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ALIBABA – BUILDING A SOCIAL SUSTAINABILITY
ECOSYSTEM FOR E-COMMERCE yo
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HARITHA SARANGA AND HUANG YANGHUA
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No
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Haritha Saranga, Professor of Production & Operations Management and Huang Yanghua, Institute of Industrial Economics, Chinese
Academy of Social Sciences, Beijing, Peoples Republic of China, prepared this case for class discussion. This case is not intended to serve as an
endorsement, source of primary data, or to show effective or inefficient handling of decision or business processes.

Copyright © 2018 by the Indian Institute of Management Bangalore. No part of the publication may be reproduced or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise (including internet) –
without the permission of Indian Institute of Management Bangalore.

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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I believe the spirit of equality and transparency at the heart of the Internet will make it
possible for Chinese society to leap-frog in its development of a stronger institutional and
social infrastructure. That’s why we built Alibaba as a “social business” from Day One.

--- Jack Ma, founder of Alibaba Group

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Jack Ma’s primary objective of starting Alibaba.com in 1999 was to facilitate the access of world markets
to small businesses operating in China. After nearly 20 years of tireless efforts by Alibaba’s founding
members, more than 10 million out of the nearly 40 million micro, small and medium enterprises
(MSMEs) operating in China managed to gain access to Chinese and world markets through Alibaba’s
various digital marketing platforms. In the process, Jack Ma built an empire of e-commerce economy,

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with Alibaba’s profits in the year 2015 overtaking the combined profits of Walmart, Amazon, and eBay.1
Sales in Alibaba’s various platforms generated the delivery of more than 55 million packages every day
and were expected to reach 100 million packages by 2020.2

However, the ever-ambitious Alibaba Group had a new objective, that of bringing the entire rural
population of China into the online e-commerce, through Rural Taobao strategy. By the end of August
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2016, within a mere two years after the initiative began, 1311 Taobao villages3 and more than 135 Taobao
towns4 across 18 provinces of China were on board. It was only a matter of time before the entire rural
hinterland became part of Taobao Villages’ network, making Jack Ma’s dream of creating a successful
digital marketplace that was not only profitable, but also inclusive and socially sustainable. Of course, the
role of local governments, especially the grass root county and township governments, is critical in
making this particular dream come true. It was the dual approach of ‘‘rural Taobao’’, wherein the local
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governments helped to create a ecosystem that gave rural people access to internet and other related
services, and ‘‘Taobao villages’’, spearheaded by Alibaba group, which made it a success.

However, the growth in Chinese e-commerce market was slowing down as the market began to mature,
and Alibaba needed to find new avenues for expanding its business beyond China. Alibaba had already
made entry into e-commerce markets of other emerging countries including the second most populous
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country in the world, India, by acquiring stake in local players. While the Indian online market itself was
very small, at $17 billion, a mere 2%, compared to Alibaba’s revenues in 2016, the potential for growth
was enormous. India consisted of one of the youngest and the second largest population of mobile phone
users5 in the world, just ripe for explosion of e-commerce in the near future. Similar to China, India also
had large number of MSMEs and was full of cottage industries. India’s rural population was huge, with
more than 700 million people living in semi-urban and rural areas.6 The online market in India was
already a major battlefield, with homegrown e-commerce companies such as Flipkart and Snapdeal at
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1
https://www.digitalcommerce360.com/2016/05/05/alibabas-annual-web-sales-easily-surpass-us-e-retail-sales/
2
Clark, Duncan. Alibaba – The house that Jack built. Harper Collins Publishers, 2016, pp.16.
3
Main criterions of Taobao villages by Ali-Research: (1) location of transaction: operation space is village based, and administrative village as
the basic unit; (2) scale of transaction: annual ecommerce turnover exceeds 10 million RMB; and (3) size of online business: over 100 active
online shoppers, or % of households dong online business exceeds 10% of total households.
4
Main criterions of Taobao township by Ali-Research: no less than 3 Taobao villages in a township or sub-district.
5
https://en.wikipedia.org/wiki/List_of_countries_by_number_of_mobile_phones_in_use
6
https://en.wikipedia.org/wiki/Demographics_of_India

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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first and third places (in terms of GMV) tearing each other apart, and Amazon briskly gaining momentum
to grab the top slot, right at the heels of Flipkart. However, none of the existing players in India had either
made profits or mastered the art of penetrating into the rural markets, as Alibaba had done in China. The
losses were mounting year on year, with venture capital investments, although very aggressive in the
initial years, beginning to dry up as years passed. Alibaba was watching the e-commerce scene unfolding

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in India from the sidelines, having invested in Snapdeal and PayTM, the third and fourth ranked players
in the Indian online retail market, but had not entered the fray directly yet. It appeared to be the right time
to make an entry, with internet access and mobile connections expected to reach 829 million7 and 90%,
respectively by 2021.8 However, what should be Alibaba’s strategy in India? Could it repeat what it did in
China? Could it build an e-commerce ecosystem that is both profitable and socially sustainable in India as
well?

