A brief history of B2B marketplaces : the rise of Alibaba

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Following in the footsteps of Alibaba, several marketplaces came into existence. Some of them building on an already solid network of both sellers and buyers, some of them starting from scratch...

The cornerstone of Alibaba’s success

Alibaba has pioneered B2B marketplaces. Launched in 1998 in Guangzhou by Jack Ma (former english teacher), Alibaba.com started off by enabling Chinese SMBs and wholesalers to find clients overseas.

After a few years, and several rounds of equity funding, the B2B platform became profitable in 2003, paving the way for Alibaba’s diversification in B2C (Tmall) and P2P (Taobao) trade. And even though wholesale currently accounts for 11% of Alibaba’s total sales, it solely due to the sheer size of the other businesses.

In absolute value, the wholesale business brought Alibaba $1 bn in revenues for the fiscal year 2014 alone.

Innovative value proposition

Let’s take a few steps back to understand Alibaba’s value prop.

As China opened up to foreign trade in 1979, a large untapped pool of worker became available to international companies. Before long, China became a popular offshoring destination for manufacturing industries. But China’s regulation was harsh on those enterprises who wished to trade with Chinese partners. under the system of joint ventures, companies were forced to establish an hybrid company.

Of course that was possible to large companies, who had sufficient funds and expertise to develop such a long lasting relationship.

But traditional oversea manufacturers had to resort to the services of import houses, since they couldn’t afford starting production facilities in China. On the other side, SMBs and small entrepreneurs in China, who were not large enough to get noticed by international firms, had limited access to international markets. To those businesses, Alibaba offered a simple, fast and convenient way of finding international buyers, effectively bypassing all the legislative trouble previously mentioned.

Like its rival Amazon, Alibaba chose to monetize its B2B platform by charging commissions on transactions. Moreover, they offer annual subscriptions for sellers willing to fine tune their personal shop (SEO, larger product listings).

However, the two heavyweights of e-commerce differ fundamentally in their approach to partnership. Amazon launched the Fulfilled by Amazon offer, aimed at leveraging their state of the art logistic chain for smaller businesses. Alibaba on the contrary holds no warehouses, and remains a pure platform player, merely providing access to a pool of buyers/sellers.

Growth and success factors

As the platform started growing, new sellers, from outside China, came onboard. That turned out to be extremely beneficial for Alibaba, since they were able to leverage at the same time the plentiful supply from Chinese merchants, but also the demand for international products on the Chinese market. Alibaba has now become a key partner for every B2B seller willing to launch on the Middle Empire. It is also taking full advantage of China’s monetary policy of competitive devaluation, that mechanically favour Chinese exports. In addition to being a successful international trade enabler, Alibaba has managed to stay in a dominant position on a domestic scale. The main reason being that Alibaba’s products are not indexed by Baidu’s search engine, making the marketplace one of the most visited and searched website in China. As a result it serves more than 18 million buyers and sellers worldwide, and counting!

In a nutshell, Alibaba’s success in the B2B sphere is linked to two things. Favorable demographics; by targeting a huge untapped market on both sides (supply and demand), Alibaba was able to quickly consolidate its position as a market leader. Correlatively, they were able to scale up so quickly thanks a peculiar revenue and cost structure (with very limited ownership of assets). Alibaba’s success paved the way for other B2B marketplaces, operating in different markets, and offering tailor-made features when Alibaba sticked to its “mass market” positioning.

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