Alibaba IPO Architect Lays Out E-Commerce Empire Blueprint

Alibaba, the world's biggest e-commerce company, changed how China shops. Now the man driving its blockbuster U.S. stock sale wants to transform the rest of the country's services industry, adding new users to the giant's 300 million customers.

Joe Tsai, executive vice chairman of Alibaba Group Holding Ltd, sees an Alibaba future that stretches from banking to education, travel to entertainment. Customers will buy mutual funds using Alibaba mobile applications, safeguard homes with Alibaba insurance, and use Alibaba virtual credit cards to order goods from U.S. websites that will arrive on China's doorsteps in 10 days.

On March 16, Alibaba said it's planning an initial public offering in the U.S. Analysts say it could be worth more than $16 billion. That would surpass Facebook Inc's 2012 listing, valuing Alibaba at over $140 billion.

"In five to 10 years we're still going to be an e-commerce business, but the kind of things we sell on our platform will be a lot more diverse than just physical products," said Tsai in an interview with Reuters days before the IPO announcement.

"We're going to be selling digital content, there's going to be services that will flow through our platforms," he said. "Our vision is to become more a part of people's lives and fulfill all of their needs."

Alibaba already accounts for about 80 percent of all online shopping by individual consumers in China, which iResearch expects to reach 2.45 trillion yuan ($394 billion) this year.

If Alibaba has seemed unstoppable in its 15-year rise, an IPO that could make it one of the world's most important technology companies comes as the firm faces its most serious challenges so far.

Chief rival Tencent Holdings Ltd has the upper hand in mobile services, now the most important battleground for Chinese Internet companies. Alibaba's strategy of building a global e-commerce empire with its own financial services is attracting close scrutiny from China's regulators and resistance from the country's banks.

There's more riding on Tsai's ability to pull off the giant IPO than just Alibaba's fortunes. Tsai found out himself, after Facebook's debut flop, that a high-profile failure can turn investors sour on a whole sector: In what he termed a "hairy" experience, an Alibaba plan to raise $10 billion in private funding that coincided with Facebook's listing nearly went awry as investors backed away from Internet companies.

SHARP TACTICIAN

Tsai declined to discuss specifics of Alibaba's IPO or its finances but on March 12 he told Reuters Alibaba would "never" change its partnership structure to list in Hong Kong.

Alibaba's revenue climbed 60 percent to $4.9 billion for the nine months ended September, the latest period for which numbers have been published, according to filings by 24 percent shareholder Yahoo Inc. Net profit was $2.2 billion, a near eight-fold increase.

Tsai, a 50-year-old Taiwan-born Yale law school graduate, has emerged as Alibaba's chief strategist and financial tactician. He left Swedish investment firm Investor AB's Hong Kong office in 1999 to join what was then founder Jack Ma's startup - Alibaba.

Tsai served 14 years as Alibaba's chief financial officer, steering investment strategy and handling negotiations with big-buck investors like Yahoo and Japan's Softbank Corp, with its 37 percent stake.

As Alibaba's executive vice chairman since early 2013, Tsai has taken on the role of driving more than $3.8 billion of investments in everything from digital mapping to online education.

The strategy, said Tsai, has a single focus: to boost Alibaba's core e-commerce business, especially as consumers shop more on smartphones. "We'll be sticking very close to our knitting, staying very true to our core business, e-commerce," said Tsai.

INVENTING E-COMMERCE

That business is huge. Take China's "Singles' Day", the annual November 11 commercial celebration for people who are single that Alibaba has turned into the world's biggest online shopping day.

Last time, goods sold on Alibaba's platforms were worth over 35 billion yuan ($5.63 billion). By comparison, the last U.S. "Cyber Monday" of year-end holiday sales online racked up $1.74 billion.

"Alibaba effectively created the way e-commerce works in China," said Duncan Clark, managing director at Beijing-based technology advisor BDA. "It took a lot of guts and a lot of capital," said Clark, hired as a consultant in Alibaba's early years, who introduced Ma at a Stanford University lecture in 2011.

