Understanding the Alibaba Business Model

Alibaba Business Model

Alibaba business model is a complex one as they are a mammoth company that keeps growing. This article provides a breakdown of all the core components that makes up the Alibaba business model.

Alibaba has 4 main business segments: core commerce, cloud computing, digital media & entertainment and lastly innovative initiatives.

1. Alibaba Core Commerce (China)

1.1 China Retail

Alibaba business model

86% of Alibaba’s revenue comes from core commerce. Within core commerce, you can look at it from 2 angles. China vs International, and Retail vs Wholesale.

In China, the two most well-known brands are Taobao and Tmall. Taobao is the largest e-commerce website for people to go online shopping. Tmall is also an online shopping platform, except its sellers are official brands and retailers. Broadly speaking, the key difference between Taobao and Tmall is the former is C2C while the latter is B2C.

Freshippo (known as “Hema” in Chinese) is a grocery retail chain that is somewhat like Amazon Go. There are unmanned checkout kiosks, mobile-scanned product details, conveyor belts and they are creating a new shopping experience by mixing online and offline activities.

There are about 227 Freshippo stores as of June 2020 and 25 million annual active consumers.

Similar to Freshippo, Alibaba also has a Tmall Supermarket (天猫超市) which sells online grocery. In 2017, Alibaba invested US$2.9 billion for additional stakes in Sun Art, China’s top hypermarket operator. They are going in big on the Offline-to-Online (O2O) market in grocery. Tmall Supermarket tagline is to offer 1-hour delivery to some of China’s largest cities.

Alibaba Health is actually a listed company in Hong Kong. There are 4 pillars to Alihealth. First is an e-commerce platform that sells healthcare products. Second is online healthcare services such as cloud-based medical consultation (雲醫生). The third is a tracking system called (碼上放心) that collects production, distribution, product data and etc. The final pillar is a healthcare management tool for individual customers.

In April 2020, Alibaba has transferred all its pharmaceutical products on Tmall and Tmall Global to Alibaba Health for US$1 billion which was settled through the issuance of ordinary shares. Alibaba equity interest in Alibaba health is about 60% now.

1.2 China Wholesale

Ling Shou Tong (零售通) which roughly translates to integrated retail, is similar to Square (SQ) in my opinion. They help mom-and-pop stores to achieve digitalisation and stay relevant. Some of the stuff they do are inventory management, consumer insights, supply chain as well as merging offline and online sales channels. The platform is free to use, in exchange for consumer data that eventually feeds into Alibaba cloud.

Finally, 1688 is the largest wholesaler in China and they cover B2B, B2C, wholesale and manufacturing products. Suppliers would need a government business license to list and sell their products on 1688.

Alibaba business model
https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_FinancialInvestmentPerspectives.pdf

Within China, Alibaba has about 874 million mobile monthly active users and 742 million active annual consumers. China’s total population is 1.4 billion and the addressable consumers are 1.2 billion. That 0.2 billion difference is those whose age is above 80 and below 10. Alibaba still has about 40% more headroom for growth and most of it would come from 3rd-tier cities and below.

2. Alibaba Core Commerce (International)

Outside of China, Alibaba has Lazada which targets the Southeast Asia market. This competes directly with Sea Limited’s Shopee. The difference between Lazada and Shopee is that Lazada runs its own logistics network. More than 75% of Lazada’s parcels went through its own facilities or first-mile fleet while Shopee depends largely on 3rd party logistical services.

Alibaba business model
https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_Lazada.pdf

Lazada has about 100+ million monthly active consumers and 80+ million annual active consumers. Southeast Asia is a high-growth booming market and both Shopee + Lazada has reaped the benefits of e-commerce.

Order volumes for Lazada have increased by more than 100% Y-o-Y over the past 2 years.

AliExpress is a retail e-commerce platform that allows international customers to buy directly from manufacturers and distributors in China. This is somewhat like the English version of Taobao.

天猫国际 or Tmall (International) is similar to Tmall, except that their target market is for overseas Chinese consumers rather than local.

