1.1 Mission and strategic objective of the company
Alibaba is China’s largest e-commerce platform. In order to open up the international market, it decided to relocate its Head Quarters (HQ) and warehouses to the United States (US).
Relocating its HQ in the US is of great benefit. First, the US has the world’s most advanced financial markets, stock markets, and banks. Second, the US has a developed information network where the world’s advanced business information and technical information are brought together.
Third, the United States has an international policy platform that can help Alibaba quickly adapt to the international market.
Therefore, this move can integrate Alibaba’s international resources, expand and enhance its competitive edge, as well as attract more American consumers with greater purchasing power parity.
Moving HQ and Warehouse to the United States is not an easy task. The difficulty Alibaba faces in its expansion in the US is not only the strong competitors of the US, but also the trade tension between China and the US.
Also, it needs to conduct cross-cultural management, be familiar with local labor laws and deal with the local government and labor union, etc.
1.3 Business Strategy
If Alibaba decided to move its headquarters to the US, New York might be its choice. Alibaba has considered setting up its international HQ in New York, and it already has a Corporation Service Company and a principle executive office located in New York. Apart from that, Alibaba has moved its HQ to Beijing, showing that the degree of preferential policies is not Alibabas main concern, but the distribution of talents, the convenience of transportation and the integration of resource brought by advanced geographical location.
Therefore, it has to conduct a detailed business analysis before its relocation, learn and understand the current situation in the US, identify macro environmental issues with the potential to inhibit Alibaba successful relocation, analyze the competitiveness of the US industry and its potential competitors to help it better adapt to the US market and mount a successful competitive fight in international market.
2.0 Company Background
2.1 Business ownership
Alibaba Group Holding Limited is a Cayman Islands holding company established under the Companies Law of the Cayman Islands (as amended) on June 28, 1999, and it conducts its business in China through its subsidiaries and variable interest entities. Its ADSs are listed on the NYSE under the symbol “BABA.” (Alibaba Group 2019)
According to Alibabas FY2019 Annual Report, as of June 3, 2019, Alibaba co-founder and chairman Jack Ma is the largest individual shareholder of the company, with 161.9 million shares, which represents a total of 6.2% of shares outstanding. Apart from that, SoftBank Group Corp. holds 673.8 million shares in Alibaba, which accounted for 25.9% of shares, is the largest shareholder of Alibaba. At the same time, Altaba Inc. holds a 9.4% stake in Alibaba and is the second largest shareholder of Alibaba. (Alibaba Group, p184)
2.2 Scope of activities
Alibaba acts as a middleman between buyers and sellers online and facilitates the sale of goods between the two parties through its extensive network of websites. (Investopedia 2019 a) It has three core businesses: Alibaba, Taobao and Tmall, providing technology infrastructure and marketing platforms for merchants, brands and other businesses to help them interact with users and customers and operate more efficiently.
2.3 Mission Statements
Its mission is to make it easy to do business anywhere. Its founders founded the company to embrace small businesses in the belief that small businesses can compete more effectively and fairly in the domestic and global economy through Internet innovation and technology development. It believes that focusing on customer needs and solving their problems – whether these customers are consumers, merchants or businesses – ultimately will lead to the best results for their business. (Alibaba Group 2019) And now it becomes a digital economy that encompasses consumers, businesses, brands, retailers, third-party service providers, strategic partners, and other businesses.
3.0 Macro Environment: PESTLE analysis
3.1 Political Factors
The United States has a strong democratic system and an effective rule of law whose elections are widely considered to be open, fair and impartial. The US enjoys enormous political and economic influence in both national and global policy development and is recognized as the world’s leading superpower. However, certain interventionist policies of the US in certain parts of the world have received a lot of criticism internationally.
Since the tariff fight began last year. Chinas diplomacy with Washington has frayed. US government officials now openly call China an adversary and believe that China is trying to undermine and replace US power and global leadership. Although Chinese leaders used a more moderate language in public, it is clear that at least under the Trump administration, the US is the enemy of China, trying to weaken China and threaten the rule of the Chinese Communist Party. Under such circumstances, the US government is likely to transfer its anger on Alibaba Group. After all, Huawei’s forced suspension of expansion in the US should be regarded as the attention-meriting warning.
