Alibaba IPO: Challenges and opportunities ahead

The IPO of Chinese e-commerce giant Alibaba has already broken several records. With a value beyond Amazon and Facebook, the company has officially become the largest ever tech IPO. The market is expecting the entry of several additional Chinese IPOs in the coming year, eager to benefit from the wave of optimism being ridden off Alibaba’s coattails. London corporate finance has already made its intentions clear in welcoming future Chinese players, and a number of Chinese telecom giants are already extremely active on the UK market. Sell businesses are also increasingly viewing Chinese majors as potential acquirers of start-ups, in what could become a healthy landscape of competition between east and west.

Domestic potential to drive Alibaba attraction

China’s e-commerce market is due to hit $713 billion according to iResearch and Alibaba’s 280 million customers are consistent digital shoppers. In the past year they made an average of one transaction a week, accumulating to an average spending of $1,000 annually. China’s tech market has matured very quickly, with smartphones already in the hands of most consumers in big markets such as Shanghai and Beijing. But the market is bifurcated. China still has half a billion citizens without internet access. Only half of China’s internet users shop online compared with practically two-thirds in the US, according to the research group IDC. That means there’s lots of room for growth. On top of that, the general view is that the Chinese economy is shifting towards a consumption model, which is currently just 36% of GDP. So what we have at stake here is an untouched e-commerce market in rural China. It’s a difficult bet for investors to make as China’s growth is slowing.

Foreign acquisitions

The challenge for Alibaba will also be proving to investors that is has growth opportunities outside China’s e-commerce industry. Leading up to its IPO the company has been aggresively investing in the US to expand its footprint stateside. Alibaba has invested about $1 billion in American tech firms both within the e-commerce sector and outside it. Its enormous chest of information about online shoppers should give it the edge, as it can evaluate consumer tastes and tailor entertainment accordingly.

Mobile remains a weakness

Alibaba’s marketplace model results in its profitability. It links buyers and sellers and leaves the business of transporting the goods to others. Alibaba has a huge network, meaning it’s only likely to attract more users. Volume equals profits, and the more volume, the more difficult it will become for a competitor to get in on the action. This isn’t to say Alibaba doesn’t have cracks. It does. Mobile being the main one. It’s no secret that it’s Alibaba’s biggest problem. Like many first-generation web companies, the sudden explosion of smartphones and tablets caught it off guard. Alibaba’s revenues come primarily from marketing, and on mobile this a difficult game to tackle.

 

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