Why Alibaba’s IPO will make it the next global tech powerhouse

In 1999, when Jack Ma gathered together the small cadre that would form the core of Chinese online retailer Alibaba into his small, Hangzhou apartment, no one would have mistaken him for a general. Standing a little over five feet tall and dressed in an ill-fitting blazer with a collared shirt buttoned to his Adam’s apple, Ma more closely resembled an eccentric English teacher—which he was. But when he spoke, he sounded like a man sending troops off to war.

“If we are a good team and know what we want to do, one of us can defeat 10 of them,” Ma blared. “Them” in this case referred to American tech firms. “We can beat government agencies and big famous companies because of our innovative spirit.” It was a bold proclamation for a man armed with only $60,000 and scant Internet experience. But Crazy Jack, as he would soon be known, was right.

Fourteen years later, Alibaba Group Holding Ltd. has burst out of Ma’s apartment to become the world’s largest online retailer. In 2012, two of Alibaba’s platforms processed more than US$160-billion worth of goods, more than Amazon and eBay combined. Around 80% of all online consumer purchases in China are made through Alibaba. Analysts can’t seem to agree on a valuation for the company, except that it’s a big one. Mark Mahaney, a tech analyst for RBC Capital Markets, recently pegged its worth at $150 billion. That makes it the third-most-valuable Internet company in the world, after Google and Amazon.

With an initial public offering around the corner that’s likely to dwarf Facebook’s piddly $104-billion initial public valuation, 2014 will be the year Alibaba begins to transform itself into a truly global company. It’s rumoured to be eyeing a listing on a New York stock exchange, another step toward becoming a crucial gateway for western companies looking to reach China’s massive consumer market. “Alibaba cannot be underestimated. It’s enormous,” says Rob Sanderson, an analyst at MKM Partners. Alibaba has the scale, expertise and financing to take on American giants outside of China, and its unique approach to online retailing gives it a head start in other developing countries.

But what exactly is Alibaba? “It’s almost offensive how many people said, ‘You guys are like the eBay of China,” says Porter Erisman, a former Alibaba VP and the director of a documentary about the company. It’s true that commentators fumble around for American analogs, and they don’t stop at eBay. It’s been called the Amazon of China, the Google of China and the PayPal of China.

The reality is, Alibaba is all of those companies. It started with business-to-business site Alibaba.com, an eclectic online marketplace that mainly connects small and medium-sized Chinese manufacturers to international buyers. As it grew, it became an increasingly important tool for vendors outside of China as well. “You will have people in Canada buying things from sellers in India, or someone in Kazakhstan buying from someone in Nigeria,” says Erisman. Say, for instance, you operate a large clothing chain in Calgary and are looking for a new line of jeans. You’ll find an endless number of suppliers on Alibaba.com. Thousands of Canadian businesses use it to find buyers for their own goods, too. Do Lobster Ltd. in Nova Scotia, for instance, advertises live lobster in bulk (only a 3%-5% mortality rate) to international buyers.

Not content with the success of Alibaba.com, Ma pushed the company into new realms. Alibaba created Taobao.com in 2003 for consumers to sell to one another, a direct threat to eBay. The auction giant charged a fee for listing, so Ma recruited vendors by offering his service for free, making money through advertising and charging sellers for better placement on its sites. By the time eBay abolished its fees in desperation, it was too late. The U.S. tech giant essentially abandoned China in 2006.

Alongside Taobao is Tmall.com, which allows established brands to sell directly to consumers. Together, the two platforms are massive. Consider that total U.S. sales on Cyber Monday in 2012 reached $1.5 billion, according to data from Bloomberg. Alibaba’s sales on Singles’ Day, a modern Chinese celebration held around the same time as Cyber Monday, totalled $3 billion.

The payment backbone on Alibaba is Alipay, which accounts for about half of China’s online payments market. The company now issues loans to entrepreneurs and small businesses, helping to establish more vendors to sell through its sites.

