Alibaba: How Big a Deal Is It?

Alibaba insists that its success has been the result of smart business decisions and market acceptance rather than connections at the highest levels of the Chinese Communist Party (CCP). That may be true: anyone who has lived and worked among Chinese born after 1980 knows the deep appeal of Alibaba's e-commerce platform Taobao and its payment solution Alipay for this massive market. And "guanxi" (read, roughly, as "connections") has never been an ironclad guarantee of success: there are numerous examples of Chinese companies that relied on connections as their competitive mojo, only to fail spectacularly.

Unfortunately for Alibaba, perception counts more than the truth. This is the case everywhere, but in China, corporate opacity, weak securities laws, cowed auditors, and a shackled press corps allows Chinese companies in particular to manufacture and hawk without rebuttal their own versions of "the truth." The result is a populace—and a corps of outside observers—for whom plausible rumor and innuendo rings more genuine than a story in the nation's largest newspaper.

The scions of China's Party elite, (the guan er dai) and the children of China's wealthiest citizens (the fu er dai) are collectively both envied and reviled in China. If members of those circles are among those who profit most from Alibaba's IPO, it will appear to an increasingly jaded Chinese public that the company has relied on its connections to a far greater degree than it acknowledges.

After such an offering, speculation would grow about Jack Ma's residual ties to the government and the company's relationship with Xi Jinping's administration. Analysts would cast a revisionist eye on the company's history, seeking out the critical junctures where it simply have been government help that allowed Alibaba to beat eBay, Paypal, Amazon, and a legion of local competitors. It is, after all, far more comforting to ascribe the extraordinary success of others to special privilege than it is to think that they were faster, smarter, and better than we. And in a nation where special advantages have been at the heart of so many successful enterprises, it is somehow far more convincing than a singular Horatio Alger story with Chinese characteristics.

But does it matter? Even if the worst happens—even if Wall Street and the Chinese people believe that Alibaba succeeded because of its connections—the juggernaut is unlikely to be slowed. Taobao and Alipay have market positions akin to public utilities in China, key parts of the life infrastructure of two generations of Chinese people. Investors, rather than be deterred by the prospect of strong government support, will be encouraged by it. The only thing that could impede Alibaba now would be for the Xi administration to cast its anti-corruption beacon on the company and its investors. There is only one person in the world who knows whether that will happen, and he seems busier promoting China's Internet giants than hobbling them.

The New York Timeshas won plaudits (including a Pulitzer) for highlighting the role that the sons and grandsons (and indeed daughters and granddaughters) of senior Communist Party elders in China play in brokering commercial contracts and regulatory exemptions or securing significant equity stakes in high profile companies such as Ping An Insurance.

In a July 20 article entitled “Alibaba’s I.P.O. Could Be a Bonanza for the Scions of Chinese Leaders,” the Times attempts to paint Alibaba with the same brush.

But there is a big difference between the “Know Who” companies in China that have emerged within monopolistic sectors such as finance, insurance, or energy overseen by the State (and Communist Party) and a “Know How” company such as Alibaba founded and run by entrepreneurs who have discovered and built on a competitive advantage in the marketplace.

The article spends a lot of time looking at the “quid” but in my opinion fails to make a case of any “pro quo.”

First the “quid”: the September 2012 transaction that saw existing significant shareholder Yahoo sell down half of its (then) $7.6 billion stake in Alibaba Group to purchasers including what the Times highlights as “notably China’s sovereign wealth fund and three prominent Chinese investment firms.”

The Times faults Alibaba for not detailing “the deep political connections of the investment firms.” Yet the “princeling” credentials of the firms were widely known at the time, and the firms’ names detailed in the press release.

So much for the “quid”: three politically connected companies joined an investment round in Alibaba in 2012 led by China’s sovereign wealth fund CIC. They each hold small stakes, ranging from 0.47% to 1.1% of the common equity of Alibaba Group as detailed by the company in a Weibo post last week. They and other investors in that round are poised to reap large returns in the coming IPO.

What about the “pro quo”? The Times article asserts that for these shareholders their “sway may be significant even if their stakes are not.” So is Alibaba benefiting in turn, other than from their support of the September 2012 financing, from allowing these firms to join the ranks of their shareholders? Here the article fails to connect the dots.

The article quotes analyst Anne Stevenson-Yang from J Capital Research as follows “[Alibaba’s] got so many different allies across so many different ministries.” But the article fails to detail the allies or the ministries involved.

And that’s pretty much it in the article for the “pro quo” camp. Yet we are told that “the situation raises questions about the transparency and operations of Alibaba, which is set to go public in the United States in the coming months.”

Meh.

As David Wolf points out in his excellent post here, “it is ... far more comforting to ascribe the extraordinary success of others to special privilege than it is to think that they were faster, smarter, and better than we. And in a nation where special advantages have been at the heart of so many successful enterprises, it is somehow far more convincing than a singular Horatio Alger story with Chinese characteristics.”

Alibaba’s origins are as far from a “know who” company as one can get in China. The company’s founder was born into a no name family, went to a no name school, and chose a no name profession (teaching). But in building a “know how” company—effectively designing and building the architecture of trust (but verify) that underpins all consumer e-commerce in China—Alibaba has become the object of many people’s affections, including of those in power.

As the company grows from its origins in e-commerce into new areas such as financial services and media and entertainment, investors certainly are advised to judge management for its ability to capture new opportunities rather than be captive to those who set the rules.

But in consumer e-commerce in China, Alibaba has achieved such a scale today that it is beholden ultimately only to its customers for its continued success. And so it should be.

Following is an excerpt of Alibaba's reply to The New York Times' July 20 story. The reply was sent in Chinese only via the company's weibo microblog account. Alibaba did not reply to email inquires about why its reply to The Times was published in Chinese only. The company is now in its traditional "quiet period" before a U.S. listing, when Securities and Exchange Commission rules dictate limited communication with potential shareholders.

Today, The New York Times published a story that inaccurately portrayed some of Alibaba’s shareholders and made inferences about them that exhibited obvious personal bias. We strongly oppose these personally-motivated inferences, as well as the other theories about Alibaba’s investors that are constantly circulating in the media.

We understand that international media outfits tend to impose their own suspicions and judgments onto Chinese society and Chinese companies. But the international community should come to terms with the fact that there can be, and have already been, a handful of large international companies in China that grew naturally out of the market, and that truly do serve the market.

We have expressed our gratitude and respect toward the market era on numerous occasions. We’d like to take this opportunity to reiterate our position: The market is our only “background.” As for the foreign media’s insinuations about the background of our investors, we’ve never relied on such connections in the past, we don’t now, and we never will in the future.

In addition, we wish to emphasize once more that all information disclosed by Alibaba is in strict adherence to the rules and principles laid out in our IPO prospectus. We strive at all times for openness and transparency in our operations, and we fulfill our legal duties in an effort to realize those goals.

—Alibaba Group

(Translation by Austin Woerner)