In September 2019, Alibaba also acquired Kaola (考拉海购) for $2 billion. Kaola focuses on cross-border import retail e-commerce business. Instead of China selling to the world, Kaola is a platform that allows international brands to sell their products to Chinese consumers.

Kaola focuses more on higher-end and niche items, often from international boutique brands. They are shifting towards a subscription-based model and it is the first membership-based platform in Alibaba’s digital ecosystem.

Alibaba.com is a wholesaler marketplace similar to 1688, except the latter is for China’s domestic market while Alibaba is for international customers.

Alibaba business model
https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_FinancialInvestmentPerspectives.pdf

If we include Alibaba’s international business + China market, their annual active consumers have hit the 1 billion mark as of June 2020. Though only 194 million or about 20% of them comes from overseas.

3. Alibaba Local Consumer Services

China is going big on two battlefronts. Local services (本地生活) and new retail initiatives (high-tech supermarkets like Hema and etc.)

They are trying to target offline consumption and integrate it online through digitalisation. This is known as the Online-to-Offline (O2O) business and it is a massive industry that is still underpenetrated.

Ele.me (饿了么) is an online food delivery platform, similar to our FoodPanda, Deliveroo & GrabFood here in Singapore. Their rival is Meituan Dianping which is owned by Tencent.

Both Ele.me and Meituan dominates the food delivery landscape in China. But Meituan is currently the leader with a market share of about 65% compared to Ele.me which is about 28%.

Ele.me initially wanted at least a 50% market share, but it has now pivoted its tone towards achieving higher-quality growth and synergy with Alibaba.

Based on data from Aug 2020, Meituan’s orders exceeded 40 million and they have MAU of about 144.8 million. This is about twice as much as Ele.me’s orders of 20 million and MAU of 76.6 million.

Koubei (口碑) which translates to “word-of-mouth” started off as an F&B restaurant review business, similar to Yelp or Dianping before Meituan merger. It was later merged with Ele.me to expand their core offerings in the food delivery & restaurant business.

Lastly, Fliggy (飞猪) which translates to “flying pig” is Alibaba’s online travel service platform. You can book airline tickets, train tickets, accommodation, package tours, car rentals and shop for duty-free goods. This competes directly with Meituan Dianping’s “In-store, Hotel & Travel” business segment.

4. Alibaba Digital Media & Entertainment Business

Alibaba business model

Youku, the Chinese version of YouTube, is the 3rd largest online video platform coming after iqiyi.com (founded by Baidu) and qq.com (Tencent Video).

Youku’s content come from 4 sources. self-produced, jointly-produced, rights licensing and lastly an open platform for user-generated content.

https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_DigitalMedia.pdf

Initially, most of Youku’s content comes from licensing, but they are now shifting towards self-production over the years.

Youku’s daily average subscriber base has increased by 52% Y-o-Y during the quarter for June 2020.

Quite similar to Youku, Alibaba Pictures also produce content, distribution, licensing and a cinema ticketing management system.

The difference is Youku is online while Alibaba Pictures lean more towards offline entertainment (cinemas, theatres, events and etc). Also, Alibaba Pictures produce movies like Hollywood while Youku produces a wide variety of content like Netflix.

Founded in 2004, Damai (大麦) is the largest live event platform that sells tickets for performances, sports and movie tickets. It was fully acquired by Alibaba on March 2017 as ticketing is a complimentary service to their entertainment business.

Alibaba also owns Taopiaopiao, an app that allows people to book movie tickets online. Movie ticketing in China is like the 3 kingdoms. There is no single dominant player and the market share is equally distributed between WeiYing (Tencent), Taopiaopiao (Alibaba) and Maoyan (Meituan Dianping).

Everything was good for Taopiaopiao until the market equilibrium took a sudden turn when Maoyan and WeiYing decide to combine forces and do a merger.

https://ir.alibabapictures.com/en/investors/financial-information/interactive-analysis-tool/

Alibaba Pictures have not been doing well as revenue and gross profits are declining. The bigger loss was primarily due to the complicated difficulties in pursuing profitable operation faced by the entertainment industry in China and the significant decrease in revenue for Q1 2020 due to COVID-19.