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E-COMMERCE IN CHINA – THE INCLUSIVE GROWTH MODEL

China launched the Reform and Opening-up policy for accelerated development of the economy, towards
the late 1970s. Before the transition, China was an underdeveloped country with scarce capital, abundant
labor, and had outdated technologies in most industries. According to economic growth theory, capital
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accumulation and technological progress are two necessary conditions for economic growth. China being
a transition economy, some basic pre-requisites for a market economy such as property rights protection,
the rule of law, and efficient price mechanism were absent. During the period of economic reforms, the
state played an active role in amending those flaws and facilitated faster economic growth. China
established a sophisticated policy system in attracting foreign capital, promoted exports and encouraged
technological upgrades, to facilitate industrial development. A prerequisite for these policies to work was
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the transfer of abundant rural labor into the industrial sector. In 1978, China’s rural population was 82.1%
of its total population. However, this ratio decreased drastically to 43.9% by 2015. In 2016, there were
about 28.2 million migrant workers, and about one-third of these migrant workers served in
manufacturing.9 During its more than three decades of consistently high growth rate, China became the
‘‘world’s factory’’ and the world’s top exporter of hundreds of industrial products. The marvelous
industrial development created a favorable supply situation, wherein any Chinese individual who thought
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of entering into an online business, had access to abundant supply of products for trade.

Moreover, Chinese market was more integrated than other major developing countries (e.g., India and
South Africa), which served as a favorable ground when e-commerce was introduced in China. China has
a long history of having centralized authority, which reinforced commerce-augmenting institutions such
as universal language, metrology, taxation, and financial system. Chinese government has been making
successful efforts in improving transportation and information infrastructures, lowering regional
institutional barriers to entry, and facilitating the flows of factors of production towards efficiency.
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Among others, China’s Ministry of Information Industry initiated the ‘‘Village Telecom Access Project’’
in 2004. After ten years of persistent implementation, the telephone access rates of all administrative

7
http://indianexpress.com/article/technology/tech-news-technology/internet-users-in-india-to-double-by-2021-says-cisco-4696154/
8
http://www.livemint.com/Consumer/zxupEDYD560LJrnoRxcn4L/Mobile-phone-penetration-in-India-set-to-rise-to-8590-by-2.html
9
source: National Bureau of Statistics, Monitor and Survey Report on Migrant Workers 2016,
http://www.stats.gov.cn/tjsj/zxfb/201704/t20170428_1489334.html

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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villages and villages increased from 88% and 90% to 100% and 96%, respectively; broadband internet
access rates of townships and administrative villages increased from 90% and 70% to 100% and 91%,
respectively10. These efforts contributed significantly to domestic market integration that serves as an
essential pillar for ecommerce business. With the help of strong broadband and high speed internet
infrastructure as a foundation, in 2016, e-commerce in China generated $777 billion online retail sales

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and accounted for 15.5% of all retail sales in China and 39.2% of global e-commerce retail sales.11 As of
December 2016, a total of 467 million Chinese consumers (out of a total of 731 million internet users)
have shopped online, with nearly 95% of these consumers (441 million out of the 695 million mobile
internet users) shopping through mobile phones.12

China’s e-commerce business has been highly successful in urban regions, backed by strong consumption

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ability, higher internet penetration rate, sound logistics, and greater access to finance. During 2014–2016,
however, rural e-commerce began to grow faster. In 2016, the internet users in rural China reached 201
million and the online retail sales in rural China accounted for approximately $137 billion,13 increased
from $27 billion in 2014 and $53 billion in 2015. There were 8 million rural online shoppers, about one
quarter of the total online shoppers. Alibaba group, whose platforms account for more than 75% of the
online sales in China, has played a major role in this inclusive growth story. According to Xiaozhun Yi,
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the Deputy Director General of World Trade Organization (WTO):14

China’s experience in the past decade has proven that e-commerce-driven growth can be
inclusive. First, e-commerce empowers micro, small and medium enterprises (MSMEs) to
compete with large enterprises on the same stage. MSMEs can leverage affordable
digital platform services, which used to be too expensive for them to establish, to build
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brand awareness, acquire and manage customers, and spur innovation. Second, e-
commerce knows no geographic boundaries. Remote rural residents can purchase the
same goods at the same price on the same platform as urban residents. Finally, e-
commerce allows more flexible and inclusive employment.

