I Hate Alibaba (The Website, Not The Company)
Just back from China (Hong Kong, actually), where I saw a television interview with Jack Ma of Alibaba. He never fails to impress the hell out of me and every time I see him my first thought is BUY.
But then I think about all the harm Alibaba has caused to so many Western SMEs and I change my mind about calling my broker/brother. Alibaba makes the naive think China sourcing is easy. I realize blaming Alibaba for the mistakes companies make in using its site is really not fair to Alibaba, but at the same time, I do not see much use for the site beyond its serving as a really good directory of potential manufacturers of particular products.
Turns out I have company.
Paul Midler (who is believed to have coined the term "quality fade" to describe how Chinese manufacturers eventually reduce their product quality), over at his new blog, The China Game, just came out with a post where he questions Alibaba's value and posits that its usefulness has declined and will continue to do so. The post is entitled, "Irrationally Exuberant: Is Alibaba.com Really Worth US$7.8bn?" and Midler has this to say about Alibaba's value to product buyers:
Alibaba.com is a website that provides information on China manufacturers (Yahoo! owns a 39% stake). The website serves as a kind of directory. Consider it a Yellow Page for prospective importers. Those who say that website is a great business model emphasize the company’s first-mover advantage. Many also get excited about this being a “B2B play” - the phrase is so “2000”, but never mind that part. My lack of enthusiasm for the IPO has more to do with many uninspired experiences with the company’s website. To be frank, I just don’t get it. Aren’t the best China supplier relationships those where the supplier and buyer are known to each other, where the two have an on-going work relationship? Established players have little use for the website after the relationship is in play, and it’s hard to imagine that, for example, Mattel, ever used Alibaba.com (its supplier relationships predate the Internet).
Midler goes on to say that though Alibaba has some value to fledgling Chinese factories looking for buyers, this is a consolidating market:
If the website has any value at all, it’s in enabling fledgling factories to find would-be buyers. If you believe there is value in such a proposition, let’s reference all of those financial analysts reports that suggest the industry is rapidly consolidating. It would be one thing if factories were like single people - dating websites enjoy a steady stream of new single customers - but manufacturing is not the same. In the long run (or sooner?), all capable manufacturers are known to the market. The website works best in a world with murky market data. We are heading away from that world, not towards it. There are already websites that allow companies to list information for free and Chinese are using these sites with greater frequency.
Despite all this, Midler has "no doubt" Alibaba's upcoming "IPO will come out strong" because it involves both China and the internet. Throw in a few more Jack Ma TV interviews and to Bill Gates and Steven Jobs and it seem Alibaba's stock will be unstoppable. In the short term anyway.
Comments
You are not the only one who hates it.
Posted by: Fotografen i Helsingborg | October 23, 2007 2:54 PM
CLB,
What you say make sense but ignores one of the main principles of Internet marketing and business success: Alibaba has the client base - in the millions, world reputation and apparently cash flow. They have the "hook" to start, even if they have to change their service. The managing director obviously knows what he's doing, and the offered stock in fact includes other services than just the site as you see it. You can also go for Yahoo as they have a high minority stake in Alibaba, if you cannot get the alibaba stock. What you can be SURE about is that it's going to skyrocket within two days. hundreds of per cent within the first week. (alibaba, not yahoo).
Having said this, Alibaba is indeed a good portal to introduce new suppliers: you can visually see their product, do complex searches, do initial filtering for suppliers: maybe 30 in one day. Simply call them on the phone etc. The statement that suppliers should be chosen from "lasting relationship" is a joke. Finding an unknown suppluer that can deloiver, MAKING them deliver, is the way to make money. Choosing a supplier that anyone else can use, well, is not going to get you much.
Posted by: Jonathan | October 23, 2007 9:15 PM
Let's have some fun...
About those "millions" of users, keep in mind the issue of quality. A million web users in America are more valuable than a million users logging on from a developing country. If we are going to look at nothing more than general traffic number, at least consider the discount that must be given to traffic figures for a site based in China. If you look at the charts I laid out at the bottom of the post at my site, you can see that overall traffic numbers are heading way down, and fast (traffic numbers are down to where they were in 2003). You have to admit that it's at least a bit curious.
Anyway, Alibaba.com is not a general audience site. It's not a Facebook, or a Google. It can't rack up an audience of millions and then promise investors that it's going to sell ads for chips and soft drinks.
