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1:39 am ET
Nov 17, 2014

Alibaba

Q&A: Alibaba Senior Executive On Apple, M&A and U.S. Plans

  • Article
  • Comments (2)
  • Alibaba

  • Alipay

  • Apple

  • Asia

  • China

  • technology

  • By
  • Juro Osawa
    • Biography
  • CONNECT
      • Biography
    Alibaba’s logo at its headquarters in Hangzhou, China. The e-commerce company’s Singles Day discount event set a record Tuesday.
    Reuters

    After going public in September in a $25 billion initial public offering, Chinese e-commerce giant Alibaba Group is gearing up for the next stage of its growth. As the company continues to expand, it is pursuing alliances with other major technology companies such as Apple as well as operators of smartphone messaging applications. Through its affiliate called Ant Financial – the parent company of the Alipay electronic payment unit — Alibaba is also expanding into financial services.

    The Wall Street Journal spoke with Alibaba Executive Vice Chairman Joseph Tsai at the company’s headquarters in Hangzhou last week. Tsai, one of the company’s co-founders, talked about Alibaba’s discussions with Apple, its strategy for alliances and acquisitions as well as its plans for the U.S. market.

    Alibaba Executive Vice Chairman Joseph Tsai
    Alibaba Group

    Edited excerpts:

    WSJD: Alibaba Executive Chairman Jack Ma said last month he was interested in working with Apple in payments. Tell us more.

    Tsai: A lot of specific points are being discussed and worked out. Apple has sold a lot of phones in China. If people want to use Apple Pay in China, Apple would have certain restrictions and limitations on operating payment businesses in China. So we are thinking whether there is any opportunity for us to work together where Apple Pay and Alipay can somehow work together in China. Alipay is part of Ant Financial, so (Ant Financial CEO) Lucy Peng and her business development team are involved in the talks. Right now, I think what we can say is that this is focused on the China market for Apple. We are positive about the potential cooperation, but it depends on the details being worked out.

    WSJD: When people use Apple Pay with their iPhones, Alipay could provide back-end services so the money for the payments comes from their Alipay accounts. Is that how it would work?

    Tsai: Yes, that’s a possibility. That’s the obvious possibility.

    WSJD: What are the some of the details that need to be worked out between Apple and Alibaba?

    Tsai: There’s a regulatory component. How can we help Apple on the regulatory side, because Alipay has the license to operate a payment business in China. There’s also an operational component. If you are talking about Alipay as the back-end operation to support the front-end Apple Pay, how do the two systems work?

    At the end of the day, you are funding the payment transactions from the Alipay account through Apple Pay, so that flow of money has to be very smooth. And there’s a lot of technology involved.

    WSJ: Alibaba said in its IPO filing that it has the right to buy a one-third stake in Ant Financial. When and how would that happen?

    Tsai: Alibaba Group today has two ways to participate in the economics of Ant Financial. It could have a profit share with Ant Financial – we are getting that right now. Or we can swap that profit share into a one-third stake in Ant Financial. Those two alternatives, profit participation and equity stake, should be valued about the same. Some of the investors may view direct stake as being better, because equity is more permanent, and profit share is just a contract. That’s all subject to regulatory approval. Under the current regulatory regime we don’t think that’s possible, but we can’t really predict the future.

    WSJD: Will Ant Financial go public? If so, when will its IPO be?

    Tsai: There’s no timetable. The experience we’ve had with Alibaba is that being a public company makes you better. So going public is a good thing.

    WSJD:  Are you in talks with mobile messaging apps like Line and Kakao about possible alliances?

    Tsai: Pretty much every single communications app company, when they want to come to China, they want to talk to us. They wouldn’t talk to Tencent Holdings because Tencent (which owns the WeChat messaging app) would be a big competitor to them if they came in. A lot of these dialogues are ongoing discussions about what we can do together, sort of like brainstorming sessions. We are doing that with all the players, including Line and Kakao.

    In the mobile Internet environment, you have fragmentation of the source of users — where the users are coming from. Chat is one of the entry points, and that’s why we are interested. Our business development teams are out there looking for potential partners.

    WSJ: You’ve done a lot of fundraising lately. How much can Alibaba spend on acquisitions?

    Tsai: Giving yourself a set budget is actually not the wisest thing to do, because you don’t want to limit yourself with the budget. On the other hand, you don’t want to say, “I have to spend this amount of money every year.”

    M&A is one of those things where there shouldn’t be a budget. Philosophically, we are against budgets on M&A.  You raise money to take advantage of the opportunities and situations at the time. Given that we are in a fast-changing environment that is very disruptive, with technology innovations happening all the time, you have to really have that flexibility.

    WSJD: What are Alibaba’s plans for the U.S. market?

    Tsai: On the investment side, our strategy is to invest minority stakes in U.S. companies that are run by entrepreneurs. We want to support entrepreneurs because we want to be in the U.S. market, support growth and understand how people in the U.S. innovate. That’s our main investment strategy in the U.S.

    When it comes to business, the key issue is whether we are going to have something in the U.S. market that will really target U.S. consumers. We think in the long run that’s an interesting market to us. But today, our focus is very much on cross-border activities where we help U.S. small businesses and merchants, and even large businesses like Costco, by giving them access to 300 million Chinese consumers.

    WSJD: How can Alibaba sustain its strong growth in the coming years?

    Tsai: I think we are very well positioned because e-commerce penetration in China is still very low. We define our addressable market as total consumption in China, a $3.4 trillion economy. And there’s only 9% penetration of e-commerce into that. So there’s a lot of room to grow, just in terms of growing the penetration. We’ve got 300 million active shoppers on our platform, but that’s only half of China’s Internet population, and only a quarter of the total population. We are fortunate to have that macroeconomic tailwind behind us. And the rest is execution.

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