ALIBABA STORY
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Companies in the 21st century need to solve social problems, not just make money
--- Jack Ma

Jack Ma, the founder of Alibaba began his e-commerce journey in 1995, by creating an online business
directory called ‘‘China Yellow Pages’’ which facilitated Chinese companies15 to be discovered by
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10
Data from Miao Wei, Narrowing the Urban-Rural ‘Digital Gap, Promoting Rural Economic and Social Development, People’s Tribune, vol.
33, 2014.
11
Online retail data is from E-Commerce in China 2016 (in Chinese), Ministry of Commerce, China, available via
http://images.mofcom.gov.cn/dzsws/201706/20170621110205702.pdf
12
Data from E-Commerce in China 2016 (in Chinese), Ministry of Commerce, China, available via
http://images.mofcom.gov.cn/dzsws/201706/20170621110205702.pdf.
13
Estimates by Ministry of Commerce, China
14
Inclusive Growth and E-commerce: China’s Experience, AliResearch, April 2017.
15
https://en.wikipedia.org/wiki/Jack_Ma

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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foreign enterprises searching for Chinese products. After China Yellow Pages was soon sold to a local
telecom carrier, in 1997, Jack Ma was invited by the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) of China to start and manage a ministry-affiliated online fair of Chinese
products. After two years, Jack Ma quit this enterprise and started Alibaba.com in 1999, with an objective
to facilitate trade by Chinese small businesses that were trying to export their products to the global

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market.

Jack Ma had famously said that his objective of establishing Alibaba was “to make it easy to do business
anywhere.”

This statement went on to become the mission statement of the Alibaba Group16. Of course, Jack Ma’s

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fondness for MSMEs was no accident. He was a native of Zhejiang province, which was full of small
businesses led by grassroots entrepreneurs. In fact, during his early entrepreneurial career, he himself had
established a small business in translation services and had faced challenges that were typical for most
MSMEs in China. For example, all small businesses had to register under Bureau of Industry and
Commerce, and to gain access to foreign buyers, they had to participate in seldom-held fairs such as the
China Import and Export Fair (Canton Fair)17 for small businesses. This was not only expensive, but also
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gave them limited exposure. On the other hand, there was sufficient demand outside the country for
Chinese products, but very limited online presence of Chinese companies, for foreign companies to trade
with. In fact, in Jack Ma’s own words, the inspiration to start yellow pages came to him, when he
searched online and found no Chinese company during his trip to the United States in 1994. This has been
Jack Ma’s secret for success throughout the evolution of Alibaba: finding gaps (institutional gaps,
information gaps, market gaps, logistics gaps and finance gaps) and converting them into business
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opportunities.

Alibaba’s growth story can be divided into four phases (see Exhibit 1 for a timeline of Alibaba’s
evolution). During the first phase (1999-2003), Alibaba.com, the business to business (B2B) trading
platform came into being, with an explicit objective to facilitate easier access for Chinese small
businesses to foreign trade. In 2001, China became member of World Trade Organization (WTO), which
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opened many opportunities for exports of goods made in China. Alibaba.com therefore was timely and
became a huge hit among the small businesses weighed down by the customs and trade related regulatory
hurdles and language barriers. The Chinese government was also trying to facilitate exports of
manufacturing goods to increase economic growth in China and was happy to accept Alibaba’s
facilitation of cross-border trade. Chinese government showed an open attitude towards e-commerce. For
example, online sellers who could not meet the requirements of business registration were allowed to
register as an online business with their personal IDs.18
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16
http://alibabagroup.com/assets2/pdf/Alibaba_Group_Corporate_Overview_Eng.pdf.
17
The fair was started in the spring of 1957 in Guangzhou, capital city of Guangdong Province. The fair opens twice annually in spring and
autumn of each year.
18
State Administration on Industry and Commerce, Interim Administrative Procedures on Online Transaction and Related Services (SAIC No.
49), 2010.

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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In March 2002, eBay, the American auction based e-commerce company, entered China by acquiring
EachNet, which made a successful business out of the consumer to consumer (C2C) online bidding and
buying, and soon achieved a dominant position in this business. eBay’s market share was 85% in 2003.19
This gave Jack Ma sleepless nights with the fear that eBay’s power sellers might grow to compete with
Alibaba’s small vendors in the B2B space. He decided that it was time to get into the C2C business in

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China, and consequently Taobao (literally meaning ‘‘Treasure Hunt’’ in Chinese) was born in May 2003.
This began the second phase of Alibaba’s growth story. Three important strategies by Jack Ma and his
team sealed the fate of Taobao in the Chinese e-commerce market and gave eBay a run for its money.
First was the ‘‘no fee’’ strategy, where the sellers could register under Taobao for free and sell their
products without incurring any commission for Taobao. Meanwhile, eBay adhered to its original formula
of making profits by charging commission on goods traded on its platform. Second was the establishment

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of Alipay in October 2003, which as a third-party escrow service20 ensured that the payment by the buyers
was secure and reached the sellers only after the buyers were satisfied with the product they had received.
Although eBay introduced a direct payment system of Paypal, in this system, buyers were exposed to the
risk of asymmetric information of online trade. The third was the introduction of a chat service called
‘‘Ali Wang-Wang’’, which enabled the buyers and sellers to communicate with each other without any
cost, allowed possibility for negotiations and after-sales services. In contrast, eBay prohibited online
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traders from sharing their contact information publicly and penalized off-platform transactions.21 These
three main strategies helped Taobao, an unknown entity outside China, to take on the mighty eBay, a
well-established ecommerce giant across the globe and beat it into a retreat.