3.2 Economic Factors
The United States is the worlds largest economy, with GDP ranking first in the world. Many famous companies in the US such as Google, Facebook, Microsoft, Apple are shaping and leading the world’s economy. The recession in 2009 has seriously affected the US economy when countless companies have closed down and the unemployment rate has risen to an alarming level. However, in the past decade, the US economy has steadily increased that the unemployment rate has gradually decreased, and income levels have also risen significantly.
3.2.1 Business cycles
According to the chart Appendix B, after the last trough in the fourth quarter of 2008, the US economy has been in the expansion phase of the business cycle for more than 10 years. (see Appendix B for full chart) The expansion phase usually lasts for about five years, so the recession is likely at the corner. (Kimberly 2019)
3.2.2 Interest rates
The federal funds rate is currently 1.75% to 2% after the Fed cut interest rates by a quarter a percentage point on September 18, 2019 (Federal Reserve 2019 a). This is the second rate drop in 2019 (Federal Reserve 2019 b), which is a reflection of the health of the US economy.
The Federal Reserve cut the federal funds rate to 0.25% in December 2008, trying to light a spark under the economy in the worst financial crisis since the Great Depression. The rate remained unchanged until 2015, and steadily rised as the economy accelerated through 2018. (see Appendix C for full chart) The rate cut in 2019 signed a slowdown in Americans economic growth.
3.2.3 Unemployment rate
The Bureau of Labor Statistics (BLS) released its monthly Employment Situation Report, showing that the growth rate of employment has gradually slowed down. The US unemployment rate was unchanged at 3.7 percent in August 2019 from the previous two month’s figures and in line with market expectations. (BLS 2019) However, some experts forecast that the Unemployment rate in the US may stand at 3.80% in a year and around 4.10% in 2020 according to the econometric models. (Trading Economics 2019)
3.3 Social Factors
The US is the third most populous country in the world with a total population of approximately 329 million according to United States Census Bureau. The United States has a large aging population that its population over 55 accounts for 28.7%, which may cause problems in terms of labor supply. (United States Census Bureau 2018)
Wages in the US are high compared to labor rates in China. The minimum wage in the United States is $7.25 per hour, while China is $3.09 per hour, less than half of the United States.
3.3.2 Human Rights Issues
Unlike China, the US allows citizens to exercise their right to assembly, collectively negotiate, strike, and even barging for better wages and working conditions. The laws governing the exercise of rights by Chinese employees are weak and there are few avenues for workers to address their grievances their dissatisfaction with working conditions.
3.3.3 Equal Opportunity
In the US, people value creating workforce made up of different races, genders, and backgrounds. Equal opportunity is a policy for anyone who wants to get a raise or promotion.
3.4 Technological Factors
The United States is a global leader in science and technology. It has been at the forefront of adoption and application technologies in a variety of fields. Despite strong competition from emerging economies, its technological advantages are expected to remain for a long time.
For example, Amazon invented a Drone Delivery System, Prime Air, which has been patented and successfully tested. Prime Air is Amazon’s future delivery system designed to safely ship packages to customers in 30 minutes or less by using drones, which help rapidly deliver packages and increase the overall safety and efficiency of the transportation system. (Amazon Prime Air) At the same time, this new technology may face the problems of safety, regulatory, economic, bad weather and high cost.
3.5 Ecological Factors
The United States is a country that attaches great importance to environmental protection and has many environmental organizations. Therefore, Alibaba should adhere to the concept of environmental protection when developing in the US, and attach great importance to ecological factors such as climate change, green development, waste utilization and so on.
It is undeniable that the packaging cartons used in the delivery process are likely to cause dissatisfaction from some environmental organizations in the United States, and even consumers have raised similar issues. How to reduce the use of packaging and increase recycling is a problem that Alibaba must face.
3.6 Legal Factors
Each state in the United States has its own government structure and legal system. The company is under the regulation of the state in which it operates. The country insists on equal treatment of nationals and foreigners. Foreign employees can expect a fair trial in the judicial system.
The Taxation System in the US also differs from what is in China.
