This article is by Mohanbir Sawhney, professor, and Sanjay Khosla, senior fellow, at Kellogg School of Management. They are the authors of Fewer, Bigger, Bolder: From Mindless Expansion to Focused Growth.
Move MOVE +1.29% over Amazon. There’s a new e-commerce leader in town. With its triumphant $21.8 billion initial public offering, Alibaba has eclipsed Amazon as the largest and most valuable e-commerce company in the world. In fact, based on the first day of trading, Alibaba is more valuable than Amazon and eBay combined. Alibaba’s vast e-commerce empire encompasses wholesale, retail, group buying, and payments. It has also been aggressively investing in startup firms, shelling out $8 billion just in the past six months. Alibaba’s charismatic founder, Jack Ma, has made no secret of its global ambitions. Alibaba is knocking on Amazon’s doorstep in the United States and Europe. Meanwhile, Amazon is making efforts to expand its small presence in the lucrative Chinese e-commerce market.
As these two titans of e-commerce cross borders, who will win the global e-commerce war? Will Alibaba become a viable competitor for Amazon in the West? Will Amazon be able to compete on Alibaba’s home turf? The battle is just beginning, but we can make some predictions about how it may play out by looking at the similarities and differences between Amazon and Alibaba.
At first glance, the companies seem to have a lot in common. Both companies focus on helping people buy a vast variety of products at low prices without stepping into a store. Like Amazon, Alibaba has built up a massive customer base and data infrastructure and has emerged as the dominant player in its home market. But the similarities end there. Alibaba is not a traditional e-commerce company. It operates an “open marketplace” that connects buyers with sellers. It has created an e-commerce platform that helps small businesses as well as branded manufacturers reach consumers. It does not sell anything directly and does not own any warehouses. As a result, Alibaba is vastly more profitable than Amazon, with margins of almost 40% and earnings of almost $2 billion in the most recent quarter, according to its IPO filing documents.
In contrast, Amazon operates a “managed marketplace” that is closer to traditional retailing. It owns massive distribution centers, sells a majority of its products directly, and even manufacturers its own brands of smartphones and tablets. Amazon’s model gives the company far greater control over the customer experience and has allowed it to build a storied reputation for customer service. The downside: It has to make massive investments in infrastructure, employ legions of people, and operate on a wafer-thin profit margin.
Both Amazon and Alibaba have built e-commerce platforms uniquely suited to their home markets. Alibaba has a deep understanding of Chinese consumers and of nuances in terms of tone, approach, and product variety. The company has mastered the intricacies of Chinese regulations and how to work with state and national governments. Conversely, Amazon is a master of logistics and supply chain management, and it is the world leader in cloud infrastructure services. Its Kindle Fire devices rely heavily on its vast catalog of music and movies and its shipping services as well as its cloud infrastructure. Unlike the iPhone, which is a truly global product, the Kindle Fire tablet and the Fire phone cannot deliver on their value proposition without hooking up with Amazon’s data centers and distribution system.
Amazon and Alibaba will find it difficult to export their finely tuned business models to each other’s markets. Amazon will need billions of dollars and several years to build out its distribution and content delivery infrastructure in China. It will have to engage in a costly battle for market share against a firmly entrenched competitor that knows its way around China way better than Amazon can ever hope to. Similarly, Alibaba will find it very difficult to compete with Amazon’s strong brand and well-honed supply chain and logistics skills in Western markets.
So how can Alibaba or Amazon conquer the world? They will need relentless focus on their home markets and disruptive innovation to win in their competitors’ markets. Alibaba will be well-served to continue to focus on the Chinese consumer, as the Chinese e-commerce market is still under-penetrated. It should rein in its confusing series of acquisitions and investments and focus them on e-commerce, cloud computing, digital content, and logistics. Flush with IPO cash and a lucrative stock as currency, Alibaba will be tempted to continue its acquisition spree in Western markets. But it should be cautious not to spread itself too thin and stay focused on assembling a coherent set of e-commerce platform assets in the United States and Europe.
The strategy for Amazon in China and India will also need to concentrate on building local market understanding and capabilities. This will require smart acquisitions of local e-commerce companies and a differentiated value proposition. For now, the money and the momentum is on Alibaba’s side, but success on Wall Street does not guarantee success on Main Street in the United States. The one sure winner in this battle of titans will be the e-commerce consumer.