The Financial Focus Series: Alibaba

Image courtesy of alibaba.com

Alibaba: An introduction

The hype and attention that this Chinese conglomerate has enjoyed is not undeserved. Having ended the 2019 fiscal year with a total of approximately US$54 billion, as well as online sales revenue surpassing that of all US retailers combined since 2015, the company’s capabilities are nothing to scoff at. Its recent debut in the Hong Kong Stock Exchange (HKSE), as such, gives cause for concern: does this mean that China is looking to re-establish Hong Kong as its financial powerhouse? How did the company transition from a small startup in a Hangzhou apartment to a massive global conglomerate in less than 2 decades?

Back to AliBaBasics

In 1999, then-chairperson Jack Ma and a team of friends and students founded the company in Ma’s Hangzhou apartment. Forecasted to improve China’s e-commerce market and establish a platform for Chinese online markets, the company received financial backing from Goldman Sachs and Softbank. The company became profitable in 2002, and its subsequent expansion paved the way for its financial success in the years to come. Currently, the number of full-time employees working for Alibaba stands at close to 102 thousand, and excludes the jobs created by its extensive retail ecosystem, which according to Renmin University stands at approximately 40 million jobs for online consumers and producers. Its impact on local and global economies is thus demonstrably massive.

Debut on the HKSE – Why now?

The debut was lauded by the company’s Chief Executive, Daniel Zhang, as Alibaba having “returned home”. It remains to be seen, however, whether the motives were purely financial or otherwise. This return comes at a crucial point in Hong Kong history, with anti-government sentiment in the country running at an all-time high. Perhaps this debut was an attempt to curry favour with the Chinese government by demonstrating confidence in the financial future of Hong Kong, or maybe Alibaba was simply looking to attract other Chinese conglomerates back to the mainland in light of the US-Sino trade war. Regardless, it is undeniable that the political unrest currently ongoing in the former British colony has had an impact on the financial power of the Chinese mainland, and it is wise to placate the higher-ups in Beijing if Alibaba wishes to retain its financial success. To do so, after all, typically means that companies get to enjoy substantial state-sponsored subsidies that help prop their bottom line up. Alibaba is no different.

Closed sesame – What this means for the world

Hong Kong remains one of the most financially-connected cities in the world, alongside New York, Singapore and London. To have listings in both New York and Hong Kong gives Alibaba both leverage and funding in 2 of these financial headquarters. With a debut deemed “slightly better than expected” by experts, the company looks set to open up the local market to both local and global investors, as well as setting the stage for other Chinese companies listed overseas to return back to the Asian continent.

However, concerns have been raised about the company having to “pick a side” when faced with increasingly strict government regulations, as well as economic pressures from global competitors like Amazon as well as local startups like PinDuoDuo. Furthermore, the company’s positive performance on the stock market in spite of the US-Sino trade war is largely due to rapid local expansion and a lack of anti-trust regulatory laws, and demonstrates its growing reliance on maintaining a positive relationship with Beijing. It is important to note, however, that Alibaba is leading a withdrawal of investments in US start-ups. This is a result of increased scrutiny of foreign deals since 2018, and symptomatic of the increasingly hostile US-Sino trade war. Analysts thus worry that any steps taken to cosy up to the Chinese government may push Alibaba away from the global market, and the company’s alleged abuse of its market power may cause it to lose favour with the CCP either way, resulting in lesser benefits conferred.

Regardless, Alibaba remains a sizeable market force with or without the backing of the CCP, and to ignore any changes it effects on the region and the rest of the world is folly. The company’s inextricable link with the CCP means that the future of the conglomerate relies on the geopolitics in the region and elsewhere. Most, if not all, companies who wish to expand their influence into the Asian continent now need to pay close attention to the pressures that Alibaba and the CCP exert on each other so as to decide on their courses of action.

Next: Amazon – should Bezos care more about his workers?

I would like to take this opportunity to explain a bit more about IPOs and Market Valuations, a couple of terms that may confuse first-time readers. In laymen terms, Initial Public Offerings, or IPOs, are public offerings where shares of a company are sold to the public in order to - among other reasons - raise funds for the company. These shares are listed on one or more stock exchanges to enable their sales. Market Valuations refer to the price which an asset would be traded at or sold for. Saudi Aramco having a market valuation of US$1.7 trillion, for example, would refer to the selling or trading of the company for US$1.7 trillion or an asset of equivalent value. Hopefully this helps to clear up any confusion!

By Ronald Poh