5. Alibaba Innovation Initiatives

Amap (Auto Navi) is the largest provider of mobile digital map by MAUs. It is just like Google Maps. Amap hits its 100 million daily users mark on Oct 2018.

Their closest rival is Baidu Maps which has about 300 million daily users during the same period.

Ele.me and Kuobei were integrated into Amap. Users can search for nearest restaurants and book a reservation directly from Amap. They also introduced an aggregated ride-hailing service on its premise, allowing its users to book rides from various ride-hailers.

DingTalk is a digital collaboration workspace somewhat like Zoom, Slack, Microsoft Teams, etc. DingTalk is currently the largest business efficiency app in China by MAUs as of March 2020.

Finally, Tmall Genie is like Amazon Echo (Alexa) and Google Home. It is an AI-powered speaker and they are trying to create new customer experiences through IoT and smart home appliances.

Alibaba also recently launched their new digital manufacturing factory, Xunxi (Rhino) on September 2020. Here is a video of Xunxi technology in operation.

These innovative intiatives are small little seeds that are planted with hopes that it will grow to big trees like Taobao, Tmall, Cainiao and Alibaba Cloud.

https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_LocalServices.pdf

Alibaba’s Local services (本地生活) which comprise of Ele.me, Kuobei, Taopiaopiao, Amap and etc, make up about 290 million active annual customers.

So far we have covered the consumer platforms in Alibaba’s business model. But it needs infrastructure to operate these apps and deliver those goods and services. That is what the 2nd part of this article will be about.

6. Alibaba Cainiao Logistics Network

Alibaba has its own logistical services known as Cainiao (菜鸟). It is founded in 2013 with eight other backers including Temasek Holdings, GIC, Primavera Capital and etc.

In 2017, Alibaba pumped in $807 million to acquire a controlling stake of 51%. In 2019, they double down their investments by another $3.33 billion raising its equity stake in Cainiao from 51% to 63%.

Cainiao is highly digitalised as the whole warehouse and delivery process is highly automated through IoT, big data analytics, robotics and artificial intelligence.

Alibaba has an ambitious goal to deliver packages in China within 24 hours and 72 hours internationally. Cainiao has about 170 million daily courier parcels in China on average. Considering the sheer volume of demand, it is really phenomenal to see how Cainiao manages to pull it all together.

Here is a video of how Cainiao robots roll in 2 minutes.

Cainiao is also planning to increase its chartered flights from 260 to 1,260 over the next 9 months. That’s a five-fold increase and a leading chartered broker go as far to say it is being “too ambitious”.

Delivery time for overseas would be reduced from 7-10 days to 3-5days, a step closer to its goal of fulfilling 72 hours global delivery time.

They are also planning to double the floor space of its overseas warehouse to 2 million sqm.

This comes after Alibaba’s strategy to focus on 3 growth engines: domestic consumption, Cloud Computing & Data Intelligence, and globalisation.

Cainiao’s quarterly earnings for June was RMB7.7 billion (US$1.1 billion), up 54% YoY.

Cainiao currently makes up about 5% of the group’s total revenue and it is finally expecting to generate positive cash flow for FY 2021.

The sister company of Cainiao is Fengniao (蜂鸟即配) which translates to phoenix. While Cainiao delivers packages for Taobao and Tmall, Fengniao delivers food for Ele.me & Kuobei business as well as groceries for FreshHippo.

7. Alibaba Cloud

Alibaba Cloud is the world’s third-largest coming after Amazon and Microsoft. Within China, Alibaba Cloud is the leader with a market share of about 40%. They are the only China-based Cloud Service Provider included in Gartner’s Magic Quadrant for 4 consecutive years. The closest rival is Huawei Cloud and Tencent Cloud, each with a market share of about 15%.

Cloud penetration in China is still at an early stage as China IT spending is only US$402 billion as compared to the US which is about US$1,246 billion.

Founded in 2009, Alibaba Cloud arises as a need to address the massive scale of data that is coming in Alibaba from its e-commerce platforms. They have successfully migrated the core systems of their e-commerce businesses onto Alibaba Cloud.