In China, the main corporate tax is income tax, and the general tax rate is 25%. According to Alibaba’s annual report, from March 2018 to March 2019, Alibaba Group’s income before income tax and share of results of equity investees was USD143.37 billion. After the tax deduction and tax credits were removed, the income tax they should pay is USD24.66 billion, which approximately accounted for 17% of the income. (Alibaba Group, p2)
However, in the US, after the Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, the U.S. federal corporate income tax rate was reduced from 35% to 21%. However, there is another layer of corporate income tax levied by states waiting for the corporations operating in the United States. (Kyle 2018) The average corporate tax rate over states is 6.3%, and the average combined states and federal corporate tax rate is 25.9%. (see Appendix A for full table) New Yorks current income tax rates for general business taxpayers are 6.5%, (New York State Department of Taxation and Finance 2019) which is at the average level and approach to Chinese income tax rate after combine federal corporate tax rate.
4.0 Porters Five Forces analysis
4.1 Rivalry between existing competitors
Alibaba is ambitious in the global market. However, its international business only accounts for a small portion of its total revenue, most of which comes from the wholesale business between Chinese suppliers and international business customers. As Alibaba moves its HQ to the US and continues to pay efforts to connect buyers and sellers around the world, its competition with eBay and Amazon.com, two global e-commerce giants, will intensify. Alibaba’s competitive advantage is that it can directly connect buyers and manufacturers, which is not available on other platforms. In addition, Alibaba has a price advantage in the face of these two competitors. However, the dilemma faced by Alibaba is that many customers lack trust in Chinese goods.
4.2 The threat of entry
Building a small, focused e-commerce platform is not difficult, but having a large online market and distribution channels around the world like Alibaba is more than difficult. It requires a lot of investment in the early stage, and it needs to maintain high profit growth to give confidence to consumers and investors, which is almost a mission impossible. Therefore, the new entrants have low threat to Alibaba.
4.3 The threat of substitutes
Alibaba has many substitutes, most of which are physical retail store offering low-priced goods. Also, many suppliers in the US have their own retail websites, which tend to ship directly to customers, and the prices of the goods offered are the same as those sold on Alibaba. Moreover, many vendors now tend to sell on social media, such as Instagram and Twitter. Therefore, Alibabas threat of substitution is high.
4.4 The bargaining power of buyers
Buyers, especially those who shop online, often have very demanding needs that they want to buy the best products by paying the lowest price. Due to the wide variety and low price of Alibabas products and Alibabas huge distribution network, most buyers have no choice, which makes it difficult for buyers to influence the market. But now there are a lot of small, well-focused websites that are beginning to grab Alibaba’s market share, such as some websites that are focusing on selling oversea products. This may be the buyers’ choice, which, to a certain extent, has brought pressure to Alibaba.
4.5 The bargaining power of suppliers
Alibaba’s suppliers are in fact the members of its website sales page. Alibaba has a large number of suppliers for every product category, and suppliers need to pay membership fees to sell their products on Alibaba’s selling page. Because suppliers do not have switching costs when selling products in Alibaba, many suppliers are willing to sell their products at Alibaba’s website at market prices. Thus, suppliers have little chance of raising market rates.
5.0 VRIO analysis
VRIO analysis for Alibaba comparing 4 resources.
Value: Alibaba is a valuable brand name that it is well-known for customers all over the world as it provides products with low price and delivers them anywhere rapidly. This has led to its significant advantage over its competitors.
Rarity: Alibabas brand name is a rare resource. Most of Alibaba’s competitors are less famous, the brand has not yet been recognized globally, and there are fewer competitors with high brand awareness.
Rare: Alibaba’s distribution network is valuable because it helps Alibaba attract more customers and ensures that Alibaba gets more income. It also turns promotion activities into sales as the products are easy to get.
Rarity: Alibaba’s distribution network is a rare resource because competitors need a lot of investment and time to build a better distribution network than Alibaba. Also, it is rarely owned by other industry companies.
Inimitability: It is also costly for competitors to imitate Alibaba’s distribution network, which were well-developed over years. If competitors want to build a similar distribution system, they have to invest a great amount of money.
Value: Alibaba’s financial resources are valuable because they help to invest when external opportunities occur. Also, they help Alibaba deal with external threats.
Rarity: Alibaba’s financial resources are rare. Only a few companies in the industry possess strong financial resources.
Inimitability: Alibaba’s financial resources are difficult to imitate. The company acquires these resources through years of extended profits. New entrants and competitors will take a long time to get similar profits to accumulate such huge financial resources.
Organization: Alibaba organize its financial resources to capture value that seize opportunities and respond to threats. Therefore, these resources have proven to be a source of continued competitive advantage for Alibaba.