13 May 2014 Views on News The Alibaba Effect Alibaba's $200 billion megaIPO is history making in a number of ways. Bill Kirby and Warren McFarlan discuss what the deal says about Chinese entrepreneurship and American markets. by Bill Kirby and Warren McFarlan Alibaba is about to make history with the first genuine megaIPO of a Chinese entrepreneur-founded company in the United States. The numbers are historic as well—an anticipated market capitalization of some $200 billion. It comes to the US rather than Hong Kong for the most old-fashioned of American reasons: to "raise capital and maintain management control," which they couldn't do in Hong Kong. Hong Kong believes in the principle that each share of stock is entitled to one vote. The US markets, on the other hand, proclaim that some classes of shares can have more clout than others. Thus, founder Jack Ma and his management team, who own a little over 9 percent of the company, can still retain control of its destiny. (Meanwhile, although Hong Kong stock market authorities are officially pleased to stay true to their rules and principles, we anticipate intense internal second guessing among them and probably an eventual change in policies and views. Losing Alibaba really stung.) Alibaba was founded in 1999 in the city of Hangzhou in Zhejiang province in eastern China. In those early days, it was a small, struggling startup with an opaque mission and a remarkable ability to both raise and burn cash. Its only asset was Mr. Ma, its charismatic and dynamic founder. After we wrote our first case study about the company in 2000, we were afraid it would go bankrupt before we could teach the case for the first time. Instead, we were present at the birth of one of today's great online giants. "Alibaba's only limits are those imposed by the speed at which these enterprises continue to grow" Still largely unknown in the West, Alibaba dominates China's Internet and logistics space with over 600 million subscribers and nearly a quarter trillion dollars of annual transactions. A combination of Amazon and eBay, it holds an 80 percent share of the e-commerce market in the world's second largest economy. Its net income for 2013 was four times more than in 2012. Its products and services lie at the core of an extraordinary transformation of China today from a low-cost, export-driven economy to one that is driven by consumers. Like no other company, Alibaba has succeeded in making China—a country with countless internal barriers to trade—seem like one market, where goods can be purchased, delivered, and paid for with a confidence unimaginable little more than a decade ago. It has done more for China's small- and medium-sized enterprises than any government policy, ministry, or bank. Alibaba's only limits are those imposed by the speed at which these enterprises continue to grow. Health and welfare systems, especially for China's rural poor, also need to function if today's 40 percent personal savings rate is to be reduced, thereby unleashing cash to fuel new growth in consumer spending. Creating this domestic safety net will be crucial to enabling Alibaba to grow even faster. COPYRIGHT 2013 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 1