In a much-quoted analogy regarding his fight with eBay in Chinese market, Jack Ma had said:22
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eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in
the ocean, we lose, but if we fight in the river, we win.

By 2005, within 2 years of Taobao’s launch, eBay’s share in Chinese C2C market decreased to 24%,
while Taobao enjoyed a market share of more than 70%.23 By 2008, eBay faded into obscurity in China,
whereas Taobao managed close to $15 billion worth of business on its platform. In addition to Jack Ma’s
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innovative strategies, some of the fatal errors by eBay, such as charging high commission fee to the
sellers, standardizing the website design with its global site, prohibiting negotiation between buyers and
sellers, weak guarantee on the payment, and migrating the eBay China website to the United States, have
significantly contributed to Taobao’s success.24

19
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Sherman So and J. Christopher Westland, Red Wired: China’s Internet Revolution, London: Marshall Cavendish International Asia Pte Ltd., p.
97.
20
Alipay opened its 24-hour customer service hotline to improve user experience.
21
Besides those three strategies, Taobao created an effective authorization system to enhance trust between online traders, including tying ID and
banking information with online trading and payment accounts, introducing a rating system based on buyers’ experience on the goods and
services of sellers.
22
https://www.forbes.com/sites/helenwang/2014/08/07/alibaba-saga-iv-a-crocodile-in-the-yangtze-river/#721694578f89
23
Chinese Academy of Social Sciences, 2015 China E-commerce Market Survey Report, available via
http://www.cnebr.net/jxyd/content.asp?id=104&parentid=15.
24
http://www.globalcma.in/wp-content/uploads/Alibaba_-The-House-That-Jack-Ma-Built.pdf

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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To everyone’s surprise, some of the small businesses also began to sell their products on Taobao resulting
in business to consumer (B2C) transactions as well, even though the platform was originally meant for
C2C business. During this period, as the Chinese economy was growing at a high pace (with an average
GDP growth rate of more than 10% between 2000 and 2008) owing to exports and increase in
employment opportunities, the domestic demand had picked up. As the annual household expenditure per

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capita in China increased from approximately $600 in the year 2000 to nearly $2000 in the year 2010 (see
Figure 1), the MSMEs found that selling on Taobao was the easiest way to reach the Chinese consumers.
The traditional way of doing business necessitated physical infrastructure, distribution and logistics
facilities which were in short supply. Real estate in China was very expensive and most small-scale
vendors could not simply afford to establish a physical outlet in a commercial street. Online business not
only eliminated many of these needs, but also removed the many layers of middle men of the traditional

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supply chains that one had to go through and share profits with.

Figure 1
Household final consumption expenditure per capita in China (2001-2016)
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Source: World Bank WDI Database

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Note: Measure in constant 2010 USD

Also, Taobao had promised that listing under their platform would be free during the first 5 years after the
launch. When Taobao tried to introduce a registration fee in 2005, the sellers put up a major fight and
made sure there was no fee until the 5 years were completed. In addition, sellers on e-commerce
platforms did not have to pay the taxes that applied to traditional businesses.25 As a result, the online retail
as a sales in China grew steadily as seen in Figure 2, with a significant contribution from transactions on
Taobao.
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25
During this period, the Chinese government, as in other emerging markets, was simply watching the emergence of e-commerce market and did
not have policies in place. Since Taobao was meant for individual consumers buying from other individual sellers (C2C), the small-scale B2C
business went unnoticed. However, when the Taobao Mall, the B2C business of Alibaba, was formally launched in 2008, there was a fierce
debate on imposing taxes on online businesses. On the one hand, the tax authorities faced challenges to determine the appropriate tax rate, due to
high variation of products traded online compared to offline businesses, and therefore the cost of monitoring/inspecting online transactions for tax
purposes was likely to be more than the tax collected. On the other hand, many advocates for no-taxation emerged to support the development of
small business. Considering the challenges involved and the popular sentiment, the government decided to maintain status-quo.

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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As the C2C and B2C businesses on Taobao’s platform grew, the need for support services grew with it.
Jack Ma realized that, to be able to provide better support to the individual sellers and small businesses on
Taobao, he would have to partner with third-party service providers and create an ecosystem around the
e-commerce business. Thus, began the third phase of Alibaba’s journey in 2008, with the focus on
‘‘Ecosystem Strategy’’. To make doing business online easy, Alibaba began to engage and partner with

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many third-party service providers, including, distribution channels, financial services, website design,
training, management and technical consultancy, warehousing, logistics, customer and marketing
services.

Figure 2
Share of online retail in the overall Chinese retail sales during 2006-2016 (%)

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Source: J. B. Cao, China’s E-Commerce Market Development Report 2016, Beijing: Social Science Archive Press, 2017.

