In its second-largest acquisition, Amazon buys the company for $970 million.
Services help retailers ship to—and collect payments from—consumers in China.
Buying online from overseas e-retailers is popular in China. So popular, it has its own Chinese moniker: hai tao, which roughly means "ocean search."
Twelve million Chinese consumers bought from retailers overseas online in the second half of 2012, according to the China Internet Network Information Center, a government-sanctioned research organization. 34% said they did so because the brand they purchased was unavailable locally, while 30% cited better product quality guarantees.
"Chinese consumers are hungry for high-quality products at reasonable prices, and they know this is what they get when they buy direct from U.S. retailers," says Jingming Li, group vice president and head of Alipay U.S., Alibaba Group Holding Ltd.'s payment unit. Alibaba is the largest e-commerce operator in China.
Chinese consumers want to buy direct from foreign retailers for several reasons. Goods purchased directly from foreign sites are often less expensive than the same merchandise bought at retail in China, and the selection and quality when buying directly from foreign sites is often better, Alibaba says. U.S. goods are more costly when sold in China, in part, Alibaba says, because many Chinese online sellers employ agents to travel to the United States and purchase goods to bring back and then sell online in China for a significant markup. That process also means the selection might be slim. For example, Chinese sellers touting high-end MAC Cosmetics might only have a few colors. The growing demand in China for goods direct from foreign web sites has even sprouted a network of Web-based agents, coined "Haitao-ers" who, for a fee, will make purchases on behalf of Chinese consumers, handle currency conversions and take care of getting the product into China and delivered.
Selling to Chinese consumers is alluring to North American retailers because online spending in China is growing at a much faster clip than in the United States. The number of Chinese online shoppers has grown by 125% from 108 million consumers who made at least one online purchase in 2011 to 242 million in 2012, says the China Internet Network Information Center. That helped fuel 42% growth in China's e-retail sales in 2013 to $305.74 billion, from $215.31 billion in the prior year, Beijing-based Internet research firm iResearch Consulting Group estimates.
But despite a massive potential sales pool, selling direct to such a far-away region is complex for U.S. e-retailers. They must navigate foreign taxes, customs and duties and accept payment methods other than the U.S.-standard Visa, MasterCard and PayPal. Then they have to get the goods to the shopper. Foreign shoppers, meanwhile, want to know items ordered from abroad will clear customs quickly and what they will have to pay upfront. Several Chinese e-commerce service providers have emerged that seek to address these challenges, and they're hoping U.S. retailers will use their services.
The Alipay payment option is a prime example. Alibaba says it is now in talks with several large U.S. web merchants to provide fulfillment services to help them display fully landed costs for orders to consumers at checkout and to deliver orders placed by Chinese consumers on U.S. e-commerce sites.
Retailers who accept Alipay—a popular Chinese payment option similar to PayPal—can use the Cainiao (pronounced: TsaiNow) logistics network that taps into hundreds of couriers throughout China, enabling delivery to even the most remote locations, Li says. Before, Alibaba only offered this service to Chinese sellers on Alibaba marketplaces Tmall and Taobao. With Alibaba's new offering, the merchant's back-end systems are linked to the Alipay payment infrastructure and, via that, to Alibaba's Cainiao logistics network. This integration means that when a Chinese consumer elects to pay via Alipay, the Alipay system can manage a large part of fulfillment.
Using data generated by the merchant's e-commerce platform, Alipay first calculates the shipping cost and customs duties on the order and collects the total from the consumer in China in Chinese yuan, remitting it to the merchant in U.S. dollars. The merchant ships the order to a U.S.-based Cainiao warehouse; there are several, including in Los Angeles and New York. Cainiao finds the customer's verified address on the Alipay database and uses it to generate a local Chinese shipping label—avoiding any confusion around China's notoriously complex addresses. It finally dispatches the order to China by air. Once the item arrives in China, Alibaba hands off the package to a local courier for home delivery.
Alibaba says it has an agreement with the Chinese government that customs officials will open and inspect no more than 5% of shipments coming from Alibaba's U.S. warehouses because all the customs and duties will be prepaid. This, Li says, lets U.S. e-retailers guarantee that goods will arrive within 10 days. But most, he says, will arrive in four to five days.
Alibaba won't say what it charges for the fulfillment service except to say that the fees it charges are "much less" than what a U.S. merchant could likely offer on its own because of the rates Alibaba has negotiated. Alibaba says it is also common for retailers to pass on the fees to Chinese shoppers.
As part of its North American push, Alibaba is also opening its Alimama digital advertising network to U.S. retailers to help reach Chinese shoppers hungry to shop with stateside merchants. Alimama, originally designed as an advertising platform for merchants selling on Alibaba's Taobao and in TMall marketplaces, serves targeted ads on Alibaba sites, and Chinese news and media sites. Li says Alimama serves targeted ads based on what Chinese shoppers search for and that its ads produce billions of impressions daily. Li says the ad network, which is similar to Google Inc.'s DoubleClick, offers many pricing structures from pay per click to pay per transaction.