Chinese e-commerce giant Alibaba Group – the company that had caught the attention of the global media with its historical IPO of $25 billion in 2014 – once again grabbed the headlines recently due to a standout $1 billion deal in April for a controlling stake of Lazada, an e-commerce company that operates across six countries in Southeast Asia, including Singapore, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. In 2015 alone, the company spent $18.3 billion acquiring stakes in more than 65 different companies both in and out of China, according to estimates.
How to understand this recent but highly visible global buying spree? In 2012, University of Cambridge economist Peter Nolan wrote an illuminating book, “Is China Buying the World?”, which countered the pervasive anxiety in the popular media about China’s growing number of cross-border acquisitions, then mainly from its national oil companies. Fast forward to today, when China’s growing Internet industry is aggressively expanding globally, empowered by the Xi Jingping-Li Keqiang leadership’s flagship “One Belt One Road” roadmap and “Internet Plus” plan— one centred on expanding China’s presence globally, and the other on the country’s booming digital sector— the global expansion of China’s Internet firms, such as Alibaba, demands urgent attention.
For a long time, public perception has focused on a repressive authoritarian regime that aims at building an inward-looking national intranet that is sealed by the “Great Firewall”. The reality is that China’s internet companies are among the largest in the world, and are increasingly projecting their power outward in global cyberspace. Perhaps the time is therefore right to once more pose the question: is China buying the world again, this time through its Internet companies?
This article aims to shed some light on this question by examining the international expansion of Alibaba, and by focusing on two questions about Alibaba’s global journey: Where has its money come from? And where has the money gone?
Where has the money come from?
Despite the fact that Alibaba is headquartered in Hangzhou, China, it is hard to characterise it as a truly Chinese company, especially in terms of ownership structure. A quick scan of the major shareholders in its 2014 IPO US Security and Exchange Commission filing offers a most comprehensive picture. It reveals that SoftBank of Japan holds 34.4% of the company, Yahoo owns 22.6%, and its management team – including its executive chairman, Jack Ma – controls only 14.6%. Other notable shareholders include: Fengmao Investment Corporation – a division of China Investment Corporation, the nation’s sovereign wealth fund – which owns 2.8%, Silver Lake, an American investment firm, which owns 2.5%, Yunfeng Capital, a China-based investment fund established by Jack Ma, which owns 1.5%, and CITIC Capital Excel Wisdom Fund, a unit of China’s state-owned investment company CITIC, owns 1.1%. The rest of the shareholders each hold less than 1% of the company. What Alibaba’s ownership structure reveals is that the company is made up of a complex and diverse network of investors, including foreign Internet giants like Yahoo, transnational Investment firms like Silver Lake, Chinese state-controlled financial vehicles like CITIC, and domestic private funds like Yunfeng.
The funding structure of its global expansion is equally, if not more, complex.
As is to be expected, domestic financial capital has played a role. It is reported that in 2012, to repurchase half of its stock back from Yahoo, Alibaba sought a substantial loan of $1 billion from China Development Bank, one of China’s three policy banks that are responsible for financing trade and economic development projects, and the one that has provided financial support to China’s networking equipment giants Huawei and ZTE. The company also raised part of the funds in its deal with Yahoo by selling stocks to a group of domestic investors, including a mix of state-owned investment firms, such as China Investment Corporation, and private equity firms New Horizon Capital and Boyu Capital, which are affiliated with high-level Chinese political elites.
Alibaba’s gigantic purchasing power has also been partly subsidized by global financial networks. The enormous proceeds – $25 billion – it raised on the New York Stock Exchange in 2014 has certainly boosted the company’s international shopping budget. Indeed, Alibaba chose to list in the US, instead of Hong Kong — the IPO destination of its B2B business in 2007 — because the latter refused to accept the Group’s dual-share structure. In the words of Jack Ma,”[In Hong Kong], all the existing listing regulations were designed decades ago before the Internet Age for property developers, banks, financiers and traditional retailers, and not relevant to startups and new businesses.” Moreover, its buying spree has also been funded by transnational investment capital. For example, in March 2016, Alibaba announced a $3 billion five-year syndicated loan with a group of eight lead arrangers to sponsor its expansion plans: ANZ Group, Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, JP Morgan, Mizuho Bank and Morgan Stanley. According to Reuters, the aim of this loan was to “help the e-commerce giant as it snaps up stakes in companies within China and overseas.”
Where has the money gone?
Fuelled by massive infusions of domestic and transnational capital, Alibaba has been working hard to expand its overseas footprint. According to data from the China Global Investment Tracker compiled by the American Enterprise Institute-Heritage foundation, it is only since 2013 that Alibaba began projecting large amounts of capital overseas. From 2013 to 2016, the company completed 10 large deals of $100 million or above, mainly targeting neighbouring countries in Asia, such as India and Singapore, but also expanding into the center of the global Internet economy, the US.
On the one hand, in the interests of expanding and strengthening its core e-commerce business, Alibaba acquired various stakes in foreign e-commerce companies or groups, including Shoprunner and Groupon in the US, Snapdeal and One97 in India, logistics company Singapore Post, and most recently, the Southeast Asian e-commerce company Lazada. On the other hand, to diversify its business structure, Alibaba also invested a considerable amount of capital into the social media and online gaming market segment, venturing into the main business of its domestic rival Tencent, with a $220 million investment in Tangome and $200 million in Snapchat, both US-based mobile messaging services, and $120 million investment in Kabam, a US mobile gaming developer.
Even with large amounts of capital infusion and evidently active overseas activities, however, how much global territory Alibaba has actually gained remains far from clear. Fierce competitions from other Internet players has certainly restricted its growth. For example, unable to gain a foothold in the US market – the home front of Amazon and eBay – Alibaba sold its US online shop 11main, just one year after its launch, to a New York-based e-commerce company OpenSky, in exchange for a 37% stake. So far, its international retail and wholesale business has only accounted for a small amount of Alibaba’s annual revenue: 9.2% in the fiscal year of 2014 and 8.5% in 2015.
A detailed analysis of Alibaba’s outward expansion seems to echo what Peter Nolan pointed out four years ago—that China is not buying the world. In any case, the question ‘is China buying the world’ requires cautious interpretation. In the case of Alibaba, not only has its international revenue been very limited so far, its corporate nationality also needs careful qualification. Moreover, Alibaba’s buying spree has been subsidized by a complex group of financial funds, relying heavily on transnational capital. This pattern is consistent for other Chinese Internet companies as well. For example, like Alibaba, overseas revenues of Tencent and Baidu, the other two of the BATs, have also been limited: only accounting for 8.2% and 0.5% of their 2014 annual revenues, respectively. On the other hand, foreign ownership, enabled by a highly convoluted business structure, Variable Interest Entity (VIE), by which foreign investors could inject capital into and receive interests from Chinese companies operating in the country’s highly regulated strategic industries, has been prevalent in China’s Internet sector.
Is this pattern going to change? With the “Internet Plus” and “One Belt One Road” strategies moving full speed ahead, the global expansion of China’s Internet industry requires continued attention.
This feature was written exclusively for Digital Asia Hub. For permission to republish or for interviews with the author please contact Dev Lewis.