The company’s pending IPO means Alibaba will be under pressure to accelerate its growth and eventually boost its international efforts. Ma has long harboured global ambitions, and there are signs the company is acting on them. In October it led a $206-million investment round in ShopRunner, a U.S. company that competes with Amazon by partnering with retailers to offer free two-day shipping to its members, who pay a fee for the service. Alibaba hasn’t said much about why it invested, but has called the U.S. market “interesting.” Alibaba could be looking to offer Chinese companies a way to reach the U.S. through a more established name.

“Almost everything you buy today is made in China, and Alibaba’s existing businesses already support a huge array of Chinese manufacturers, wholesalers and retailers,” according to Mark Natkin, founder of Marbridge Consulting in Beijing. “Now it simply needs to connect these players more directly with western retailers and consumers.” ShopRunner, or future acquisitions and partnerships, could ultimately prove to be such a gateway. The investment—and the seat Alibaba snagged on ShopRunner’s board—will also allow it to glean a lot more insight into the U.S. online consumer. “If you’re Alibaba, you want to probe and find out more, and use it as a learning experience,” says Martin Pyykkonen, a tech analyst at Wedge Partners. Alibaba could then apply these lessons to its own properties.

It already has an English-language retail site called AliExpress. It’s not nearly as popular as its China-centric counterparts, suffering from poor shipping and payment arrangements. Alibaba is clearly eager to expand, however, and signed an agreement with MasterCard last year to better facilitate cross-border payments. Expect Alibaba to make more such partnerships down the road.

“AliExpress could be a strong competitor to eBay over time if hassles in international shipping and payments are gradually eliminated,” says Julia Zhu, founder of Observer Solutions, a China market research and advisory firm. The main attraction for consumers is price. Because vendors typically sell direct and not through a middleman, the goods are cheap. You can find men’s suit jackets for less than $15, for example. The products could be of dubious quality, though. Alibaba’s sites have a reputation for being rife with counterfeit merchandise. (If you’re in the market for cheap “Calvin Kleine” T-shirts, then AliExpress is for you.)

Alibaba’s best bet for international expansion is probably not North America but everywhere else. Last year it made all of its products available in Hong Kong, Macau and Taiwan. Countries like Singapore and Malaysia, with large numbers of Chinese speakers, now look ripe for the picking. Emerging economies in Africa and Latin America are also promising, where underdeveloped financial systems could allow Alipay to become the dominant online payment system.

Alibaba’s experience in overcoming Chinese consumers’ distrust of online commerce should also help as it expands into other emerging economies. Among its innovations have been a third-party verification process to vet sellers’ claims and a chat function so buyers can talk to sellers in real time. Alipay is also an escrow service, so payment isn’t released to vendors until buyers indicate they’re satisfied with the quality of the goods. The company doesn’t have to grow organically, either. “It is an extremely cash-rich company that could easily gain a large position in other markets through investments or acquisitions,” says James Roy, an associate principal at China Market Research Group in Shanghai.

As Alibaba considers tentative steps abroad, it’s also becoming a crucial link for western retailers coming to China. Because of Tmall’s popularity, it’s far easier and cheaper for foreign brands to buy exposure on the site rather than start from scratch. Chinese consumers don’t even look for products through a search engine; they go straight to Tmall. Adidas, Pampers and Canada’s own Roots now have dedicated pages on Tmall. A spokesperson for Roots declined to comment, other than to say its Tmall presence is a “preliminary test to help determine whether we decide to develop this further.” Tmall alone is set to surpass Amazon in 2015 to become the world’s biggest online retailer, according to Euromonitor, so any company would be foolish not to consider partnering up.

There is still plenty of room to grow at home, too. More than half of China is still not connected to the Internet. But Alibaba needs to improve its shipping processes first. Unlike Amazon, Alibaba doesn’t ship products itself, instead depending on Chinese infrastructure, which is spotty at best. That means you can often expect a package to arrive in weeks, not days. To change that, the company has launched a consortium through which it promises to invest $16 billion in Chinese logistics over the next eight years, with the hope of making same-day delivery anywhere in China a reality.

Ma, the company’s quirky but driven founder, will not be the one leading Alibaba’s next chapter, though. He stepped down as CEO last year. (He remains as executive chairman.) The aggressive entrepreneurial spirit he instilled in the company, however, will ensure you’ll be hearing a lot more about Alibaba this year—and keep its foreign rivals watching with trepidation.