The “Crocodile in the Yangtze”

Alibaba group Headquarters

Alibaba Group Headquarters in Yu Hang District, China. April 14, 2012. Thomas Lombard (Wikimedia Commons)

China’s largest e-commerce company, Alibaba, is set to make history in the coming months. Founded in 1999, Alibaba has the potential to set the largest initial public offering (IPO) in the US for a Chinese company and even exceed Facebook’s initial valuation in 2012.

While Alibaba has declined to comment on why it moved its IPO from Hong Kong to New York City, its decision is largely based on a disagreement between company executives and the Hong Kong Securities and Futures Commission. Unlike Hong Kong’s stock exchanges, the NYSE and the NASDAQ do not maintain a one-share per one-vote standard, allowing Alibaba’s key partners to maintain control over its board of directors.

Holding its IPO in the United States could also facilitate future acquisitions of American companies. Its recent investments in the Silicon Valley start-ups Tango and AutoNavi indicate that Alibaba is seeking market expansion at the international level. More than just a middleman between sellers and buyers, Alibaba allows its customers to pay bills, buy insurance, and even take out loans. Its wide range of services and competitive pricing structure are enticing to both consumers and venders. Moreover, Alibaba’s capital is substantial. In the past fiscal year, its estimated sales exceed $420 billion, which dwarfs the combined revenue of Amazon and eBay. Further, it boasts 300 million customers across China – a number that will surely grow in accordance with increased Internet penetration.

Flickr - World Economic Forum - Jack Ma Yun - Annual Meeting of the New Champions Tianjin 2008 (1)

Jack Ma Yun, Chairman and Chief Executive Officer, Alibaba Group, speaks during The Future of the Global Economy: The View from China plenary session at the World Economic Forum Annual Meeting of the New Champions in Tianjin. China 28 September 2008. Copyright World Economic Forum (www.weforum.org)/Photo by Natalie Behring (Wikimedia Commons)

The big question that remains is whether Alibaba is capable of competing with established Western brands in the global e-commerce marketplace. Jack Ma, Alibaba’s founder and former CEO, responded to doubts of Alibaba’s competitiveness: “Ebay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win.” Ma’s tempered confidence is justified. Although Alibaba has enjoyed tremendous success in the People’s Republic of China, it may not enjoy viability in the global marketplace. Alibaba’s prospects of successful market penetration are poor, particularly in the United States where the market is already saturated with established firms, such as Amazon and Zappos. Alibaba’s micro-lending, insurance market, and investment services, however, could prove highly successful in several Latin American and African economies where such service industries are severely underdeveloped.

Yet, Alibaba’s main obstacle to success may be the Chinese Communist Party. Consider yuebao, Alibaba’s financial investment service that provides a 5% return on risk-free investments. Yuebao offers a fantastic yield in China where millions of laymen deposit their hard-earned yuan into bank accounts only to see its real value depreciate from an inflationary tax. As Yuebao continues to threaten Chinese banks’ monopoly on savings, its days may be numbered before the Communist Party intervenes. Only time will tell if Alibaba can fend for itself in the vast ocean of e-commerce. Continued expansion within China and throughout the developed and developing world may prove impossible. One thing is for certain: Alibaba’s biggest threat to global development no longer lies in America, but in Beijing’s Politburo.

The views expressed by the author do not necessarily reflect those of the Glimpse from the Globe staff and editorial board.

Xiaomi’s Expansion and the Test of Chinese Soft Power

Xiaomi is outselling Apple in the Chinese smartphone market, and recently announced its plans to expand globally. You may be asking: “Xiao-who?” Well, here is an introduction to the hottest tech company in China, their blueprint for expansion, and what this means for China’s growing “soft power” – a construct that emphasizes a state’s economic and cultural influence.

