Airline Pilot Central Forums - Watch out Amazon Air... Here comes Alibaba

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In a recent speech at the Economic Club of New York, Jack Ma, founder and executive chairman of Alibaba Group, talked eloquently about Alibaba’s plans to compete on the global market. Ma spoke at length of Alibaba’s unique ecosystem and how it is different from Amazon’s – one that is much friendlier to small businesses.

What is the ecosystem Jack Ma talked about? How does it support small businesses where Amazon fails? Recently, I attended an event in Shanghai hosted by Razorfish Global called “China: 10 Years Ahead,” designed to help Western companies learn the dynamics of China’s e-commerce and social media sectors. I got a chance to take a closer look at how Aliabab built its ecosystem and competitive advantages in serving small businesses.

Alibaba Group includes Alibaba.com, a business-to-business trading platform, Tmall, a business-to-consumer e-commerce site, and Taobao, a consumer-to-consumer marketplace. In addition, Alibaba Group owns AliPay, the largest payment system in China, and Alibaba Cloud, a data mining technology company catering to e-commerce businesses. Together, Alibaba Group has covered all aspects of e-commerce and created a network effect with a massive customer base.

Among these entities, Tmall bears the greatest similarity to Amazon. Unlike Amazon, Tmall does not sell goods directly to consumers. It operates as an online marketplace and facilitates transactions between buyers and sellers. Sellers set up their shops on the site, and consumers buy goods from them. Alibaba charges a commission of 2% to 5% for each transaction. Its business model is more like that of AirBnB, which has become the largest hotel chain without owning a single hotel.

This is an important difference between Alibaba and Amazon. Alibaba’s success depends critically on its sellers’ successes. For this reason, it has made an extra effort to help them to be successful. Alibaba created a marketing consultancy arm, Alimama, to help its sellers reach their customers. Alimama provides services such as customer segmentation, product positioning, marketing campaign, and more.

For example, Yan Ge Ge, a seller on Tmall specializing in exotic products like bird’s nests, tried unsuccessfully to sell its products to young mothers. Alimama helped the company to identify pregnant women as better prospects and increased its sales dramatically. Alibaba also provides these kinds of services to international brands and helps them to launch stores on Tmall and target ever-growing and voracious Chinese consumers.

By standing firmly behind its sellers, Alibaba thrives while its sellers thrive.

Amazon, on the other hand, operates more like a traditional retailer and sells its own products on its site. Only about 40 percent of Amazon’s sales come from third parties. Amazon has less incentive to help those third-party sellers to succeed. In fact, some small businesses have complained that Amazon uses the marketplace to identify hot products, and then sells them at cut-rate prices that small sellers cannot compete with.

A Wall Street Journal article indicates that Amazon regularly launches new products that had been selling well by third parties. For example, the California-based small retailer Collective Supplies listed a product called “Pillow Pets” on Amazon’s site. For months, sales had been great. Then, Amazon started to offer the same product at a lower price. Collective Supplies’s sales suffered. When Amazon does this, small businesses cannot compete. Tottini, a Seattle-based toy store, stopped selling the giraffe-shaped teeth toy on Amazon’s site once Amazon began to offer a version of its own.

Another interesting discovery I made in my research is that Alibaba takes extra steps to scrutinize sellers and make sure they are reputable businesses. Because there are many frauds in China, Alibaba has raised the threshold for those who are allowed to sell on Tmall. A business needs to pay a deposit of as much as $25,000 in order to set up a shop. The deposit serves as an advance for Alibaba’s commissions. Most businesses are not bothered by the high upfront cost because their sales through Tmall are well worth it. Importantly, the hefty upfront cost screens out illegitimate businesses and ensures that vendors on Tmall are serious and committed for the long term. As a result, Chinese consumers have more confidence in purchasing products on Tmall.

In contrast, Amazon lets any individual set up a seller’s account free of charge. It also allows many different vendors to sell the same brand name product. This opens the door for fraud. Some brand name products sold on Amazon are by unauthorized vendors. For example, Estee Lauder doesn’t distribute its products on Amazon. Yet, in a search on Amazon you will find hundreds of sellers selling Estee Lauder products, from expensive night repair creams to makeup kits. Worse, many counterfeit products have been comingled into Amazon’s warehouses. I personally have bought some cosmetic products on Amazon that are not authentic and outdated. Countless customers have complained about the knockoff products sold on Amazon.

This problem hurts small businesses the most. Large companies such as Johnson & Johnson JNJ +0.00% can stop distributing on Amazon. For small companies, their revenues are undercut, and they are powerless to get Amazon’s attention. A consumer electronics seller discovered that over 70 percent of products sold on Amazon under its brand were knockoffs. The seller did its own investigation and brought proof to Amazon. To the company’s dismay, Amazon refused to do anything about it. Mathew Frank, CEO of a kitchenware manufacturer that sells ice-cube molds and trays, told the Wall Street Journal that one year after reporting fraudulent sellers to Amazon, he still found counterfeit products ranked high up on the Amazon site.

Small businesses are drawn to Amazon Marketplace’s vast potential, but feel crushed by Amazon’s mighty power.

Jason Goldberg, Senior Vice President of Razorfish and an expert in retail, pointed out that Alibaba and Amazon are well-suited to their respective home markets. In China, there are no well-established national retailers. Alibaba tailors itself to serve small businesses. In the US, however, large corporations dominate, and Amazon caters to larger retailers and brands.

Jack Ma has made clear his ambition to expand Alibaba Group to the US market and beyond. Amazon had better watch out. Small businesses account for 40 percent of Amazon’s sales. If they are not well served, they may flock to Alibaba.