Alibaba Cloud is able to process over 544,000 orders per second and 970 petabytes of data without disruption for 24 hours during the 11.11 sale in 2019.

Cloud computing allows customers to quickly build up an IT infrastructure online without much computing hardware or any on-premises work. There has been a 50% surge in demand for Alibaba Cloud in Singapore SMEs. One of them is none other than RedMart which is owned by Lazada.

About 60% of A-share companies are on Alibaba Cloud and it has supported 38% of the Fortune 500 companies over the past fiscal year.

There are about 3 million paying customers right now and Alibaba Cloud computing makes up about 8% of the group’s total revenue for LTM.

During the latest quarterly results, Alibaba’s cloud computing revenue grew 59% Y-o-Y to RMB 12.3 billion yuan.

After 10 years of innovation & investment, Alibaba Cloud is forecasted to generate a positive net profit for FY 2021.

Both Alibaba Cloud and Cainiao are two growth engines that have finally seen their investment pays off as they approach the breakeven mark.

8. Ant Group Business Model

Ant Group is Alibaba’s fintech arm and it was formerly known as Alipay. Alipay was created as an escrow need in 2004 to build trust and facilitate transactions between buyers and sellers.

Back then all the banks were not interested in such middlemen business as it is unprofitable for them to deal with micro-transactions.

It subsequently caught on the momentum of mobile commerce and Alipay grew rapidly. As their cash deposits pool piles up, Alipay starts to expand towards investments and money market funds. They called it Yu’e Bao (餘額寶) which translates directly to “leftover treasure”.

If offers better interest rates than local banks and users start throwing their money in Yu’e bao. The fund grew so big until it overtook J.P Morgan’s fund and became one of the world’s largest market fund at one point in time.

Regulators even took action as they believed that the Yu’E Bao fund had grown so large that a wave of withdrawals could cause systemic risk to the financial system. A limit cap was placed on how much one can invest.

Yu’E Bao fund is currently the largest online investment services platform in China by assets under management, with a total of RMB 4.1 trillion invested through the platform as of June 30.

8.1 Alipay Rebranding to Ant Group

Alipay was later rebranded to Ant Financial Services in 2014 and Ant Group in 2020. They wanted to drop the word “financial” for 2 reasons. One to avoid drawing scrutiny from regulators and second to emphasize that Ant Group is a tech company rather than a financial company.

Ant Group has 4 main business segments: payment, wealth management, micro-financing and Insurance. They serve as a middleman role partnering up with financial institutions to provide access to loans or services. Ant is able to provide an added-value service because it has massive consumer data.

For example, their Zhima credit (芝麻信用) generates credit scores for customers based on relocation trends, money transfers, shopping activities and even social relationships. This score determines whether they can get access to loans, and good scores can even exempt one from paying a deposit for car rentals, hotel booking and apply for a visa.

Ant’s consumer lending business is facilitated through Huabei (花呗) and Jiebei (借呗). The first one means “just spend only” and it acts like a credit card business. Spend first, repay later. The second one means “just borrow only” and they offer small micro-loans. Your limit spending and all is determined by your credit rating score on Zhima credit.

Their insurance business, Xiang Hu Bao (相护宝) which translates to “mutual protection” is run on top of Alipay’s proprietary blockchain technology. Xiang Hu Bao covers more than 100 types of critical illnesses and the risks are spread collectively.

There is are no admission fees and each person only pays a small amount and the pool of funds goes to those in need. Approved claims can go up to RMB 300,000.

Two-thirds of Xiang Hu Bao’s users come from the rural areas as Alibaba aims to narrow the rural-urban health gap.

Most of them used the interest earned from Yu’e Bao to pay for the monthly payments on Xiang Hu Bao.

Alipay got spun off from Alibaba due to regulation restrictions from the Chinese Government. Beijing only allows company without foreign ownership to apply for a license for 3rd party payment services, but Yahoo & Softbank was the largest shareholders back then. A new agreement was forged which entitles Alibaba to 37.5% of Ant’s pre-tax profits. Alibaba subsequently traded those rights for a formal 33% stake in Ant group.