Xiaomi Founder at the Fortune Global Forum 2013. (via flickr: Fortune Live Media/ Creative Commons some rights reserved)

Xiaomi Founder at the Fortune Global Forum 2013. (via flickr: Fortune Live Media/ Creative Commons some rights reserved)

Ascent to Stardom

Xiaomi Inc. is an Internet service and consumer electronics company founded in April 2010 by Steve Job’s Asian twin, Lei Jun (see photo). Selling high-end smartphones at near production costs, Xiaomi has challenged Asia’s top smartphone providers in the Chinese, Taiwanese, and Hong Kong markets. In the second quarter of 2013, Xiaomi became the fifth-largest supplier of handsets in Mainland China. In August, Lei poached top Google executive Hugo Barra to orchestrate Xiaomi’s global expansion. And shortly thereafter, a “flash sale” of 100,000 Hongmi-model smartphones ($135 compared to the $750+ iPhone) sold out in 90 seconds. In October, Xiaomi sold 100,000 of the luxury Mi3-model smartphones ($327 for 16GB or $410 for 32GB) in 83 seconds. Less than four years after incorporation, Xiaomi has gained Apple-like popularity and a market valuation at $10 billion (equal to Lenovo or double that of Blackberry). Xiaomi executives project smartphone sales in the neighborhood of 20 million units by year’s end.

International Expansion

But they aren’t satisfied. At a recent media event in Taiwan, Lei and Barra announced their expansion into the Southeast Asian market, specifically Singapore and Malaysia. Why? Singapore and Malaysia have the necessary technological (network coverage) and regulatory (welcoming governmental and legal institutions) infrastructure for Xiaomi’s entry. Further, the people of Singapore and Malaysia are smartphone fanatics. Smartphone penetration in Singapore and Malaysia is at 87% and 80% respectively. Comparatively, the United States is at 60%.

Xiaomi may succeed in its initial expansion—despite entering a saturated market—for four reasons:

  1. Fandom: “Flash sales,” and the social media blitzkrieg surrounding these events, have generated frenzy among middle-class shoppers eager for the newest smartphone. Further, Xiaomi allows its customers to actively shape its software platform. Miui, a spinoff of Google Android software, is updated nearly every week based on the suggestions of its 5.1 million members. Client-customer collaboration has boosted Xiaomi’s popularity in China and promises to do the same in Southeast Asia.
  2. Increased competition: Samsung has run a near monopoly in the Southeast Asian smartphone market. But three Asian companies, Huawei, Lenovo and LG, are challenging its dominance and eating away at its market share each successive quarter. Xiaomi could benefit from an increasingly diverse market.
  3. Subsidies: Singaporean and Malaysian telecom operators offer smartphone subsidies. Thus, Xiaomi phones could be free with the purchase of a contract—an enticing offer for those who disheartened by the larger sticker price of a Samsung or Apple handset.
  4.  Apps: Singaporeans and Malaysians love apps. In fact, they score highly (Singapore at number one) in the World Mobile Readiness Index, a metric that calculates a population’s willingness to pay for mobile apps. Singaporeans’ and Malaysians’ willingness to pay for apps perfectly accommodates Xiaomi’s business model. Xiaomi has razor-thin profits on smartphones (compared to a company like Apple that has a 55% profit margin on the iPhone) and therefore relies on apps and accessories to generate profit.

Litmus Test

Xiaomi’s success in Singapore and Malaysia will be indicative of its potential success outside the Chinese mainland. Xiaomi has thrived in the Chinese market where Apple holds less than 5% market share and Google Play (Google’s “App Store”) is not officially available. How Xiaomi competes in areas where Apple and Google have a stronger grip will be telling. If unsuccessful, Xiaomi will likely retreat to China. If successful, look for Lei and Barra to deepen expansion in Southeast Asia, particularly in the Philippines—a country with a higher Mobile Readiness score than Malaysia and Hong Kong yet with only 15% smartphone penetration. The Filipino market would be wide open to an injection of Xiaomi products.

