Corporate Social Responsibility / Human Resources / International Business / Organizational Strategy

Red Flags Around Alibaba

alibaba

The Chinese online merchant company, Alibaba, has Wall Street enthralled as the group obtained the largest global IPO ever with nearly $25 billion. On 11/11, Veteran’s Day, satirically known as “Singles’ Day” in China, Alibaba set a record on China’s largest online shopping day as its marketplaces hosted $9.3 billion in sales (1, Osawa). Alibaba’s growth depends on the large mobile and Internet user bases, which serves as a foundation. Its success depends largely on its business model.

Alibaba’s success is a combination of Taobao and Alipay. Taobao, which serves as a platform for sellers and shoppers to find each other, is favored by its users because the site does not charge transaction fees. Yet Taobao still manages to generate a lot of revenue because its 7 million online merchants spend money on ads to make their products more visible (2, Osawa). Alibaba is now worth more than Walmart due to the increasing number of users shopping online and on smartphones. According to Vice Chairman Joseph Tsai, Alibaba added 29 million mobile users during the past quarter which is a sum larger than the population of Texas (3, Osawa). Alipay, the main payment option, has played a significant role in supporting the process of such massive amount of transactions online. The 210% year-over-year increase in transactions through Alipay indicates Chinese consumers’ confidence in the system.

With these factors, Alibaba made history the second time this year. However, a question still exists about whether Alibaba can maintain sustainable growth, originating from its unusual corporate structure. Different from typical U.S. public companies, Alibaba allows its partners to control the board of directors, rendering shareholders very little influence. The founder Jack Ma and his partners control the company even though they only own tiny shares of the company. It brings up the issue that Adam Smith mentioned in the Joint Stock Trading Company.  Ma cannot be expected to watch over Alibaba with the same anxious, vigilance watch over his own business. The flaw in a top-heavy leadership structure is that one man may be overpowering. This structure is very dangerous because shareholders can be easily overruled on making decisions which may devastate the relationship between the company and its investors.  After the record-breaking $9.3 billion of goods sold on China’s Singles’ Day, Jack Ma planned to make Alipay public in the future. Whether or not this strategic move is profitable to the company, it will be Jack Ma’s decision. In fact, Jack Ma split the Alipay payment service from Alibaba and moved it to a different firm, which he controlled without board approval. In the end, although the board negotiated a settlement, trust has been weakened because of Ma’s arbitrary decision.

This is not the only conflict among stakeholders caused by this structure. Alibaba’s quarterly profits, ended in September, fell by 39% even though its quarterly revenue rose by 54%, because the company rewarded its employees and executives, in an attempt to hold on to them (3, Osawa). As we know, stakeholders engage in market transactions with the firm as it carries out its primary purpose of providing society with goods and services. In other words, employees, stockholders, suppliers and customers are all stakeholders. Although stakeholders are not equitably powerful, they should be treated equally. As Alibaba cares about its employees’ interests more than other stakeholders’, it failed to realize the interconnectedness of stakeholders.

Alibaba only turned to NYSE after its failure in Hong Kong since regulators stopped insisting that shareholders should be in charge. When Alibaba went public in Hong Kong in 2007, the stock price hit an all-time high but the gauge had slumped 55 percent by the end of 2008. Jack Ma ended up delisting the Hong Kong marketplace in 2012 as stocks languished nearly 40 percent below its peak (4, Nishizawa).

When shareholders’ rights are overshadowed by powers of a small group of insiders and when only one man or a group of few people is making the decisions, stakeholders lose their trust in the company. To simplify the Alipay situation by framing it, Ma responded: “Trust”, when asked about how investors should cope with Alibaba’s risks. Ma was trying to distract people’s attention away from the management issues of the company. However, stakeholders lost their trust because of the way Ma has been supervising the company. Thus, Ma and Alibaba should put in an effort to construct a better way of management to gain stakeholders’ trusts again.

Ren Wang


Sources:

  1. Osawa, Juro. “Alibaba Establishes Singles’ Day Record.”The Wall Street Journal. Dow Jones & Company, 11 Nov. 2014. Web. 11 Nov. 2014.
  2. Osawa, Juro. “How Does Alibaba Make Money?”Digits RSS. N.p., 9 Sept. 2013. Web. 12 Nov. 2014.
  3. Osawa, Juro. “Alibaba Revenue Lifted by User, Mobile Growth.”The Wall Street Journal. Dow Jones & Company, 4 Nov. 2014. Web. 12 Nov. 2014.
  4. Nishizawa, Kana. “Jack Ma Times Market Selling Second Alibaba IPO in Rally.”com. Bloomberg, 2 Sept. 2014. Web. 12 Nov. 2014.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s