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Alibaba IPO Shares in High Demand, But Just Who are Its Customers?

Sept. 16, 2014
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You may have never heard of Alibaba — the Chinese company likely to break records with its IPO later this week — but you may have purchased goods procured through the e-commerce site. You just didn’t know it.

Like the “Designed by Apple in California. Assembled in China,” note festooned on Apple products for sale in the U.S., American companies large and small buy supplies or assembled goods from China for products sold here.

Since its inception in 1999, Alibaba has been catering to Western companies as a business-to-business portal that connects suppliers and manufacturers in China with commercial customers globally. Alibaba’s customers make and sell just about anything you can name: buttons for shirts, components for smartphones, bulldozers for construction companies or dog bowls for pet stores.

You can buy a fart-sound bottle opener, a David Beckham sex doll, a barf bib, kangaroo meat or a caveman robot.

“If is the everything store, Alibaba wants to be the everything company,” USA Today says.

In China, Alibaba is now Amazon, eBay and PayPal all rolled up into one. Alibaba makes its cash acting as a matchmaker among businesses — and increasingly hooking up Chinese consumers with direct online sales. The company gets paid through commissions and online advertising on its sites.

AliPay, Alibaba’s online payment service, handles half of all online transactions in China, the world’s No. 1 Internet market with a mind-blowing 618 million people online — nearly double the population of the U.S.

Alibaba’s online auction site, Taobao, helped shutter eBay’s early entry into China. Analysts say Alibaba showed it understood Chinese consumers better than the eBay, which just migrated its U.S. business model to China.

“Taobao was quick to recognize that people wanted to buy new products online rather than secondhand goods,” Edward Yu, chief executive of Analysys, a Beijing market analysis company, told me in 2010. EBay, which had 79% market share in China when Taobao opened in 2003, left China in 2006 after its business there cratered. EBay now is back in China — but with a much lower market share.

New businesses, such as Tmall Global, are helping foreign companies tap into the growing spending power in China by selling directly to Chinese consumers — a boon in a nation rife with counterfeit products and concerns about domestic food after tainted formula poisoned tens of thousands of babies in 2008.

But there still are concerns that Alibaba can be like the “Wild West” when it comes to the flow of illegal goods. The Financial Times notes a recent ad on Alibaba for the rare metal gallium, used to stabilize plutonium. (Alibaba later took down the listing.) That comes after the FBI used Alibaba in a botched sting with an ad looking for yellowcake, a partially refined uranium ore used for nuclear weapons. The Sierra Leone man who answered the ad was arrested, but later acquitted in Florida.

Alibaba is using its IPO to bankroll global expansion. But for U.S. investors wondering whether to buy into the IPO, the company’s lock on the Chinese e-commerce market may hold the most appeal for those wanting to cash in on China’s explosive growth.

For investors looking for opportunities in China, “Alibaba is a top pick,” Henry Guo, senior research analyst at JG Capital, tells NerdWallet. “This company is well prepared to dominate there over the next 5 to 10 years.”

Alibaba offices image courtesy Alibaba Group Holding.