a separate F membership system of Fliggy, a travel business. The latest information reveals that Alibaba will debut “88 Membership Festival” on August 8, using “membership points” to unify membership system. “Super members” with over 1,000 membership points will be rewarded with multiple bonuses. The membership points are calculated by customers’ comprehensive score of purchasing amount, frequency, interaction, credit and other actions in Alibaba’s platforms like Taobao, Tmall, Fliggy, Tao piaopiao.

Compared with the strategic height of Amazon to Prime membership, however, the performance of Ali membership needs further observation. Critics pointed out that this system is too complicated.

Although they have similar business maps, the driving forces behind are different. That determines their different choices in logistics models, deployment of membership systems and strategic directions of innovation. Amazon keeps enriching its Kindle e-books and series of Echo smart loudspeaker boxes so as to increase connection points with end-customers. And Ali’s innovation product lines launched DingTalk and YUNOS which mainly serve enterprises.

It is predictable that Alibaba and Amazon will see further obvious divergences in their models based on different start points of sellers or buyers. They will also compete in models behind which stand business ideas that cannot be reflected by market value in certain period.

Bezos was already an up-and-coming economist in the Wall Street before he founded Amazon. But now he seems to keep capital at arm’s length. He does not attend earnings conference calls as other CEOs do, and notes that he will spend only 6 hours per year to communicate with investors who hold his corporate stock in a long term, and he called people holding it for a short term “dealers”.

In 2000 when Amazon’s share went through fluctuations, he wrote “I don’t care stock prices” on a white board at his office, and said at a general meeting “you don’t feel you are 30% smarter when stock price rises by 30%; and you will not feel a 30% dumber when it slumps by 30%.”

Seemingly, market value is no big deal for a CEO who emphasizes long-term investment. Both Amazon and Alibaba have a long way to go in the future.

 

This article originally appeared in China Entrepreneur Magazine and was translated by Pandaily.

Click here to read the original Chinese article.

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