Business Malvika Sriniwasan Technology

Amazon versus Alibaba: The Disruptive Innovation War

In the ultimate battle to conquer the e-commerce industry globally, who is doing it better, Amazon or Alibaba?

By: Malvika Sriniwasan

In the ultimate battle to conquer the e-commerce industry globally, who is doing it better, Amazon or Alibaba?

In our fast-paced, dynamically progressive world, technology steps in as a giant catalyst. Rapidly changing technology paves the way for a world dominated by AI and machine learning, along with platforms for businesses to work virtually from any location. With technology, businesses can gross large profits simply through a few clicks of the keyboard. The e-commerce industry, for instance, has boomed with developments in technology, and two dominating firms have risen to power, providing healthy competition to each other every second. You’re probably wondering – two? The first name that most probably popped up in your head was Amazon, the e-commerce & cloud computing venture that made Jeff Bezos the world’s richest man. In  close competition to Amazon is the Alibaba Group – founded by Jack Ma – a Chinese multinational conglomerate participating in e-commerce, retail, AI, and technology. These two companies have been – and continue to be – engaged in the battle of disruptive innovation to conquer the tech world, racing to monopolize the e-commerce industry globally. So, in this battle, is there even going to be a winner? And if so, who is it going to be?

History

Amazon started off as an online bookstore in 1995, selling books all over the United States and 45 other countries. Soon, in late 1995, Amazon went public with an IPO, debuting at $18 a share, and setting Amazon’s market value at 438 million USD. In 1999, Alibaba started off as an online commerce company within China as a B2B (business to business) portal to connect Chinese manufacturers and Western businesses. The Alibaba Group soon diversified and launched 2 main portals to conduct its transactions: the Taobao Marketplace and the Taobao Mall (Alibaba.com), discussed later. Alibaba went public as late as 2014 with an IPO debuting at $92.70 a share, with Alibaba’s market cap reaching a world record high of 25 billion USD.

Business Model, Philosophy, and Profitability

While examining the key differences between the two tech giants, one could posit that the stark contrast between the two lies in the philosophy of their business models. On the one hand, Amazon is an entirely consumer-centric retailer – its goal is to continually globalize its branded marketplace by tending to consumer needs. In its initial stages, it was an effort to bring the “Walmart economy” online – a cost-saving venture for consumers worldwide. Amazon, unlike Alibaba, owns warehouses all over the world in order to facilitate transactions. Its success lies in its ability to gather data on sellers in order to improve its brand roll-outs. Alibaba, on the other hand, is a platform for brands – its ideology lies in bringing collective entrepreneurship online, turning vendors who list their products on Alibaba.com into microentrepreneurs. It places special importance on preserving the intellectual property of brands and businesses. However, Alibaba diversified into a business to business (B2B) and business to consumer (B2C) e-commerce venture by launching the Taobao Marketplace and Taobao Mall respectively. The Taobao Marketplace has a business model similar to eBay, allowing SMEs and consumers to list products and merchandise online for sale. The Taobao Mall is a B2C portal allowing businesses and large brands to sell to consumers directly. It is interesting to note that Alibaba charges minimal listing fees to its vendors, and has no operating warehouse costs, in contrast to Amazon. Who knew acting as a middleman can be so profitable? While Alibaba has low operating costs and a large market presence, and Amazon has a large market capitalization, how are they really making profits, and who is doing it better?

Let’s begin with sales. As of June 2018, Alibaba’s market cap stood at USD 542 billion. Its sales surpassed that of Amazon, eBay, and Walmart combined. Amazon’s market cap, however, stood at USD 814 billion, but it has large operating costs, a larger employee force, warehouse costs, to name a few. Alibaba has taken advantage of developments in technology and has successfully escaped many of these maintenance costs, and continues to establish its market presence. This is evident in the two company’s operating margins, which shows the amount of revenue available to cover additional costs. According to Yahoo Finance, as of 2017, Alibaba’s operating margins stood at 32.68%, while Amazon’s lay at 2.31%. Additionally, China is the largest Internet market in the world, twice that of the United States, and it thus successfully grosses healthy profits. In 2016, Amazon accounted for 53% of online sales growth, meaning it took 53 cents out of every new dollar Americans spent online, while Alibaba accounts for a large proportion, approximately 80%, of online retail and sale within the Chinese economy alone. It is interesting to note that along with extra costs Amazon is burdened with, its market strategy is based on lowering its prices in order to undercut its competition and gain market share. This is known as predatory pricing, a monopolizing strategy Amazon has successfully mastered. Alibaba, however, matches Amazon’s numbers without hurting other companies, rather it benefits many small business and microentrepreneurs with its B2B and B2C portals.

