Looks like I’ve neglected to post in quite a while.
The past year has certainly been a blur with both market and geopolitical disruptions domestically and abroad. What started out as my good intention to take the market disruption as an opportunity to do more work on a number of companies I’ve long admired (largely within e-commerce and internet space), quickly lengthened into a years-long journey exploring new areas/industries such as payments, SaaS software, and biotechnology. As a starting point, these areas have proven to be quite fruitful in looking for robust business models that can create immense, sustainable business value over time.
The benefit to you is that I now have several notebooks worth of thoughts that should hopefully prove interesting to you in the coming months.
Stay tuned, and now on to the current post.
As you’re probably already quite aware, ecommerce is one of the most dynamic industries in the world right now. Although the biggest companies like Amazon and Alibaba are already household names and both look relatively undisruptable, I continue to believe that industry dynamism will open new avenues for disruption, which will force leading players to evolve their business models in order to stay competitive.
I’ve previously argued that Amazon potentially faces a threat from Alibaba (see “The Other Supply Chain Gorilla That May One Day Challenge Amazon“). While Amazon has a very strong lock on the B2C market in the US with particular strength on the consumer/demand side due to Prime/fast shipping, Amazon’s seller/supply side remains quite dependent on the Chinese supply chain as illustrated through these equations:
If we take a platform view, Amazon’s business is simple enough:
Equation 1: Sellers (Product) –> Amazon (Transaction Mediator and/or FBA) –> Buyers
Amazon has a lot of influence over buyers and sellers in this equation because buyers and sellers are presumably fragmented and small relative to Amazon’s size.
If we take a supply chain view, the situation looks more like this:
Equation 2: Chinese Manufacturer –> Amazon Seller –> Amazon –> Amazon Buyers
This equation reveals that many Amazon sellers are potentially also middlemen that can get aggregated on the other end. However, this is still not particularly problematic for Amazon since Chinese manufacturers are presumably also fairly fragmented with Amazon wielding the most concentrated power in the system.
In reality the supply chain equation looks like this:
Equation 3: Chinese Manufacturers –> Chinese Sellers –> Alibaba / Aliexpress –> Amazon Sellers –> Amazon –> Amazon Buyers
This equation exposes one of the, potentially, weakest links in Amazon’s supply-chain-driven strategy, which I believe is largely undiscussed by US ecommerce market observers/investors.
It is from that perspective that I found Alibaba’s recent push into US B2B market absolutely fascinating:
Alibaba.com, one of the world’s largest B2B ecommerce marketplaces and a business unit of Alibaba Group (NYSE: BABA), today opened its platform to empower U.S. businesses to sell their products to millions of Alibaba.com buyers in the U.S. and around the globe. Now, the nearly 30 million Small and Medium-sized Businesses (SMBs) in the U.S.– especially manufacturers, wholesalers and distributors – can better access the $23.9 trillion global B2B ecommerce market, an opportunity that is six times larger than the global B2C ecommerce market.
What makes this so fascinating is how my previous post arrived at the wrong conclusion despite what I believe to be sound assumptions. I assumed that given Alibaba’s stronger lock on the supplier side of the equation due to their control of the Aliexpress platform where many Amazon sellers source products (and overall greater direct familiarity of Chinese suppliers with Alibaba), Alibaba would one day extend greater influence into Amazon’s value-chain by aggregating Amazon’s supply side of the platform.
Although this can still certainly play out, Alibaba seems to have found a much more logical step near-term by going after US B2B. B2B is very likely an underserved opportunity, and Amazon has much less power/influence over this part of the market. This allows Alibaba to make a relatively easy entry. More importantly, Alibaba is soft-leveraging the single asset that makes them the 2nd most valuable ecommerce company globally – the Chinese economy. From a US seller’s perspective, joining Alibaba’s B2B efforts would allow them to potentially sell to Chinese businesses (indirectly to Chinese consumers, perhaps even directly in the future). While the Chinese economy remains smaller than the US, the gap has shrunk materially and continues to shrink given China’s faster growth rate. For Alibaba, this gets them a foot in the door into the US and further strengthens their relationship on the supply side. Over time, Alibaba might be able to combine these relationships in US-to-US-and-US-to-China/global B2B with their China-to-US B2B/B2C Aliexpress relationships.
Should Alibaba be successful in aggregating the supply side of the equation, Amazon would have a much weaker flywheel, which would leave its consumer side up for disruption.
Within all this is two generalizable points – 1) History seems to suggest that platforms are usually only disrupted by other platforms, 2) The more sides to a platform, the harder it is to disrupt since each side exhibits a pull within the network that keeps the ecosystem sticky.
For an ecommerce platform, the flywheel looks something like this: Sellers go to where the customers are (for now, Amazon in the US). The customers go to where the cheapest/most convenient/greatest supply is. As more sellers come to the platform, more consumers come to the platform as well.
The question is what happens to Amazon’s flywheel if sellers start to think that Alibaba offers a much larger global market for their wares than Amazon does? At the end of the day, sellers are rational and go to where the customers are. And the risk on the consumer side is that consumers are fickle. Where the best deals / shopping environment goes, so goes the consumer. First as trickle, and then a flood.
Lots of hypotheticals and potential scenarios. Will be interesting to watch what Alibaba attempts to do from here, and what Amazon does next.
Disclosure: I have a direct beneficial interest in BABA as of publishing date.