And lastly, not forgetting Ant Group’s blockchain AntChain 蚂蚁连!

9. Alimama Business Model

Last but not least, Alibaba’s monetization platform + digital advertising business is Alimama (阿里妈妈). Launched in 2007, Alimama uses big data to match the marketing demands of merchants, brands and retailers with the media resources on their platforms.

You can think of them like Google AdSense or Facebook Ads. They display marketing ads targetted to different groups of consumers and some could be through bidding auctions, impressions, clicks, time-based or fixed cost.

In short, they are monetizing China’s website traffic and attention. And if you think about the traffic on Taobao and Tmall, it is massive. Alibaba’s Mobile MAUs is 874 million and billions of ads impressions are served every day across all of Alibaba’s platforms.

Ad Tech is a big data and artificial intelligence game. Jack Ma recently said in Chongqing’s Smart China Expo, we look at a company’s asset utilisation, ROA and production efficiencies in the past. But in the future, it will all be about how much data are you collecting, utilising, protecting and how efficient are your algorithms.

Alimama is a leader in this area and they have open-sourced their X-Deep Learning (XDL) framework on Github. XDL is the industry’s first deep learning framework that allows for super-large-scale industrial data.

If we breakdown Alibaba’s revenue by type, Alimama’s XDL is the mother of all money-making machines behind the scenes. Alibaba’s platforms like Taobao, Tmall, Ele.me helps bring in massive web traffic and consumer data. Alimama converts all these data into money.

Total customer management services make up more than a third or 38.6% of the group’s total revenue.

10. Summary of Understanding Alibaba Business Model

Alibaba business model
https://doc.irasia.com/listco/hk/alibabagroup/annual/2020/ar2020.pdf

If we look at Alibaba’s business model, their platforms and apps encompass the end-to-end journey of both the customers and merchants.

The underlying foundation of Alibaba’s business model is Alibaba Cloud and big data intelligence.

This allows everything to run smoothly at scale and their AI algorithms are constantly improving due to the massive amount of data collected.

The intermediary level of Alibaba’s business model is Cainiao and Ant Group. Alibaba is deeply integrated within the payment and logistics space.

And finally, the surface level is Alibaba’s digital ecosystem with all the apps and platforms that we touched on in the first part of this article.

For merchants, Alibaba provides you with cloud technology to handle all your data storage needs. Ling Shou Tong helps seller with their day-to-day operations and business insights analytics. Alimama helps sellers with marketing & advertising.

For buyers, your convenience needs and lifestyle wants can be satisfied with Alibaba’s shopping, grocery, health, travel and entertainment apps. Cainiao and Fengniao deliver everything to you within 24 hours.

As you frequent their platforms, data is collected and analyzed for consumer insights. Commissions are earned for every transaction made and advertising revenue is earned for every user’s attention.

Alibaba is well-poised to take advantage of digitalisation in the future. This is because they have all the necessary infrastructure at each layer to meet the scale and demand in China’s consumer market.

Alibaba business model
https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_AlibabaDigital.pdf

China is shifting from an export-driven and investment model to demand and consumption model. While US consumer spending makes up more than two-thirds of GDP growth, China is only somewhere about 40%.

Within China consumption market, Alibaba’s digital economy manage to capture about $1 trillion of GMV. That’s why Alibaba is actively acquiring offline channels businesses and bringing consumers online.

As of the latest quarter, Alibaba has about RMB 310 billion (US$44 billion) worth of cash sitting on its balance sheet. The last we heard was Alibaba being in talks to invest $3 billion in Grab.

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6 Comments

  1. Hi Chang,

    Alibaba is greatly undervalue compared to Amazon. But it is more or less a copy of Amazon. Anyway, Alibaba is doing everything right now, and hopefully, they will be given the freedom to continue innovation. It is one of my biggest stock portfolio.

  2. Hi Chang, thanks for the good read!

    Alibaba is greatly undervalue compared to Amazon. But it is more or less a copy of Amazon. Anyway, Alibaba is doing everything right now, and hopefully, they will be given the freedom to continue innovation. It is one of my biggest stock portfolio.

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