scale, in the absence of profit

The economist looks on with a mixture of admiration and uneasiness on the fortunes of Jack Ma, while sketching up a backdrop about the rising tide of internet services in China. 

…until the mid-1990s the growth of the internet went all but unreported in China’s news media. So getting started was hard for Mr Ma. But now he sees opportunities everywhere.

China has millions of small entrepreneurs but a primitive financial system. To boost traffic through his websites, Mr Ma set up an online payments system, Alipay, in 2004. Its growth was greatly helped by the ban that China imposed, until recently, on its American rival, PayPal. Alipay says it now has 470m users worldwide and that more than 500,000 Chinese merchants accept it. In some Chinese cities people can use it to pay their utility bills.

Mr Ma has also started a service called Ali-loan. He does not lend money, but works with banks, which typically have no idea if a small borrower is creditworthy. Mr Ma, in contrast, has a trove of data revealing whether small firms pay their bills on time. He can also bundle together firms that know each other, so that a seller can help guarantee a bank loan to a regular customer. According to Alibaba the proportion of Ali-loan’s lending that goes bad is a trifling 0.35%, which suggests that the service could be expanded fast.

The firm faces several obstacles. First, the Chinese internet market is cut-throat and evolving fast. Baidu, the country’s leading search engine, has not yet attacked Alibaba head on, but one day it might. Second, talent is in short supply. Wages for the best engineers and managers are soaring.

Third, in its rush to grow, Alibaba has neglected to make much profit. Its main services are free, with sellers paying only for extras such as being bumped to the top of a list of search results. Mr Ma says this is deliberate: size will eventually bring rewards. But investors will not wait for ever…

via Alibaba: China’s king of e-commerce | The Economist.

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