In May 2015, the Alibaba Group – China’s largest e- commerce company – got a

new Chief Executive. Daniel Zhang was 43 years old, with a career in the accounting
firms Arthur Andersen and PwC before joining Alibaba in 2007. Zhang’s experience
in international firms was reflected in an early statement: ‘We must absolutely glo-
balize,’ he said during a company-wide strategy session. ‘We will organize a global
team and adopt global thinking to manage the business and achieve the goal of
global buy and global sell. ’
Zhang’s appointment as CEO came at a difficult time. Alibaba had undergone the
largest ever Initial Public Offer-ing (IPO) on the New York Stock Exchange in
September 2014, achieving a total valuation of $231bn (£138.6bn, €173.3bn). But
the first quarter of 2015 had seen profits at half those of the same period in the
previous year. The Group’s share price was down a third from its post-IPO peak.
Zhang’s predecessor as CEO had been dismissed after just two years in the job.
The man who appointed Zhang was Jack Ma, founder of Alibaba just 16 years
earlier. Alibaba started as China’s first business-to-business portal connecting
domestic manufacturers with overseas buyers. Since then, the Group had grown in
many directions. 1688.com was founded for business-to-business trade within
China. Ali-baba’s Taobao Marketplace serves small businesses and individuals.
Tmall.com provides electronic shop fronts to help overseas companies such as
Nike, Burberry and Decathlon to reach Chinese consumers. Juhuasuan offers daily
deals on everything from toys to laptops. There is also Alipay, effectively under Ma’s
personal control but functioning as the Group’s equivalent to PayPal, which
processes 75 per cent of Group transactions. One way or another, it is possible for
Alibaba’s customers to trade
almost anything: the American security services have even set up a sting operation
on Alibaba to catch trad-ers selling uranium to Iran. At the start of 2015, Alibaba
had approaching 80 per cent of the e-commerce market in China, the largest e-
commerce market in the world, and also had strong positions in Brazil and Russia.
Inter-national e-commerce represented nearly 10 per cent of the company’s total
sales of 76.2bn Yuan in the financial year ending 2015 (about $12.3bn, £11.2bn,
€8.2bn: see Table 1 ).
Alibaba had always had an international bent. Founder Jack Ma had started his
career as an English language teacher in the city of Hangzhou, not far from
Shanghai. As early as 2000, Ma had persuaded both the leading American
investment bank Goldman Sachs and the Japa-nese internet giant Softbank to
invest. The then ascend-ant America internet company Yahoo had bought nearly a
quarter of the Group in 2005. Post-IPO, SoftBank still held 32.4 per cent of the
shares and Yahoo 15 per cent. The Alibaba Group board counted as members
Yahoo’s founder Jerry Yang, Softbank’s founder Masayoshi Son and Michael Evans,
former vice-chairman of Goldman Sachs. Even so, Jack Ma was ambivalent about
Western investors: ‘Let the Wall Street investors curse us if they wish!,’ Ma had
proclaimed at a staff rally. ‘We will still follow the principle of customers first,
employees second and investors third!’
 Strictly, overseas investors do not directly own stakes in the Alibaba Group, instead
owning shares in a shell company – a so-called variable interest entity (VIE) – that
has a contractual claim on Alibaba’s profits. This VIE structure is a common way for
Western-listed Chinese firms to get around Beijing’s foreign-ownership rules. But the
Chinese government could close the loophole at any
time, and it gives foreign shareholders limited recourse against abuses by Chinese
companies’ managers. Ironi-cally, the most notorious VIE controversy so far
involved Alibaba’s Jack Ma, who in 2011 separated Alipay from the rest of the Group
without board approval. Ma said new Chinese regulations forced him to make the
move. Yahoo was only told about the spin-off five weeks after it had happened. A
fund-raising round for Alipay’s new parent company valued Alipay at nearly $50bn.
Alibaba’s relationship with the Chinese government is hard to read. Jack Ma insists
that he has never taken loans or investment from the Chinese government or its
banks: he had gone to overseas investors instead. However, given that a third of
Chinese business activity is carried out within state-owned enterprises, the
government is bound to be in close liaison with the dominant national player in e-
commerce. Ma explained his philosophy as: ‘Always try to stay in love with the
government, but don’t marry them.’ The Alibaba Group has built up its political
connections. Tung Chee-hwa, Hong Kong’s first chief executive after its return to
China, served on its board of directors. Alibaba has also allied with several so-called
‘princelings’, children of important political leaders. Princeling investors include
Winston Wen, son of a former Chinese premier; Alvin Jiang, grandson of a former
Chinese President; He Jinlei, son of a former Politburo member and a senior
manager of the state Chinese Development Bank; and Jeffrey Zang, son of a former
vice premier and a senior manager at China’s state sovereign wealth fund, Citic
Capital.
