Two cheers for Alibaba

If someone had asked me to identify Alibaba even a year ago, I would have said that Alibaba sounds like an Arabian folk tale character in One Thousand and One Nights. Indeed Ali Baba is, but these days the business world has a much more modern Alibaba on its mind.

Last month Alibaba Group Holding Ltd., the Chinese internet company, conducted the largest initial public offering in United States history, raising more than $22 billion by selling its stock to American (and other) institutions and investors. (Alibaba will now be listed on the New York Stock Exchange under the symbol BABA). Started in the Hangzhou apartment of founder Jack Ma in 1999, Alibaba is now worth more than $200 billion. Ma himself sold some of his stock for more than $850 million, and held onto stock currently worth more than $25 billion.

If you’re wondering whether to cheer, jeer, or simply scratch your head at Alibaba’s mind-boggling success, I recommend that you begin by cheering. Alibaba brilliantly enables Chinese consumers and businesses to purchase goods directly from retailers and suppliers. It is a little like eBay or Amazon, and its sales are roughly equal to the sales of eBay and Amazon combined. The business model would be cutting edge anywhere, but it is revolutionary in China, where businesses have traditionally been forced to curry favor with local officials, often by paying bribes, to acquire the goods they need.

I suspect recognition of the corrosive effects of communism on business is one reason Ma named his company Alibaba. In the Arabian Nights story, Ali Baba discovers the secret password used by a den of thieves—“Open Sesame”—and thanks to the help of his faithful slave girl, thwarts their mischief. Alibaba has helped to circumvent an even more pernicious mischief. On some days, Chinese customers arrange more than 100 million shipments through Alibaba services.

Although the current euphoria is well-deserved, several risks lie in Alibaba’s future. Alibaba’s corporate structure ensures that Jack Ma and the other insiders retain absolute control, even though they own only a small percentage of the stock. The insiders are the only ones who can nominate directors to Alibaba’s board of directors, and they can put their directors on the board even if Alibaba’s shareholders do not approve. If Ma and his associates ever lose their Midas touch, shareholders can’t do anything about it. Alibaba argues that Ma needs free rein to work his magic, just like Mark Zuckerberg at Facebook. His genius is indeed essential, but it is always risky to take away other shareholders’ authority.

Scarier still is the risk that the Chinese government will pull the rug out from Alibaba’s business. As L. Gordon Crovitz recently pointed out in The Wall Street Journal, China forbids foreigners from owning a majority of the stock of companies in “strategic and emerging industries” like the internet. Alibaba has sidestepped this restriction by offering investors interests in a “variable interest entity,” rather than in Alibaba itself. So far the Chinese government has looked the other way, but Chinese authorities could change their minds, seize the business, and expropriate investors’ interests.

Alibaba’s main protection, as Crovitz also noted, is its size and notoriety. Chinese officials are likely to think twice about interfering, given the international outrage that would follow. But there are no guarantees. And the Chinese government could use the threat of intervention to pressure Alibaba to accede to its wishes, even if the government doesn’t actually intervene.

Alibaba’s success is a wonderful illustration of the potential for market innovation to counteract the inefficiencies of a highly undemocratic government. But the story isn’t over. Alibaba still hasn’t fully vanquished the 40 thieves, and we cannot yet be certain that it will.

—David Skeel is the author of True Paradox: How Christianity Makes Sense of Our Complex World (IVP, 2014)