For example, majority of Chinese banks were state-owned and naturally focused on lending to large
enterprises, or enterprises that had assets to mortgage. However, small businesses, micro-enterprises and
rural entrepreneurs were starving for funds and could not exploit the growing business opportunities
presented by e-commerce. While Alipay facilitated financial transactions between buyers and sellers,
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there was a clear need for other financial services such as provision of funds for working capital needs of
sellers, loans for buyers, micro finance for small businesses, etc. Similarly, the sellers, especially in rural
markets, needed handholding to set up their store fronts on Taobao’s site, advertise and market their
goods, identify appropriate means to reach the sold goods to buyers and storage facilities for their goods
as transaction volumes increased. Without these support services, it was difficult for online sellers to
survive in the business. Of course, Jack Ma did not want to get into the provision of all these necessary
services himself. Instead, he opened up a platform to the third-party service providers, who not only
helped Taobao’s customers, but also became customers of the platform by hosting their services on
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Taobao. In the process, they created an ecosystem wherein buyers, sellers and service providers became
interdependent and began transacting with each other in high volumes, a necessary ingredient for growth
(see Figure 3). According to Jack Ma, these seller services were similar to “the water, electricity and gas”
that people needed in their daily life.26

26
http://tech.hexun.com/2008-08-09/108648485.html (in Chinese)

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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Figure 3
Alibaba’s E-commerce Ecosystem

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Sellers Buyers

Service

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providers

E-commerce Platform

Source: Created by the case writers

They also separated the B2C business from Taobao, finally establishing Taobao Mall or Tmall in 2012, so
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that more focused support could be provided to small businesses catering to domestic consumers. This led
to the emergence of the Alibaba ecosystem. The launch of Aliyun, the cloud computing service provider,
was driven intrinsically as businesses expanded. Alibaba was not born as a typical technological
company, but technological challenges emerged from the fast growth in both the value and diversity of
business, such as security and risk control for the Taobao and Tmall transactions and accounts, and the
extreme demand for extraordinary computing capacity for events. Aliyun was developed by solving those
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challenges with emerging cloud technology, which later became a broader cloud service. The Ant
Financial originated from the Alipay was officially founded in 2014. It was a technology company that
utilized the data of online transaction and payment to develop a totally unique credit rating system that
was different from traditional system, through which a wide range of financial services for consumers and
small businesses was developed. By 2015, after just one year of this founding, the Ant Financial
successfully reaped licenses of security, bond, banking, and fund from Chinese financial administrative
No

agencies. Later, the Ant Financial included all the online financial businesses. Cainiao was created in
2013, which was joint venture between Alibaba and its partners, including China’s major delivery
services and financial companies. Cainiao started developing the Internet of Things to make online
package services more efficient. AliExpress was founded in 2010, and was the only online platform for
global buyers, and Alipay was employed for warranted payment and international delivery services.

Sale of counterfeit products by some sellers on the Taobao platform resulted in Taobao being added to the
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“Notorious Markets List27” in 2011 by United States Trade Representative (USTR), which not only
threatened Alibaba’s reputation, but also complicated its plans for an IPO. This was another reason for the
establishment of Tmall, so that better quality and screening of genuine products by branded sellers could
be carried out, owing to more manageable scale and ability to charge for related services.

27
This list details marketplaces that reportedly “engage in and facilitate substantial copyright piracy and trademark counterfeiting.”

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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By 2014, Alibaba and its associated online businesses on Taobao and Tmall had become so big that their
revenues surpassed some of the largest global companies such as Walmart, eBay, and Amazon. The sheer
size of business and the volume of sales on its platforms during special days such as “Single’s Day” (held
on November 11)28 necessitated Alibaba to upgrade its technologies. Thus, Alibaba entered the fourth
phase in 2014, where it began focusing more on building and exploiting Aliyun’s cloud computing and

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Ant Financial’s fintech capabilities to transform into a ‘‘Technology Company’’. The huge amount of
data available to Alibaba on small businesses and consumers buying and selling on its platforms provided
opportunities to offer more value-added services to consumers and businesses transacting on its platforms
through big data, cloud computing and analytics capabilities of Aliyun. These were also the services that
Alibaba typically charged for and hence contributed to its revenues significantly (see Exhibit 2).

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In the meantime, the Chinese government began to establish regulatory framework for the fintech29
sector, with an objective to strike a balance between technological innovation, growth and financial
stability through prevention of systematic risks.30 As part of these regulations, Alipay, being a non-bank
payment company, needed to obtain a license from People’s Bank of China (PBoC) (the central bank of
China) to operate in China. To be on the safer side, Alipay was spun-off from the Alibaba Group and
restructured as a domestic company in 2011, which finally evolved into Ant Financial in 2014. This new
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company enabled Alibaba group to fill the existing gaps in its ecosystem. Ant Financial’s objective was to
benefit the society by resolving practical pain points and facilitating small transactions for customers as
well as small businesses. To meet these objectives, Ant Financial created an online financial ecosystem
involving Alipay (an online payment portal), MYbank (an online banking system) and Yu’e Bao (a
money market fund). For example, within 48 days after its establishment in 2016, MYbank provided
loans worth approximately $5 billion to nearly one million small and micro businesses in China.31 The
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mega ecosystem of Alibaba including the core and supporting services in all its platforms as of 2017 is
depicted in Exhibit 3.