Given Chinese President Xi Jinping’s sweeping political and economic reform
campaign, there are no guarantees of Alibaba’s position domestically. In 2015,
princeling investor He Jinlei’s older brother was under house arrest because of
accusations of corruption. The beginning of the year had also seen the publication
of an investigation by China’s State Administration for Industry and Com-merce into
counterfeit goods and fake listings on the Group’s Taobao site, leading to a 10 per
cent fall in Ali-baba’s share price. Jack Ma commented on his relations with Chinese
regulators: ‘Over the past two years, not only was I a very controversial figure, but
also these days, the disputes are bigger and bigger.’ He continued, ‘I, too, felt
puzzled, sometimes wronged – how did things become this way?’ Nonetheless, Ma
promised to clean up the site. Even so, just a few months later, fake Apple Watches
were on sale on Taobao weeks before their official launch in the United States.
President Xi Jinping’s reform campaigns were partly in response to changing
economic conditions in China. After three decades of double-digit growth, China’s
growth rate has slowed to around 7 per cent a year (see Table 1). Such growth is
very respectable by world standards. Besides, faced with rising domestic concern
about the environ-ment, President Xi was happy to restrain the expansion of high
polluting industries such as cement, coal and steel. At the same time, the Chinese
government was promoting e-commerce as a key area for future economic growth.
However, there were causes for concern. Many local authorities and firms had
borrowed heavily on expecta-tions of higher growth, and there were fears that
financial institutions had over-lent. Some warned of a consequent crash. Moreover,
it was hard to see China’s growth rate picking up again, on account of an ageing
population and the drying up of the traditional supply of young labour from rural
villages: by 2015, the Chinese workforce was falling by about three million workers
a year. Although the government relaxed the famous one-child per family rule in
2013, Chinese parents are still reluctant to have more children because of the cost
of housing and a good education in the main urban centres. It is predicted that by
the early 2030s, about a quarter of China’s population will be over 65 (against 17
per cent in the United King-dom). Slower economic growth in China overall is being
matched by some slowing in the rate of growth of the Chinese e-commerce market
(see Table 1).
At the same time, Alibaba faces greater competition. A decade ago, Alibaba had
seen off an attack by American rival eBay in the Chinese market with a fierce price-
war. Jack Ma had proclaimed: ‘EBay is a shark in the ocean; we are a crocodile in the
Yangtze River. If we fight in the ocean, we will lose, but if we fight in the river, we
will win.’ A combination of cultural, linguistic and government policy factors kept
Western internet companies at arm’s length in the Chinese market: Google has
been reduced to a market share of about one per cent, while Amazon eventually
chose to list on Alibaba’s TMall site after a decade pushing its own venture in China.
But now Alibaba’s home-market dominance is facing a local challenge from the
aggressive JD.com. While Alibaba still depends on China’s unreliable postal service
to get its goods to customers’ doors, JD.com has been more like Amazon in
investing in its own distribution centres and delivery services. As a result, JD.com
can promise same-day delivery in 43 of China’s biggest cities. Moreover, JD.com is
well-placed to benefit from the shift to smart-phones for e-commerce. Tencent,
China’s largest social networking and online games company, has taken a 15 per
cent stake in JD.com, giving the challenger access to more than 400 million users of
its WeChat phone mes-saging app. WeChat allows users to scan product bar codes
with their smartphone cameras to make instant purchases through JD.com. Alibaba
too has been entering
smartphone e-commerce, and in early 2015, smartphone sales accounted for half of
its retail Chinese sales, twice the proportion of a year earlier. But smartphone
screen-sizes are less attractive to advertisers, an important part of Alibaba’s
traditional PC-based business model. JD.com’s domestic growth in the year to 2015
has been twice that of Alibaba’s. Although JD.com was still only about 15 per cent of
its rival’s size, founder and chief executive Richard Liu has declared a goal of
beating Ali-baba to the top position: ‘The competition makes the two companies
stronger. I’m actually enjoying competing.’
Thus Alibaba’s new chief executive Daniel Zhang faced many opportunities and
threats in 2015. There were already promising signs in favour of the globalisation
strategy, though. Alibaba’s international flagship AliEx-press had rapidly taken the
number one position in Russia and the number three position in Brazil, with local
users delighted to have direct access to cheap Chinese goods.
One target now is the United States, only second to China in market size. The
Yangtze River crocodile is aiming to attack the ocean sharks in their home seas.