Secondly, cloud computing proves to be the hidden driver of profits for the two companies. Amazon’s cloud computing service, Amazon Web Services (AWS), provides wide-scale cloud computing, IT, data storage space, with high levels of computing power. Contrary to popular belief, it is AWS that nets higher profits for Amazon, rather than its retail services. Some of the world’s largest names and enterprises such as Netflix, Coursera, Kellogg’s, General Electric, Unilever, Dow Jones, and Adobe, use AWS for daily business. Alibaba, on the other hand, also has its own cloud computing services that are largely used in China. Due to the difference in geographical dominance, Amazon’s market cap sore higher than Alibaba. Alibaba Cloud has not expanded to the extent AWS has globally, but its CEO reveals its plans to accelerate the presence of Alibaba Cloud worldwide, along with the introduction of patented AI chips that would have the capacity to store massive amounts of data.

Additionally, the two companies engage in the battle of disruptive innovation by introducing subsidiaries to their brand name. Amazon, for instance, has introduced Amazon Prime, a strategy incentivizing customers to hop on the bandwagon to receive promising impressive and better service, improved product quality, and larger variety. Along with that, Prime Video – a large competitor to Netflix – , Prime Day Sale, and Amazon Go, to name a few, are additional profit drivers for the firm. On the other hand, Alibaba nets its largest profits on ‘Single’s Day’ (11/11), an extremely popular discount and sales day for Alibaba customers. In addition, it has features like AliPay, AliMusic, Alibaba Pictures, AliHealth, AliSports, taking advantage of China’s economic policy that protects their specialization and maintains a controlled open economy, thus allowing Alibaba to monopolize in several industries within China itself, making it extremely profitable.

Geographical Presence

Geographical presence is a key determinant in marking a company’s global presence. Amazon is dominant in the United States and many other countries worldwide, while Alibaba dominates the Chinese market, and is present in some other countries as well. Amazon China, interestingly, is not a direct retail website introduced by Amazon, due to Chinese economic protection policies; joyo.com, a Chinese online shopping website was acquired by Amazon and renamed as Amazon China.

While Amazon is acquiring, Alibaba is investing. Amazon, in its effort to globalize its brand, is acquiring many diverse companies all over the world, many in the consumer-centric online industry; Alibaba, however, has a minority stake in a wide array of companies in the US, China, and many others, and is investing aggressively in an effort to expand by growing its subsidiaries to dominate to the world e-commerce industry. Alibaba has recognized its need to invest money in countries outside South East Asia, and Ma has reportedly said that these investments will soon see the light of day. Considering the global influence of the two giants in the marketplace along with the boom of AI and data technologies, it will be an interesting competition to follow; will China’s large internet market be the boost for Alibaba to expand the presence of its cloud services? Will Alibaba take down the developing Amazonian monopoly? Or will Bezos’ business strategy and investments take over not only the e-commerce industry, but many other industries worldwide?

Works Cited

Image Source: https://www.boldbusiness.com/digital/amazon-vs-alibaba-retail-war/

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Dunne, C. (2018, September 25). Amazon Vs Alibaba – Who is Winning? Repricer Express. Retrieved from https://www.repricerexpress.com/amazon-vs-alibaba-winning/

Kharpal, A. (2018, November 08). Alibaba aims to make cloud computing its ‘main business’. CNBC. Retrieved from https://www.cnbc.com/2018/11/09/alibaba-ceo-says-cloud-computing-will-be-its-main-business-in-future.html

Laubscher, H. (2018, July 12). The Prime Difference Between Amazon And Alibaba. Forbes. Retrieved from https://www.forbes.com/sites/hendriklaubscher/2018/07/12/the-prime-difference-between-amazon-alibaba/#732a6afd3c47

Macrotrends. (2018). Amazon PE Ratio 2006-2018 | AMZN [Data file]. Retrieved from https://www.macrotrends.net/stocks/charts/AMZN/amazon/pe-ratio

Macrotrends. (2018). Alibaba PE Ratio 2011-2018 | BABA [Data file]. Retrieved from https://www.macrotrends.net/stocks/charts/BABA/alibaba/pe-ratio

Mourdoukoutas, P. (2018, May 07). Why Alibaba Is More Profitable Than Amazon. Forbes. Retrieved from https://www.forbes.com/sites/panosmourdoukoutas/2018/05/06/why-alibaba-is-more-profitable-than-amazon/#670950201678

Wootton, B. (2017, January 26). Who’s Using Amazon Web Services? Contino. Retrieved from https://www.contino.io/insights/whos-using-aws

Youderian, A. (2017, July 18). Alibaba vs. Amazon: An In-Depth Comparison of Two eCommerce Giants. eCommerceFuel. Retrieved from https://www.ecommercefuel.com/alibaba-vs-amazon/

 

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