- Alibaba's public offering raises questions about the future of tech startups in China
- To date, very few large Chinese technology companies have emerged
- Alibaba owes its success to China's high shopping rates and large consumer market
- Ping Wong believes that China's counterfeit culture is the company's biggest challenge
Internet giant Alibaba secured its place in history Thursday as the largest U.S.-listed initial public offering (IPO) of all time.
Alibaba, which achieved more than $240 billion in gross merchandise volume last year -- more than that of Amazon and eBay combined -- has become one of the largest technology companies in the world.
That Alibaba is a Chinese company has important implications and begs the question: Will China become the next Silicon Valley, a breeding ground for the next generation of technology giants?
Silicon Valley has long led the world in the quality, quantity and diversity of technology startups it incubates. Companies like Google, Facebook, Twitter and WhatsApp have flourished under Silicon Valley's mature and complete startup ecosystem, with its open and free market and culture and innovative environment.
The picture is quite different in Asia where thus far, only a few large technology companies have emerged. Alibaba, Tencent and Xiaomi were not nurtured in a Silicon Valley type environment, but they are successful examples from the unique Chinese market.
With more than 1.3 billion people, China is not only the world's largest country, but also its biggest consumer market. Home to a huge number of factories, manufacturers, suppliers and customers, China is also called the "World's Factory." This unique demand and supply environment helps reduce businesses' transaction costs and, indirectly, retail prices, creating a world of opportunities for entrepreneurs from China and abroad.
Often called the "Amazon of China," Alibaba's business model is in fact completely different from that of the online retail giant. Alibaba's Taobao is not in itself an online shop but an open eCommerce platform where millions of small businesses and suppliers can sell directly to individual or business customers.
Unlike Amazon, which charges commissions on transactions, Alibaba does not incur administrative charges on sellers or buyers; instead, it offers sellers paid advertising opportunities that will allow their products to stand out among the thousands of others on the platform. Alibaba's success stems from its huge traffic and competitive retail prices.
This competitive weapon piggybacks on another factor: Chinese customers are the most active online shoppers in the world, shopping an average of 8.4 times online each month, far outpacing American customers, who shop 5.2 times.
Repeated transactions by these customers contribute significantly to a steady sales volume and to Alibaba's success in China.
Opportunities come with challenges. The greatest challenge for entrepreneurs in China is the protection of intellectual property. Taobao is flooded with defective and counterfeit products: 82% of products labeled with the Columbia brand on Taobao are fakes, and the brand has had to get up to 3,000 listings taken down a month.
This is a rather unique problem in China, unlikely to be found in other parts of the world.
Without a strong legal system, copyright infringement is becoming a natural tendency. Unless a product is very difficult to duplicate, it is likely to be copied in China. These skillful and efficient perpetrators make such convincing cloned products that they often surpass the original on many levels. In a way, this is stifling creativity and innovation -- innovations are being copied, rather than respected and protected.
In addition, government policies such as taxation and embargoes may be changed or imposed at anytime, without reasonable explanation and without channels or methods of reverting the decision. Any such unexpected policy changes may have significant impact on businesses, and are interpreted as one of the biggest risk factors of doing business in China.
Despite adequate talent and capital, the closed market prevents local businesses from competing globally. Business owners who are not Chinese or do not have local connections face a much greater risk of failure.
Because of the reasons above, I don't believe it is realistic to compare China to Silicon Valley. Rather, it can be described as "a separate world" where one can thrive only with a good knowledge about the rules of the game.
Alibaba is an example of a company that has achieved a "cultural fit" in China. But whether Alibaba or other homegrown Chinese technology companies can hold their place in the competitive global market, or surpass the Silicon Valley-bred giants, remains to be seen.