62 Business The EconomistNovember 30th 2019
A
nyone whois cursed with a rational mind should ponder Ali-
baba’s faith in eight, the luckiest single digit in China. On No-
vember 26th China’s e-commerce juggernaut sold HK$88bn
($11.2bn) of secondary shares on the Hong Kong Stock Exchange
under the stock symbol 9988—88 is not only a homonym for baba,
but also signifies double luck. As soon as the gong was banged to
launch trading, the shares soared from HK$176 to the auspicious
price of HK$188. Luck was on Alibaba’s side. Nearby Pedder Street,
where 19th-century stockbrokers gathered to trade shares, has
been a hotspot of anti-China protests since early summer. On oc-
casion, the smell of tear-gas has wafted into the exchange. Yet after
a landslide win for pro-democracy parties in local elections earlier
in the week, the chaos has—at least temporarily—subsided.
Luck aside, the listing provides the company with triple bene-
fits. It wins brownie points with the Chinese government for de-
monstrating confidence in Hong Kong’s financial future amid the
protests. It partially hedges its exposure to America, where it
launched the biggest initial public offering of all time in 2014, but
has recently suffered from trade-war related turbulence. And it in-
creases the accessibility of its shares to Asian institutional inves-
tors, who may be less inclined to view China through the prism of
trade and geopolitical tensions. Soon it may be eligible for Stock
Connect schemes that link Hong Kong with markets in Shanghai
and Shenzhen, allowing mainland investors to pile in as well.
In the process, Alibaba has already chalked up one victory. It
has shrunk the discount at which its shares have long traded
against Hong Kong-listed Tencent, its sworn enemy among Chi-
na’s internet titans. Its eyes are now on a bigger prize. Alibaba’s ex-
ecutives suggest that the firm should be valued like Amazon, its
biggest global e-commerce competitor. Amazon is worth $890bn
compared with $520bn for Alibaba. The American firm’s prospec-
tive price/earnings ratio, at around 67, is over twice that of its Chi-
nese rival. To narrow the gap Alibaba has a tricky balancing act to
pull off. It needs to keep the Chinese government on its side, but
also appear less Chinese when winning over the outside world.
Alibaba’s ability to achieve its ambitions should not be under-
estimated. But even the most bullish analysts say that overtaking
Amazon is a long shot. The two firms have different business mod-els. Alibaba provides a platform that links buyers and sellers on its
biggest sites, Taobao and Tmall, and it mostly makes money from
sellers spending money to push their wares higher up the search
rankings. Unlike Amazon, it does not sell its own goods, meaning
it has no need for inventory and warehousing. That helps it gener-
ate much fatter profit margins. But according to David Dai of Bern-
stein, a research firm, its cloud-computing business, though the
biggest in China, makes a negligible contribution to its valuation.
Amazon’s cloud business, Amazon Web Services, is a gold mine,
accounting for about half of the American firm’s value. And while
Amazon generates over $70bn of annual sales from outside its
home market the figure for Alibaba is less than $10bn.
Daniel Zhang, who in September took over running the firm
from Jack Ma, its charismatic founder, is trying to transform Ali-
baba by making better use of its vast trove of data to create more
value. Roughly one of every two Chinese buy via its e-commerce
platforms. Bolstering it all is Alipay, its online-payments platform
with about 900m users in China. Alibaba owns a 33% stake in Ant
Financial, Alipay’s parent company, potentially further boosting
its appeal to investors.
But for all its clout, it remains at the mercy of the Chinese gov-
ernment. After its listing in New York in 2014, a boom in its share
price turned to bust when government regulators publicly tore it
off a strip for peddling fakes. As Alipay and Tencent’s Tenpay have
muscled into territory controlled by state-owned banks, the gov-
ernment of President Xi Jinping has angrily pushed back. Now reg-
ulatory heat is rising over allegations of unfair competition, par-
ticularly with regard to “pick-a-side” deals, in which platforms
forbid merchants from trading with their rivals. Galanz, a home-
appliance-maker, and jd.com, a big e-commerce rival, have re-
cently sued Alibaba’s Tmall for allegedly abusing its market power.
In April Colin Huang, founder of Pinduoduo, a $43bn upstart that
is nipping at Alibaba’s heels, warned of “forced exclusivity” in e-
commerce. Alibaba dismisses the issue as “baseless sensationali-
sation”. It adds that “committing to a single partner is normal com-
mercial behaviour”. Shortly before Alibaba’s Singles’ Day sales
jamboree on November 11th, regulators travelled to its home town
of Hangzhou to warn e-commerce firms that such deals were ille-
gal. If they want, they can make life deeply uncomfortable.
Alibaba, for now, appears relaxed about the pressure. It argues
that Big Tech in China is hardly a cosy oligopoly. The constant bat-
tle between Alibaba, Tencent and others is almost visceral. Yet the
importance of remaining in the government’s good books may un-
dercut its efforts to build a global business. It has made inroads in
South-East Asia. But analysts doubt its ability to compete strongly
with Amazon in Europe and America, especially in cloud services
because of concerns about the Chinese government’s access to its
data (though much of that belonging to its clients outside China is
stored offshore). Even in Hong Kong, it may find itself in an awk-
ward position if anti-China sentiment resurges.E-commerce with Chinese characteristics
Alibaba has made its own luck. Since its founding 20 years ago, it
has battled the Chinese state to get where it is, trounced foreign
competition in China and helped revolutionise e-commerce. This
year it has responded to onslaughts from the likes of Pinduoduo by
upping its e-commerce offerings in China’s hinterland. From a
tech point of view, it stands shoulder to shoulder with Amazon.
But its valuation shows how steep the China discount remains. If it
is truly lucky, the Hong Kong listing may help change that a bit. 7Schumpeter One company, two systems
Alibaba is suffering from a bout of Amazon envy