Library / Biographies | Industries

Date of review: June 2021
Book author: Duncan Clark
Вook published: 2016

Alibaba: The House That Jack Ma Built by Duncan Clark (2016)

I was initially hesitant whether to read this book since so much was available online (starting from famous YouTube stories by Jack Ma on how he was rejected 10 times by Harvard and even by KFC - the only rejected candidate out of 24 candidates). But eventually I decided to read it as I wanted to understand Alibaba's investment case better especially after the stock had fallen in 2020 and had been bought by Charlie Munger's Daily Journal. I did not realise that the author knew Jack Ma personally and advised Alibaba during its earlier stage.

An 'Iron Triangle' business model of Alibaba

The book provides a good overview of the business, background on doing business in China, industry landscape and key competitors. It has also quite a detailed portrait of Jack Ma himself as well as background on a few other Chinese Internet entrepreneurs, which I found useful.

Unfortunately, the book was short on the economics of the business model, which is probably the biggest drawback (but I realise it is not a research report). Perhaps, the only other drawback is the lack of unique insights into the business model. There are many interesting facts about the company, its history but less on specific service and how it differs from competitors.

In general, Alibaba's business model is based on an 'Iron Triangle': e-commerce, logistics and finance (Alipay). Unlike, Alibaba deliberately focused on pursuing the asset-light model - bringing two sides on one marketplace and leaving infrastructure heavy services to third parties. Essentially, Alibaba tries to recreate the experience of an oriental Bazaar where customers are pulled into different sides by various merchants with no standard product or service. Very opposite to sleek Amazon look.

As an asset-light model, the core source of revenue for Alibaba is actually advertising, no fees from merchants who only use Alibaba to find customers and have to deal with completing the order (including payments) with their own means. Alipay service is interesting and is way more than just a payment service on a marketplace. It appears to me that, unlike Amazon, Alibaba is much more focused on merchants rather than consumers as it is really a platform for merchants to find buyers. I think it has developed in such a way in many ways because of the realities of China, not sure how easy such a model can be replicated in other markets. I think Amazon's obsession with customers experience (its desire to delight them) leads to better results and financial rewards in the long term.

Clark also discusses what external conditions helped Amazon to rise in China - that is, weak incumbents (awful experience of shopping at former state shops) and expensive real estate in key cities (it was not easy to get hold of a land plot in general as everything was strictly regulated).

According to Ma, there were three reasons why Alibaba survived in the early years

They didn't have money, didn't have the technology and didn't have a plan. It was interesting to read how they took on eBay, which had big plans for China and succeeded. One specific reason was eBay's failure to understand local reality. I think it is an important lesson for analysing cases of local Internet companies and assessing risks of competition with Big Tech. Being global does not give you an automatic advantage.

One of the centrepieces of Alibaba's strategy is the so-called 'Six Vein of Spirit Sword', which includes:

1) Customer first principle;
2) Teamwork;
3) Embrace Change;
4) Integrity;
5) Passion;
6) Commitment.

The book also provides a good case on the role of regulators in EMs. It is interesting that before Alibaba's recent issues (when Jack Ma disappeared for about a month from the public and the company was fined for market abuse), other companies faced similar issues as well as entrepreneurs, including Alibaba itself. In a way, this tells me that recent issues are temporary and will not lead to the demolition of Alibaba's empire. I think this also shows poor communication by regulators and consequent misunderstanding that emerges in the market as it fails to fully understand regulators actions. Often, interpretation by the market creates more problems for the stock than the actual developments.

One serious issue about Alibaba was the previous controversy around Alipay. In 2010, Jack Ma spun it off without letting other key shareholders - SoftBank and Yahoo. I think it allowed Ma to comply with the regulation to obtain the necessary licence, but I am not quite sure why he did it without other shareholders knowing.

Key factors for Ma's success

Finally, even though I considered myself to have good background knowledge of Jack Ma's story, I was still fascinated by his determination, stamina and drive - based on what the book revealed. He had extremely poor final math test results at school and had to take the exam 3 times to be admitted to an average university which mostly prepared future teachers.

Perhaps, key factors for Ma's success was his determination, full belief in his vision and ability to convince others. He managed to hire the right people, motivate them and keep them working in a team. Interesting that he did not hire the best students, rather one level below so they would not be put off by 'dirty', hard work, which was plenty, especially in the early years. One phrase that Jack Ma apparently said often to its employees was this: "Today is brutal, tomorrow is more brutal, but the day after tomorrow is beautiful. However, the majority of people will die tomorrow night".

Alibaba still puts a lot of emphasis on teamwork, including various off-sites, training, team building events, crazy parties and so on.

Lastly, speaking of EM businesses, the book has reminded me how these stocks can be volatile despite overall success - Alibaba's stock first went up more than 50% within just a few weeks since IPO in 2014, before falling 50% and then rising about fourfold within the next 5 years.

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