During this period, online technology and social media companies such as Microsoft and Amazon had
become the main competitors for Alibaba. Realizing that the future lay in technology, and in the untapped
markets of rural China and abroad, Jack Ma announced the following three strategies as the focus points
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for Alibaba, during Alibaba.com’s initial public offering (IPO) on the New York Stock Exchange in 2014.

 Globalization
 Big Data and Cloud Computing
 E-commerce in Rural Areas

Realizing that global small businesses were spreading beyond a country’s border and aspiring for a
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worldwide transparent and fair play market, Alibaba launched the forward-looking strategy of

28
Chinese netizens call November 11 as the “Single’s Day”, the day dedicated to celebrating singleness. Alibaba’s B2C platform Taobao Mall
(changed to Tmall in 2012) initiated a sales promotion on November 11 in 2009, converted a folk event into a national wide online shopping
festival. “Single’s Day” sales of Tmall in 2017 reached RMB 168.3 billion ($ 25.3 billion) in value and 812 million logistic orders.
29
‘fintech’ was a term coined to represent the application of internet technologies and innovation to the financial services sector.
30
http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf
31
Zhu, F., Zhang, Y., Palepu, K., Woo, A. K., and Dai, N. H. ANT Financial, HBS case # 9-617-060.

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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globalization. It provided a worldwide online platform to facilitate small businesses to utilize ecommerce,
internet financing, big data, market and logistic platforms, and to offer consumers across the globe to
purchase products and services internationally through its Alibaba and AliExpress platforms. Jack Ma
also believed that the world was evolving from the IT era towards a new era of Data Technology, in
which data would be the most essential input for an innovative society. The group launched its second

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forward-looking strategy of Big Data and Cloud Computing to explore the value of data, to reshape the
growth model.

To promote e-commerce in rural areas, Alibaba adopted the “Rural Taobao” strategy of enabling online
selling of agricultural products on Alibaba’s platforms, building on the learning it gained from the
“Taobao Villages”.

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THE TAOBAO VILLAGES

Since 2010, Alibaba’s researchers had observed significant ecommerce activity in some villages, with
rural population buying and selling in Alibaba’s Taobao and Tmall. To promote e-commerce in rural
China and make products more accessible to rural population, Alibaba came up with the concept of
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‘‘Taobao Village’’ in 2013. A village qualified as Taobao village if (i) the number of households enlisted
in Taobao and Tmall was more than 100 or greater than 10% of the size of the village, and (ii) the annual
revenues from online sales of the village exceeded RMB 10 million. In 2016, there were 1311 Taobao
villages in China, which had enlisted more than 300,000 online stores in Taobao. These Taobao villages
were highly concentrated in the developed areas of east coast, with Zhejiang, Guangdong and Jiangsu
having the largest number of Taobao villages (506, 262 and 201) followed by Shandong, Fujian, and
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Hebei (108, 107, and 91). The distribution of Taobao villages was found to be highly correlated to the
spatial pattern of China’s industrial clusters, transportation and logistics facilities (please see Figure 4).

Figure 4
Evolution of Taobao Villages (2014, 2015 & 2016, respectively)
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Source: Research Report on China’s Taobao Villages, by AliResearch, 2016.

AliResearch, the research wing of Alibaba group, after an in-depth investigation of the Taobao villages
found that Taobao villages had become incubators of many startups, exploiting the opportunities
presented by the digital marketing platforms and the ease of doing business online. Many sellers were

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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conducting online business from their homes, converting their drawing rooms into offices and coopting
family members, friends and relatives to run support services such as sourcing, packaging, delivery, etc.
People, who could not take up full time jobs due to family responsibilities or handicaps, found e-business
to be a more suitable occupation. Many retired personnel, including army and industrial workers, and
even youngsters working in cities were attracted by the potential of ecommerce in rural China. For

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example, Shuyang county in Jiangsu province consisting of 31 Taobao villages had strong entrepreneurial
culture and attracted 6,500 undergraduate students, veterans and migrant workers to return home from
urban China to start businesses. It was estimated that every active online store in Taobao villages on
average created 2.8 direct job opportunities. In addition to direct jobs such as customer service,
marketing, sales, goods packing, dispatch, etc., e-commerce was also found to create diversified and
flexible indirect jobs in the neighborhood for tailors, carpenters, express delivery men, and photographers.

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AliResearch estimated that active online stores of Taobao villages created more than 840,000 direct job
opportunities by the end of August 2016.