Also, online statistics show that 52% of Alibaba.com are inside China. What's that about? The majority of these people cannot be in business, and if they are they are most certainly not on the selling side. I don't know what the ratio should be, but I'm guessing that it's at least ONE supplier for every TEN prospective buyers. My guess is that the masses of Chinese users include a great many curiosity seekers and casual surfers. In a country like China, for every good business in China, how many must be contemplating getting into the business. It's another ratio for which you would have to make an assumption. I would guess the ratio to be more like 1 to 50, at least.
Alibaba.com is where casual surfers come to dream and scheme. Those who have checked out the site will understand that a great many who purport to be factories are merely wannabes whose core business does not actually stretch beyond the collection of sample fees and freight charges.
Now, eBay - that's a business model. They take a slice from every buyer/seller transaction. If you stop and think of the billions and billions of dollars that have moved across borders thanks to Alibaba.com, and when you realize that the website was simply not in any position to collect a toll, it almost makes you sick to your stomach.
It would also be interesting to learn which group of users - American or Chinese - is also more loyal to their websites. Seems that American users are slower to switch away from a website that they have grown accustomed to.
There is another problem with the business model - a big one - and that's that buyers are often looking for factories that are not well known to other buyers. If you are sourcing a product from a factory that your competitors are also sourcing from, you have virtually no advantage. How does Alibaba.com help with finding that "unknown supplier" reference in above comment?
Alibaba.com is very much like the Yellow Pages. If you are a purchaser of services, you're not willing to pay anything for the book. On the selling side, not everyone enjoys the same value (it's the reason why personal injury attorneys and exterminators place some of the largest ads).
Alibaba is suited to a certain type of supplier. The largest don't need the website because the biggest buyers in their field know who and where they are. The smaller player gets some bang for the buck, maybe. Some suppliers will be so small that they are put off by a $5,000 fee, and a buyer may feel comfortable knowing that a supplier who can't meet the $5k threshold is gone. But what if I want a factory that can only meet a $50,000 threshold. I just don't see how this is a business model worth billions, sorry.
As far as being able to see the produts, it sounds like a good value proposition, but many product areas require that the product be handled. I might buy a shirt at online, but not likely to wire transfer large sums without knowing what's what.
Posted by: Paul M | October 24, 2007 12:06 AM
Paul M,
"A million web users in America are more valuable than a million users logging on from a developing country."
There is so much wrong with this sentence... it shows in your entire email.
Alibaba has more than one side to it, the chinese and the one in English. The English part is used by some developing countries which (are you sitting down?) not necessarily include the USA. Payments for Chinese companies to setup English pages can go to 10k EURO. For Chinese it can be as little as 280 USD a year. The CHINESE are paying for this in their masses. As for the global participation it costs less.
The chinese includes prolific information, chat forums and other.
Ebay: nice that you mentioned it. How come you didn't mention TAOBAO which is the dominate auctions site here that happens to belong to the same Alibaba group? And alicash, for e-commerence/payments?
Let me guess, you cant read Chinese, if you lived in China for years it was in a bubble?
Posted by: Jonathan | October 24, 2007 1:49 AM
I am curious what Paul thinks of Global Sources when compared to Alibaba.. just curiousity really, as I feel that ALibaba is in a way a (Asian Sources)/Global Sources knockoff. Global Sources founded the Asian verticle industry publishing niche matching suppliers and buyers out of Hong Kong more than 20 years ago and grew due to the visionary single minded perseverence of its founder, Merle Hindrichs.
Posted by: Terry | October 24, 2007 6:30 AM
Terry - Global Sources is another business that is better for its owners than for the average importer. They give away magazines at trade shows, and many importers turn them down because the likelihood of finding a good supplier there is low. Just because the value proposition isn't great for importers doesn't mean that it's a bad business, though. Chinese suppliers are advertising as they inevitably must, and GS is the beneficiary. Most of my criticisms of Alibaba.com (the website) are similarly about a value proposition to the importer that is not what it seems.
Jonathan - The buying power of website users can be taken into account in any thorough valuation. I should not have mentioned the point, but it seemed that you were about to talk about the "millions" of visitors as an opportunity for selling general advertising.
What do you make of the data that suggests 52% of Alibaba.com users are inside China? They can't all be suppliers trying to sell goods. The ratio between sellers and buyers surely cannot be 1:1. If they are busy using the chat function in Chinese, just what exactly do you think they are chatting about?
