T-Rex versus Godzilla: Alibaba's IPO sets stage for a future battle with Amazon

The super-successful IPO of Alibaba Group, China’s largest e-commerce player with a near 80 percent domestic market share, means a new T-Rex has risen in the technology world. Valued at around $168 billion on the basis of the $68 share price fixed by the bookmakers, Alibaba will be sitting on anything from $22-25 billion in cash, depending on whether or not the IPO’s underwriters exercise the option to buy 30 million more shares over the next month.

In terms of pecking order, Alibaba - which runs three major websites, Alibaba, Taobao and TMall - is thus bigger than Amazon ($150 billion) and eBay ($65 billion), but much smaller than Google ($398 billion), though Google is not quite about e-commerce.

More from Corporate

Maha: Court orders Rs 30L compensation for parents after youth dies in road accident Ashleigh Barty comes from set down to beat Coco Gauff in Australian Open lead-up

In terms of business, Alibaba’s profits were more than Amazon and eBay combined, at $3.7 billion in the year to March 2014.

But despite being the new T-Rex of ecommerce, Alibaba could well be more fleet-footed than Godzilla Amazon, for it has none of the latter’s heavy brick-and-mortar investments.

Alibaba, says an AP report, “operates an online ecosystem that lets individuals and small businesses buy and sell. It doesn’t directly sell anything, compete with its merchants, or hold inventory.”

The advantage of this model is that companies don’t have to make huge investments in warehouses and logistics for the delivery of products. The business model involves generating huge consumer or business traffic which compels all sellers and buyers to congregate there, thus generating incomes for the platform.

Put the three numbers together - a monopoly in China, a $25 billion fresh cash pile, and profits of $3-4 billion annually, and that adds up to huge financial clout in the international e-marketplace for Alibaba.

What this level of financial muscle does is give Alibaba, a company started by Jack Ma and partners 15 years ago, the currency for huge geographical expansion even while having a lock on what will become the world’s largest middle class market (China) over the next decade or so. Alibaba already has around 280 million active buyers in China on its three major sites - Alibaba.com, Taobao.com and TMall.com. While the first started out as a business-to-business site, the second is consumer-to-consumer and the third a place for brands to target consumers.

Alibaba’s monopoly in China means it is super-profitable in what will be the world’s largest consumer market in 10 years. The Chinese economy is expected to overtake the US in dollar terms somewhere around 2024-25, but in terms of purchasing power parities, it is already as big as the US. In dollar terms, China’s economy is roughly half that of the US now.

Over the next one year, Alibaba will thus be rampaging through the world looking for investments and takeovers. Earlier this week, Jack Ma said that Alibaba would be expanding in America and Europe, but India is not likely to be far from his thoughts, given the explosive growth potential here.

The Indian e-commerce market is buzzing with talk of investments and takeover, with market leader Flipkart obtaining $1 billion of funding recently. This prompted Amazon to double its bet in India with $2 billion in investment.

Alibaba is said to be talking about an investment in Snapdeal, which had sales of around $1 billion last year and is talking of doubling this in 2014-15.

Alibaba and Snapdeal may have a good business fit for the simple reason that both of them seem to be pursuing the same business model of being technology companies that offer buyers and sellers a marketplace.

Snapdeal is modelling itself on Alibaba, as f ounder Kunal Bahl told CNBC TV-18 recently . “We believe that as a technology company the operating leverage in our business is very significant where we don’t have to make disproportionate investments behind the platform to keep generating velocity of sales…. If Alibaba in China, which is the business we are most similar to, generates $5 billion EBITDA a year, there is a reason for it. They are not a retailer, they are a technology platform and that gives me confidence that in due course… we will see similar economics emerging out of our company as well,” Bahl said.

That remains to be seen, but with Alibaba rolling in cash after its IPO, the chances are Snapdeal will find itself rolling in money too. Ecommerce firms have had no problem raising money from private equity and other institutional investors, with Snapdeal itself getting money from them, and also from Ratan Tata in his private capacity.

With the next round of funding, Snapdeal’s $1 billion valuation (Flipkart: $7 billion) could rise to $4 billion.

But right now all eyes are on Alibaba, which threatens to upset the world’s ecommerce applecart with it huge IPO raising and willingness to buy and invest abroad.

The ecommerce field will thus be hugely contested territory as Alibaba becomes the next financial powerhouse. The Amazons and eBays had better watch out. Alibaba’s advantage is that it comes without the high investment needs of Amazon, which invests heavily in products, warehouses and logistics.

Amazon’s advantage is that it straddles the world’s biggest ecommerce market (America), while Alibaba’s is that it is sitting pretty in what will become the biggest over the next decade.

Amazon is already more global than Alibaba. But Alibaba has the moolah to catch up fast using high profits in China.

Amazon is more brick-and-mortar than Alibaba. Thus, one should bet more on Alibaba than Amazon. But one cannot predict the ultimate result of any battle between T-Rex and Godzilla.