RURAL TAOBAO

It’s not just about making money. It’s about making “healthy” money — sustainable
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money that’s not only good for shareholders and employees, but is also good for society,
as it enables people to live better lives.
--- Jack Ma

Since Taobao villages have done such a good job of enabling small businesses in rural areas, in response
to the call by the Chinese government to increase growth of rural economy, Alibaba decided to create
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more such villages all over China, and thus began its ‘‘Rural Taobao’’ strategy in collaboration with local
and provincial governments. Alibaba adopted a three-pronged approach to enforce the rural strategy: (i)
bring convenient and affordable goods and services to rural areas, (ii) provide support to develop an
ecosystem for the sustainable development of the rural economy and society, and (iii) help rural areas
build the infrastructure of e-business, including trade, logistics, payment, finance, cloud computing, data,
etc. In order to implement and realize the rural Taobao strategy, in October 2014, Jack Ma promised an
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investment of RMB 10 billion in 3 to 5 years, to help establish 1,000 county-level service centers and
100,000 village-level service stations.

Rural Taobao was a public private partnership (PPP), with local governments providing the necessary
physical infrastructure and Alibaba providing funding, training, manpower, and internet traffic to the rural
businesses (see Exhibit 4 for more details on Alibaba’s role). Each village service station was provided a
computer, a screen, and other necessary equipment to conduct online sales. The service stations were
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manned, typically by young people (called rural Taobao partners) who were returning home or had strong
relationships with local villagers, and knew how to operate computers and use internet. These rural
Taobao partners worked with local villagers, showed them how to buy and sell online using the facilities
in service stations, identify entrepreneurs in the village and provided them the support they needed to
establish online businesses. Since the Taobao partner in each village was a local person, and was very
likely related to many villagers, the trust factor played a major role. The villagers were first shown

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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various products that were available online (which they did not have access to otherwise), and asked if
they would like to buy them. Since the prices of online products were much lower than offline products,
the typically price-conscious villagers found them more affordable. The Taobao partner then assisted the
villagers in buying the products online and the village service stations doubled up as ordering and
delivery points. Once the villagers started buying products online, they were told that they can also sell

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online. Since selling directly to customers – especially the agricultural produce – without the middlemen
results in much higher revenues for the villagers, it usually does not require too much convincing to get
the enterprising villagers to open online stores. The Taobao partner then assisted these villagers in setting
up their e-businesses. Based on their experience with Taobao villages, Alibaba found that, it is easier to
convince someone to set up a business online, after they have had the experience of buying online.

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County-level service centers provided the required support to the rural Taobao partners within their
county and helped develop ecosystem and infrastructure for e-business liaising with Alibaba’s other
businesses such as Alipay, MYbank, Cainiao network, and third party logistics providers operating on
Taobao platforms (see Exhibit 3 for more details). By May 2017, rural Taobao had reached more than
700 counties in 29 provinces and established more than 30,000 village-level service stations. The average
monthly income of rural Taobao partners32 was estimated to be nearly RMB 3,000, with the highest being
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RMB 16,000.

According to Ali Researchers:

If Taobao villages are clusters of e-commerce people in rural areas developed by

ordinary farmers in a bottom-up manner, then rural Taobao is the rural e-commerce
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service system built and driven by the government and e-business platforms in a top-
down manner. The core feature is the “public entrepreneurship and general innovation”
and the main driving force is the innovation of ordinary people inspired by the market.
The ultimate goal of Taobao villages and rural Taobao is the same, namely the
realization of increase in farmers’ income, growth of rural economy, upgrade of
agriculture and new urbanization through the “popularization of Internet” in rural
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areas.

E-COMMERCE IN INDIA – THE EMERGING MARKET

Alibaba was founded with a simple mission to help small business owners make money.
But our next challenge is to join forces with the people of China and beyond to build an
ecosystem that can help even more people make a decent living and push for change that
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benefits everyone.
--- Jack Ma

32
The rural Taobao partners receive a commission from the villagers on the sales conducted through the service station. Alibaba also provides
some financial support to supplement this variable income from village sales.

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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India, the second largest nation in the world, which used to be a mélange of several small nations with a
variety of cultures and 780 different languages,33 was stitched together into a single country under the
British rule in the 19th century. The differences persist across various villages, towns and cities of India,
which has been divided into 29 states and 7 union territories. In addition to language barriers, the
differences in tax structures and custom duties between various states have hampered the growth of e-

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commerce in India by creating inefficiency in the way distribution centers are set up and warehousing,
logistics and supply chains are managed. However, the introduction of Goods and Services Tax (GST) in
2017 removed some of these obstacles by streamlining issues related to warehousing and logistics.
Another major challenge for e-commerce companies operating in India is the cash-on-delivery (CoD)
payment method started by the market leader Flipkart in 2010 to attract buyers who lacked trust in online
purchasing. By 2017, CoD accounted for nearly 75% of all e-retail activities in India.34 The option of