To understand Alibaba (or similar) requires spending some time on the site; it sounds as if you already have. What percentage of companies that purport to be manufacturers would you guess are really just agents, brokers, or wannabes? One of the big points about Alibaba was that it was supposed to reduce the opportunity for fraud. These fees alone - no matter how large - are not very good at preventing fraud.
You mention the differences between English and Chinese version of supplier directories. I actually know someone who creates a list of prospective suppliers from the Chinese version. He then goes to the Alibaba.com (in English) and crosses off ANY supplier who might be listed there. This is one way for assuring that a prospective supplier is not known to every single customer and competitor.
Alibaba's IPO is proving to be the most expensive in the world. The price-to-earnings ratio is around 95x-105x. Google's IPO was priced at a P/E of 90x and sits today somewhere around 50x. By comparison, Global Sources is trading at 33x its 2008 estimates. There is no doubt that the IPO is overpriced relative to revenue. That's one issue. A completely separate issue is whether Alibaba.com holds value for importers. It's possible to sell what is effectively advertising to companies that don't really benefit in the way that they should and have a good business all the same. It was a good call to mention Global Sources, and if I were an analyst, I might be comparing Alibaba's core business with Global Sources valuation. Ironically enough, Global Source's stock price is skyrocketing on the back of Alibaba's IPO, instead of the other way around (i.e., a more reasonable valuation at GS cooling heels for Alibaba).
Posted by: Paul M | October 24, 2007 1:37 PM
TOTALLY BS..............
Posted by: tingting | October 24, 2007 8:37 PM
I thought I could hook up with college coeds when I signed up for Facebook but ... Facebook is now valued at $16 billions and probably going to hit $30 billions when it goes IPOs. It is Irrationally Exuberant, e.g. Bubble 2.0! ;) Now, only I can find all the VCs business cards I collected during 1.0. I wonder if they are still in business.
Posted by: David Li | October 24, 2007 9:10 PM
David Li,
It's a risk. No risk (mostly) no gain. MS are taking this risk in the hopes to USE this site as a medium for other means - here also lyes the key point for Alibaba. The risk takers see it not only for what it is, but for what it could be used for. (The others just gamble on its stock knowing it would shoot up, and then sell it).
Of course, now you have Skype - bought for, in the billions was it - and now this investment is being questioned. On the other hand, it might have worked, or it could still work out...
Also you can think about it this way, for MS to start a site like Facebook and reach the same success, how much would it cost? Is it still possible, how long would it take?
Posted by: Jonathan | October 25, 2007 7:59 PM
Hi Jonathan,
Yup, it's always a risk to admit in public that I joined Facebook for the college coeds. ;)
I do agree with you that sites are valued at what they could be, not what they are. Alibaba shouldn't be valued at its past performance but what they can do with the cool $1 billions cash. The company grew well despite the constant complains. CLB along has done several on that. How much more valuable if it could use the IPO cash to improve its service?
I am currently doing two startups in Bay area, one for Facebook/MySpace and one for Second Life. I love bubble and I think we should constantly living in one. I moved to Shanghai after Internet bubble because Shanghai felt like one as well.
Posted by: David Li | October 26, 2007 12:27 AM
David Li,
Indeed, bubbles can be great fun as long as you cash in before their burst and then cash in again after their burst. I moved to asia in 2000 after it popped. Good timing.
Another thing to add to Alibaba's credit list: Recently Youtube got blocked in China, regardless of the reason this has serious global implications; as long as it's going on only one way (can the WTO be used for this eventually?) China has the upper hand, including its local Sites/Entities.
Posted by: Jonathan | October 26, 2007 7:00 PM
Jonathan,
Bubbles are always fun and to some extents, necessary for the great leap forward. Internet won't be widely accepted in a decade without the crazy money going after Pet.com. ;)
Well, I don't think WTO can be much help here. Internet is regulated as a media rather then commerce And rightly so. it's media rather then commerce as advertising still drove the economy. WTO can't mandate global standard on media censor. China isn't the only country filter Internet content. German, French and even US all have rule in content filtering. GFW is a wonderful propaganda the medias and bloggers happily to spread. It's being proven to be a myth (http://www.scienceblog.com/cms/chinas-eye-internet-fraud-14190.html ).
