The blockbuster initial public offering (IPO) of China’s Internet colossus, the Alibaba Group Limited, not only shattered stock market records by raising $25 billion but also busted many myths about the preconditions for technological innovation, the role of the state in spurring entrepreneurship, and the way power is distributed in the world.
Headquartered in Hangzhou in eastern China’s Yangtze river delta, Alibaba has taken the world by storm with a splashy debut in the New York Stock Exchange that originally valued the company at $168 billion. By the end of the first day of public trading of Alibaba’s shares last weekend, its market capitalisation jumped to a staggering $230 billion, leaving behind rivals in e-commerce like Amazon (market cap of $150 billion) and eBay ($65 billion), surpassing Facebook ($202 billion) and hot on the heels of Google ($406 billion).
For a Chinese company to attain the rank of second largest Internet corporation in the world is a milestone in contemporary economic history. Under the plucky leadership of a former English teacher, Jack Ma, Alibaba has upended the belief that the information technology (IT) sector only flourishes in politically free societies that allow unfettered movement of data and knowledge.
The contrast between Silicon Valley, which arose in democratic America’s cradle of liberal values California, and Zelenograd, the failed electronics and computer hub in the authoritarian Soviet Union, illustrates the common wisdom that IT booms where there is an enabling environment of personal liberty for human creativity to be unleashed.
Steven Usdin’s book, Engineering Communism (2005) argued that despite espionage and financial investments, the Union of Soviet Socialist Republics (USSR) did not succeed in harnessing IT in a way comparable to America because the former had a “dysfunctional system that crushed innovation and stifled independent scientific or artistic expression”.
China is hardly a country where information flows are uninhibited. A paranoid state under a single party constrains citizens’ access to online content through the “Great Firewall”.
Prof. Gary King of Harvard University has labelled the Chinese government’s elaborate limits on the Internet as the “most extensive effort to selectively censor human expression ever implemented”.
And yet, Alibaba and its lesser known Internet-based Chinese competitors like Tencent (market cap of $150 billion) and Baidu (market cap of $78 billion) are on the ascendant and looking to expand as global multinationals with phenomenal customer bases and revenues.
To put the Chinese Web giants in perspective, India’s software icons Tata Consultancy Services (market cap of $84 billion), Infosys (market cap of $34 billion) and Wipro (market cap of 23.7 billion) are on average smaller in scale. India’s indigenous e-commerce retailer, Flipkart, is valued at just $7 billion.
How did China overcome the curse of dictatorships and beget a world-beater like Alibaba? The credit goes to the Communist Party’s decentralisation of economic policies to provincial and city levels. Hangzhou, home to Alibaba’s campus renowned for sleekness and futuristic landscaping, has been nurtured by local party officials as a hub for incubating technology startups via low interest loans and special economic zones integrated with science faculties at Zhejiang University. This model is a near replica of the Silicon Valley ecosystem, with Stanford University at the heart of the whole innovation and R&D enterprise.
What the Soviets could never achieve, China is doing rather well through its unique brand of state capitalism which has bred low-end mass manufacturing and is now moving to post-industrial IT-enabled services that cater to China’s burgeoning middle class.
Political chatter and mass movements remain heavily curtailed online, but mercantile activity tapping into tastes of domestic consumers is not just encouraged but seeded by the Communist Party which claims to represent interests of not just peasants and factory workers but also businessmen like Jack Ma.
For the record, Mr Ma has justified the Party’s 1989 massacre at Tiananmen Square as “the most correct decision” and considers Chinese President Xi Jinping as his “friend”. Alibaba is a near monopoly in China’s humungous e-commerce sector, commanding 80 per cent of the market share. But it bypasses the scrutiny and wrath of China’s economic regulators thanks to shares it has generously distributed to “princelings” of the party linked to former Premier Wen Jiabao and former President Jiang Zemin.
By virtue of its tremendously loyal or captive consumer clientele (around 300 million people buy everything and anything under the sun from its website), Alibaba does pose a challenge to China’s traditionally dominant state-owned enterprises (SOEs) that are resented by small businesses and ordinary citizens. Affiliated spinoffs like Alipay (an online money transfer system that dwarfs eBay’s Paypal in volume), and Mr Ma’s foray into attracting Chinese citzens’ savings into money-market funds by offering higher interest rates than state-owned banks, do threaten vested interests and patronage networks of the Communist Party.
Investors who are breathlessly queuing up to own a slice of Alibaba know that there is a degree of political risk involved with Chinese corporate behemoths which are not state-run and may fall foul of the authorities one day. Nonetheless, the effusive coverage that Mr Ma has received from China’s state media as a rags-to-riches entrepreneur who is bringing glory to his nation on the world stage suggests he has done his political homework well thus far.
The party also loves Alibaba’s ethos which is driven by Chinese nationalism and quest for grandeur. The documentary film, Crocodile in the Yangtze, features a famous sequence from 1999 where a gaunt and budding Jack Ma is addressing friends in his modest Hangzhou apartment. He exhorts the audience saying, “We dare to compete with the Americans. Chinese brains are just as good as Americans. One of us can defeat 10 of them.”
Alibaba does thrive in a global business climate which transcends national barriers.
Mr Ma’s biggest shareholders come from American, Japanese and Taiwanese backgrounds. But at its core, Alibaba’s power is based on a combative nationalistic Chinese spirit with long-term dreams.
Mr Ma prioritises winning customers over gaining short-run profits and plans on assumptions that his company “will exist for 102 years”.
Through a combination of imitation, inspiration from abroad, and original ideas underpinned by a supportive state apparatus, China’s hard-charging computer titans are proving that there are alternative pathways to economic glory than textbook examples which exalt free market capitalism. Move over Bill Gates and Steve Jobs. Jack Mas are arriving.
The writer is a professor and dean at the Jindal School of International Affairs
