Alibaba and the business of trust: A case study -By Anisha Dhawan from GLIM Chennai

In September 2014, Alibaba was all over the news for the launch of the world’s biggest IPO. Today, the company has come far and wide, making it to the top 10 largest companies by Market Capitalization surpassing Facebook and has spread its wings into all major markets of the world. And Jack Ma, the founder, has become a household name. 

Since Alibaba’s inception in 1999, the e-commerce platform has experienced great growth. It has expanded its ecosystem over the years to accommodate technological innovations and has created new sectors of online businesses, leading to an overall revolution in China’s retail sector. In today’s day and age, Alibaba is not a mere online commerce company. It is a combination of all functions related to retail, an amalgamation of the work done by eBay, Amazon, PayPal, FedEx and Google to say the least.   

In simpler words, China’s local e-commerce brand ‘Alibaba’ has managed to turn into a conglomerate and take over the majority of the Chinese market with its platforms — Taobao & Tmall.

Laying the foundation of Alibaba

The gates of Alibaba had opened at an opportune time. The winds had changed. Revolution was just around the corner. Customers had started liking the idea of online shopping for services and goods by the start of the 21st century which led to a major change in the shopping patterns. People no more had to take a bus or get in a cab to hit the mall and find items at discounted prices.

Emerging websites like eBay and Amazon were making it easy for consumers to spend their dollars on retail. This was when Alibaba made a grand entry into commerce-starved China that had millions of consumers loaded with money to spend in retail. 

The story of Alibaba is one of a vision fulfilled by a common man - Jack Ma, a former school teacher, who brought a major change in the way we buy goods and services. Founded in the year 1999, Alibaba kick-started in a small apartment in Hangzhou, China, that today holds the 31st rank in the largest public company in the world on the list of Forbes Global 2000 2020.

Jack Ma had a real-world vision of creating a China-based e-commerce company that has the capacity to deliver to the 730 million internet users of the country on an efficient and timely basis. With a goal in hand, he spearheaded a group of 18 pioneers towards an initial goal of leveraging the power of the wholesale internet marketplace. 

Ever since then, the company has witnessed an upward curve. Post the initial launch of its website that helped small Chinese entrepreneurs, manufacturers and exporters to sell internationally, Alibaba Group has emerged as a global leader in mobile and online commerce. 

How Alibaba captured the Chinese market

Companies like eBay and Amazon came to China with deep pockets, prior to their experience in the US and Europe and a reputation for success, but could not hold firm ground in the Chinese market. What makes Alibaba a success story is how it adapted its business model to the Chinese reality and addressed a lingering issue at hand. By solving the trust deficit between sellers and buyers, it built an environment of mutual trust which lacked in the models of the western companies.

Trust was a crucial issue faced by China due to the lack of an effective means of dispute resolution, especially when e-commerce customers were prone to fraud in the form of product/quality offered, transactional fraud and delays in delivery. 

Alibaba managed to drill down the issue of financial security for its buyers and sellers. As a means to facilitate secure transactions it incorporated an escrow into its online payment system ‘Alipay’ — which provided a unified platform and solved concerns regarding transactions. Alipay would hold the money until the buyers received their products. As for the merchants, they knew that the money was for them to collect as soon as they sent the product. Alipay’s role was pivotal in cultivating the habit of online transactions among Chinese customers. 

Another issue faced by western companies that came to China was the assumption that they’d be able to capture the Chinese market successfully without additional efforts. But if given a chance to Chinese consumers to choose between foreign and domestic brands, they would blindly pick the latter. And even though the business strategies are witnessing a change in China today and businesses are heading into the global sphere, Chinese consumers still tend to prefer big brands which have had a long, well-established presence in their country.

Information asymmetry and Alibaba’s business model

Lack of information between two parties while conducting trade is called ‘Information Asymmetry’. Almost all economic transactions involve some form of information asymmetry and it typically arises when the seller of a service or product possesses greater knowledge than the buyer. Although unavoidable, information asymmetry can be exploited and often leads to — Adverse Selection & Moral Hazard. 

‘Adverse Selection’ occurs due to unequal information between buyers and sellers which eventually distorts the market and leads to market failure. Whereas ‘Moral Hazard’ is the tendency of the better-informed party to exploit its advantage in a dishonest way. A common term in the insurance industry, it played a big role in the financial crisis of 2008.

eBay EachNet in China did not encourage communication between buyers and sellers unless a sale had been confirmed. The buyers were unsure about the products and bargaining (a common habit in China) wasn’t entertained either. Taobao on the other hand enabled both buyers and sellers to communicate and haggle in real-time using ‘Aliwangwang’ — software which enables contact with Taobao sellers whenever and wherever.

E-commerce has led to an enormous increase in transactions which take place under ‘Information Asymmetry’. This brings us to a crucial question — How integral is trust in trade?

Market for Lemons

Alibaba’s accurate credit model helped build a trustworthy relationship between the two parties. All sellers are requested to pass an online test to verify their identity and prove legitimacy. This helped buyers choose more reliable sellers for their transactions, giving them the space to negotiate and trade. In addition, the system built encouraged online feedback for sellers. Buyer reviews were rewarded with discounts and offers which helped in improving the selection and purchase experience of customers drastically.

The rise of Alibaba can be attributed to its local knowledge and the dynamics of Chinese society. The company was sensitive to business opportunity and succeeded in addressing the issue of ‘Market for Lemons’ by solving trust issues between millions of buyers and sellers. With increased market transparency and greater access to information, Alibaba has reached a peak of customer loyalty in China.

This article was co-authored by Anisha Dhawan, in response to D2C Business Sagas. If you'd like to submit your story, click here.