How much of Alibaba's $7.3 billions valuation depends on the myth of government preference of domestic firms? With 39% owned by Yahoo, is Alibaba really qualified as a domestic firm? Isn't the myth of Chinese government preferential treatment of the domestic sites the lamest excuses for foreigner firms failing in China? Baidu vs Google and Taobao vs eBay are just two top examples.
Posted by: David Li | October 27, 2007 2:43 AM
I have just returned from the Canton Fair and Alibaba staff were everywhere as were the guys from Global Sources (NYSE: GSOL) who are probably the # 1 competitor of Alibaba. Whilst walking round I was thinking of an article I saw that said something along the lof only 10% are actually factory representatives. Didn't buy much but made some good contacts.
GSOL stock is up 97% over the last 12 months and 45% since July. For those of you who prefer to go long I think GSOL offers the better option. They run most of the trade shows in APAC now and their website is much better. I hasten to add that I don't work for either and don't own stock in GSOL.
I don't use either service as trying to find a supplier via the internet is not recommended although GSOL do offer some great value added services other than factory sourcing.
I do see the IPO crazy HK investors going for this in a big way. I am not really commenting on Alibaba as a business, I am however saying that your cash has other equally good growth opportunities in this service sector. You could always buy in on the IPO, take your profit (assuming it rises) and plough that into GSOL or FXI (iShares FTSE/Xinhua China 25 Index)if you want to get a little more diverse.
But then what do I know, I work in logistics for goodness sake!
Posted by: Alex | October 28, 2007 6:47 PM
Many comments / questions here - I will try to address a few.
I have been involved in trade media for over 10 years and worked for both Global Sources (GS) and Alibaba.com.
GS was first mover in this market (founded in 1971, online since 1995) and continues to be a pioneer in the space (mainly online). They have a variety of products and services and support the closest thing to an integrated platform (print, online, trade show) for their clients worldwide.
Alibaba.com followed suit in 1999 with a simplified offering (online only and at a steep discount), financing and aggressive global marketing, which quickly created brand equity for them within this niche industry.
The initial posting on this blog focuses on trust & safety which is a massive issue and has been for some time. However, keep in mind that both GS and Alibaba.com maintain a neutral, third party position and only provide information/content on behalf of clients (free and paying). I encourage you to read the Terms of Use for both sites.
That being said, are these companies taking steps towards addressing trust & safety?
GS is most definitely taking steps to better protect their users with their latest Bureau Veritas partnership.
Alibaba.com, as you have pointed out, needs to take a more serious look at this.
Advice to all is to ALWAYS conduct your own due diligence and NEVER trust what is posted online. This goes for all sites, including GS.
Paul asks how 52% of users are from China? To fully understand this you need to know that Alexa.com collects data based upon domain versus individual URL or site address. Thus, the data you see includes Alibaba.com as well as Alibaba.com.cn, which is about 8 x larger than Alibaba.com and only has Chinese companies as users.
Paul also mentioned eBay, which we all know is an amazing C2C model. I think they could successfully enter the B2B space and possibly introduce the 'killer ap' for cross border trade (PayPal account authentication acts as trust & safety screen) but it remains to be seen as only few companies have been successful in taking a percentage of global merchandise sales (B2B volume trade) and they are closed industry specific marketplaces.
As for stocks, I am bullish on Alibaba.com, Global Sources and Yahoo! given the demand for Alibaba.com shares. No doubt this will be a successful listing and positively impact all related stocks in the short term.
Disclosure: I am a shareholder of Alibaba Group, Global Sources and Yahoo!
Posted by: Trapp Lewis | October 30, 2007 1:30 AM
Beware of the Companies and scamers on alibaba.com.
Alibaba will not take any responsabilities of your lost.
GOLD SUPLIER AND TRUSTPASS MEBERS,anyone who pays a monthly fee to alibaba can get is companie tagged without a single question or investigation.
DO NOT BUY PRODUCTS ON THIS WEBSITE.
a contract in the US as no power in china (diffrent laws)
I just lost $2500 in goods This holiday season by buying on alibaba.com
Posted by: jean | January 22, 2008 9:28 PM
Global sources has been around for years, the companies listed are more trust worthy than alibaba. Global sources makes real money about $200 millions per quarter. They host alot of trade shows and attending trade show is the best way to find real suppliers.
Posted by: wadadlitrade | March 21, 2008 12:01 AM