China’s difficulty in accumulating soft power has been well documented. However, much to the chagrin of some Americans, China’s soft power, particularly its global economic influence, is on the rise. A burgeoning tech market has begun to stimulate international growth for a number of Chinese companies (think Lenovo, Baidu, and Haier). Xiaomi’s success in Southeast Asia could demonstrate or precipitate greater success of Chinese companies in foreign markets. As a result, Chinese communication technology may attain the “cool factor” of Apple or Samsung products—which are widely regarded as fashionable and reliable. In short, Xiaomi may trigger consumers of Chinese tech products around the world to begin prizing the “Made in China” tag rather than associating it with mediocrity. And such a rise in economic influence is a necessary characteristic of any great power.

A Look Back at Snowden in the Press

National Security Agency headquarters, Fort Meade, Maryland

NSA HQ, Fort Meade, Maryland. NSA [Public domain], via Wikimedia Commons

Here’s a worthwhile thought exercise: considering China and the United States only, which state’s media would be the most aggressive in criticizing a foreign government for suppressing individual liberty and stifling free domestic press coverage? Before the Edward Snowden case, the United States would likely be the answer. Interestingly when articles from China Daily, People’s Daily, and New York Times are examined, a distinctly different narrative emerges. The Snowden Case has provided the Chinese media with a golden opportunity to champion individual liberties and criticize US surveillance policies. Conversely, the US press coverage has been more reactionary, framing the Snowden case as a statist US-China confrontation rather than a domestic political debate gone global.

The reaction of the Chinese press has focused on the controversial NSA policies illuminated by the Snowden files; US press coverage instead covered the reactions of the Chinese and Hong Kong governments’. “Surveillance programs reveal U.S. hypocrisy,” reads the headline of a June 14, 2013 article from the People’s Daily – the word “hypocrisy” is borrowed from a Snowden quote referenced in the article. Calling for a “serious self-examination” of US government policies vis-à-vis the NSA, the article deftly uses American voices to construct its argument citing comments from The New Yorker and USA Today. This stands in diametric opposition to comments from the American press that automatically regard Chinese press criticisms of American policies as party-line rhetoric, or as New York Times columnist Joe Nocera writes “another classic response.”

The dichotomy should be clear; Chinese media emphasizes the theme of liberty and ethics while US coverage of Snowden attempts to shift the debate to one of security. Nocera’s piece addresses the problem of US cyber espionage policy linking it to China’s own cyber espionage programs noting that the Snowden scandal will make it “far more difficult to force the Chinese to get serious about sopping their own hacking.” This commentary remains firmly grounded in the ideological camp which condones hacking behavior. Chen Wiehua of the China Daily takes a far more comprehensive view asking:

In the US, (…), the discussion in the mainstream media is often limited to whether the surveillance program has violated US citizen’s rights. Very few seem to question whether such invasive surveillance programs on governments, institutions and citizens of other countries are legal or, for that matter, ethical.

Mr. Wiehua’s article presents solid evidence to back this claim; evidence that is noticeably absent in Nocera’s discussion. Meanwhile, the US media response underscores the vast gulf in tone and substance between Chinese and American reporting surrounding the Snowden case. Indeed, rather than addressing the criticisms raised by their Chinese press, an article in the New York Times simply dismissed the Chinese media response as “snide.”

While both the US and Chinese press considered the Snowden imbroglio within the US-China diplomatic frame, US commentary has consistently played up a confrontational tone between the two states. The Chinese media response has not been beyond reproach in all areas. In fact, the Chinese have overlooked their cyber espionage capabilities by waving the bloody shirt noting, “the United States has a matchless superiority and ability to launch cyber attacks around the globe.” Fact: the United States has met its cyber match with China. Regardless, press coverage on both sides viewed the governments as having a monopoly on decision-making power.

The Snowden Case has provided the Chinese media with the rare opportunity to levy ethical, moral, and policy criticisms against the United States. It is disheartening to see that the Snowden coverage in major American newspapers lacks the moment of national self-reflection that Snowden likely hoped to unleash by releasing the NSA files. Both China and the United States carry a clear policy bias, however, coverage of the Snowden case gets at the broader theme of how globalization does guarantee that no two international takes on one story are the same.