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CoD not only necessitated creation of cash logistics by the e-commerce platforms but also allowed buyers
to change their mind after the purchase had taken place, contributing to a significant quantity of returns
(nearly 30% to 40% of orders) and associated logistics costs in the Indian ecommerce space.35 While
potential for ecommerce in semi-urban and rural areas in India was touted to be very high,36 there were
equally serious challenges in terms of lack of physical and digital infrastructure, language barriers,
internet illiteracy, etc.37
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Even though India’s real GDP growth rate averaged 6.7% since 2010, the job growth rate in the formal
sector averaged only 2%, which in fact counts as nearly zero growth in jobs, after accounting for
population growth rate.38 On the other hand, India’s MSMEs contributed towards nearly 40% of Indian
GDP, 45% of Indian exports.39 The informal sector, where small businesses in India mostly operated,
generates approximately 80% of employment in India.40 With 12-15 million Indians slated to enter the
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labor market each year, there was much that e-commerce platforms such as Flipkart, Amazon and Alibaba
could offer in terms of creating jobs as well as business and self-employment opportunities in urban and
rural India. Based on Chinese experience, if used diligently and with appropriate ecosystems, e-commerce
could help small businesses in India to grow and generate both direct and indirect employment and
contribute towards social sustainability in underdeveloped areas. The question is, can established e-
commerce players in India repeat Alibaba’s performance in China? What should be the role of the Indian
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government and other institutions in creating a conducive ecommerce environment? What are the
challenges involved in adopting the Chinese e-commerce model, given the unique characteristics that
distinguish India from China?
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33
https://en.wikipedia.org/wiki/Languages_of_India
34
https://en.wikipedia.org/wiki/E-commerce_in_India
35
http://www.businesstoday.in/magazine/cover-story/cash-on-delivery-impact-on-e-commerce-companies-customers/story/202680.html
36
http://economictimes.indiatimes.com/industry/services/retail/how-ecommerce-giants-like-amazon-and-flipkart-are-piloting-rural-distribution-
model-to-cater-small-town-customers/articleshow/47635478.cms
37
http://www.yo-kart.com/blog/ecommerce-in-rural-india-untapped-potential-challenges-road-to-improvement/
38
http://www.livemint.com/Opinion/S0FE91jpvLOv4bn4aVdBNK/Why-inclusive-growth-is-indispensable-to-India.html
39
http://smestreet.in/msmes-contribute-for-more-than-37-of-gdp-and-employment-for-805-lakh-indians/
40
http://www.ilo.org/newdelhi/areasofwork/informal-economy/lang--en/index.htm

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 Alibaba – Building a Social Sustainability Ecosystem for E-commerce

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Exhibit 1
Evolution of Alibaba during 1999-2017

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Note: Alibaba was founded by 18 partners led by Jack Ma in 1999, with the first venture capital of 5 million USD. In May 2003, the
Taobao.com, a C2C online platform, was launched. Alipay was introduced in October 2003 as an essential supplement online pay service to
facilitate transactions on Taobao.

Source: Created by case authors, using publicly available information on Alibaba and information from various Alibaba websites
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Exhibit 2
Quarterly Revenues of Alibaba Group companies by segment
(for June Quarter 2017)

Business Domain Sector Revenues (in Billions Platform

RMB)
Core commerce Wholesale + Other 3.7 Alibaba.com
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International commerce 2.6 AliExpress, Lazada.com

retail
China commerce retail 36.7 Taobao.com, Tmall.com,
juhuasuan.com, cun.taobao.com,
Chaoshi.tmall.com,
Alimama.com, TMALL
GLOBAL, HEMA, Intime Retail
Cloud Computing 2.4 Alibaba Cloud
Digital Media & 4.1 UC, UC News, Youku, Tudou,
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Entertainment AliSport, Alibaba Music, Tmall

TV, Aligames, Damai.cn
Innovation Initiatives 0.6 Auto Navi, YunOS, DingTalk
& Others

Source: Alibaba Group

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Exhibit 3
Mega ecosystem of Alibaba including core and supporting services

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Source: Introduction on Alibaba’s Development and Businesses, by Policy Research Unit of Alibaba Group, 2014.

Exhibit 4
Alibaba’s efforts towards promoting Rural Taobao and Taobao Villages
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According to AliResearch, Taobao University had successfully held 40 sessions of e-business seminars
aimed at county heads, covering 26 provinces, 184 prefecture-level cities and 504 counties and training
1,398 county-level leaders and cadres. Taobao University also trained 100 personnel service providers in
the country to assist traditional county-level corporations in transition, business startups, innovation and
other aspects. Rural Taobao worked with third-party logistic service providers and opened up the logistic
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channels in rural areas through subsidy and other means. Cainiao network built the “distribution network
for big household appliances”, covering 95% districts and counties in the country and reaching 500,000
villages. Mantianxing program41 cooperated with 51 counties in the country by December 2015 and traced
the sources of high-quality agricultural products. Ant Financial connected more than 2,300 rural financial
institutions, served more than two million rural e-business people and a large number of rural Alipay
users and provided business loans to 180,000 small and micro corporations in rural areas, lending RMB
30 billion in total.
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Source: Research Report on China’s Taobao Villages, by AliResearch, 2015.

41
Mantianxing program was initiated in 2015. This program is targeted to create a unique ID for each product by using the QR code solution, in
order to trace its footprint.

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