When the wise man...

“When the wise man points to the moon, the fool looks at the finger”. (1) Whereas at end-2013 investor attention was inexorably focused on the US and changes in its asset buyback programme, looks of concern are now switching to China. A slowdown in growth, changes in the monetary policy, the weak Yuan and a poor allocation of infrastructure spending are all good reasons for the financial markets to worry and journalists to keep writing.

Still more concerned by company life than changes in macroeconomic indicators, we prefer to discuss the subject of China via the future flotation of ALIBABA on the New York stockmarket.

This champion in Chinese e-commerce is clearly less well known than its US equivalents and yet, it is already so big! At the three “giant” sites belonging to the ALIBABA group’s platform (Alibaba, Tmall and Taobao), the combined volumes now changing hands are equivalent in size to two EBAYs and one AMAZON (around $260bn). To add more to the dizziness, online payment volumes in China teetered at $867bn, while mobile payments have leapt eightfold to cross the $200bn mark. Bearing in mind that Alipay (ALIBABA’s payments subsidiary) has a 65% market share in online payments in China and 75% market share in mobile payments, this provides a faithful image of how hyper growth in Chinese internet models can look.

The fact that China has given birth to an Internet giant is somewhat surprising: admittedly, the size of the Chinese population (1,350m inhabitants) is a part of the reason, but we could have imagined that India (1,240m inhabitants) with its army of engineers and cohorts of geeks would have won the race in terms of development of e-commerce. The reason for ALIBABA’s success has not stemmed from government impulsion: indeed, in China it is above all capital from foreign investors (such as YAHOO and SOFTBANK) that has made entrepreneurial adventures possible. Moreover, the regulation of Internet and the Chinese government’s intense paranoia concerning this very controlled media could even have placed a considerable brake on the development of e-commerce businesses.

In contrast, the faster development in China than in India or Russia has clearly been enabled by the hefty infrastructure spending previously mentioned. At present, 618 million Chinese people are connected to the Internet and 90%(2) of the Chinese population lives less than an hour’s drive from a motorway: these are two essential factors for developing B to C models (3).

Valuations and multiples are likely to be much discussed when what is easily set to be the largest flotation of the year takes place in 2014 (the main lines are already known, with the group’s capitalisation expected to total around $150bn). Less is likely to be said about what has enabled the emergence of this sprawling retailer: the bridges built so rapidly and the thousands of miles of new motorways available (more than 50,000 km built between 2006 and 2012)(2).

Assessing the impact of infrastructure spending on GDP growth in a country is a delicate exercise, but at a time when references to China concern empty towers, ghost towns and bad capital allocation, it is good to highlight the positive effects of long-term investment strategies such as this outstanding success by ALIBABA.

Didier Le Menestrel

(1) Confucius: Chinese philosopher (551 BC – 479 BC)
(2) Gavekal data
(3) “Business to Consumer”: direct sales of products to consumers with no intermediary