Alibaba today has over 25,000 employees. Its Taobao marketplace allows individuals and small businesses to sell directly to customers. Instead of collecting a fee on sales, like eBay Inc, it charges vendors to advertise.

Alibaba's other big business, Tmall.com, is more like Amazon Inc. It provides an online storefront for brand-name companies like sportswear maker Nike Inc and clothing retailer Gap Inc, earning revenue from sales commissions and set-up fees.

Connecting these businesses is Alipay, an online payment platform comparable to eBay's PayPal that allows consumers to skirt traditional bank payment systems. Alipay, part of Alibaba Small and Micro Financial Services Group and not part of any proposed listed company, controls almost half of China's online payment market.

At home Alibaba is investing in financial services, housed within Alibaba Small and Micro Financial Services Group. It is buying a controlling stake in a local fund management firm, and laying the groundwork for a private bank.

"We want to provide financial services to our customer base because we see that as an extension of what we do," said Tsai.

Underpinning Alipay's financial services ambition is the trove of personal and corporate credit data it collects from customers. "We hope that we can make changes to the financial system in China," said Tsai. "As you know, the financial system in China is a little bit antiquated."

'WECHAT DOMINANT'

Successful as it has been, Alibaba faces its first serious challenges to future growth.

As more than 80 percent of China's Internet users go online using mobile devices, rival Tencent, China's biggest Internet company by revenue, dominates smartphone usage through its WeChat app. On WeChat, users can update social network profiles, play games, book a taxi, shop and, as with Alipay, invest in a wealth management product.

"WeChat has won China," said Ben Thompson, who writes about technology at stratechery.com in Taipei. "It's going to be the dominant application."

Tsai disagrees. "They have never been successful in e-commerce," he said. "A chat app? We don't think that's important at all. If people want to shop they will use the (Alibaba) Taobao app."

Alibaba's independent financial services arm also faces a battle. The company's foothold in banking and fund management has irked China's big state-owned banks and attracted increased scrutiny and regulation from watchdogs.

"There are a lot of vested interests that have been disrupted, and a lot of large banks are not happy," said Tsai.

Banks are worried about the wide popularity of online wealth management products, which Alipay pioneered only last year. In nine months, its Yu'e Bao platform is now home to China's biggest money market fund by offering interest rates almost double the amount China's traditional banks are allowed to offer on one-year deposits.

China's biggest state banks have responded by cutting how much their customers can spend on online payment services, while the country's central bank is discussing draft regulations to tighten restrictions on Internet banking.

WINNING HABIT

Tsai is used to making things work.

Two years ago, his skills were tested when Alibaba needed to raise about $10 billion in private funding to buy back shares from Yahoo and delist Alibaba.com, a business-to-business e-commerce unit then traded in Hong Kong, as the first step on the path to Alibaba's IPO.

However, the fundraising coincided with the troubled Facebook IPO, when shares slumped on their debut.

"We had planned on going on the road to start to raise capital (for a bank syndicated loan) for the transaction, and then the Facebook IPO happened," said Tsai. "Literally overnight, because of the Facebook experience, most of the institutional investors were turned off by Internet companies."

Alibaba eventually raised the capital from lenders - just two days before the deadline. "That was pretty hairy," Tsai said.

Now, Tsai is joining other Chinese Internet companies in listing in the U.S. E-commerce rival JD.com plans a $1.5 billion IPO, while Weibo Corp, 18 percent-owned by Alibaba, is seeking a $500 million listing.

Though important, the IPO won't distract Alibaba from its core mission, Tsai said.

"When you look at Alibaba you really should think of us as one of the largest technology companies in the world. And technology companies innovate."

($1 = 6.2180 Chinese Yuan)

(Reporting by Paul Carsten in HONG KONG and Matthew Miller in BEIJING; Additional reporting by Anne-Marie Roantree in HONG KONG; Editing by Kenneth Maxwell)