[Wall Street] Alibaba Narrows Focus to Smaller Orders

China-based Alibaba.com, which runs several websites for commerce between businesses, posted strong financial results for the first two quarters this year, but it faces the continuing challenges of keeping up subscriber growth and expanding customers' use of its value-added services. Alibaba has said it expects slower export growth in China in the second half this year, which could crimp prospects for the many small- and medium-size Chinese exporters that use its websites. 

Alibaba.com, the Hong Kong-listed unit of e-commerce company Alibaba Group, provides online listings for Chinese and foreign companies to find buyers for their products and derives most of its  revenue from exporters. Chief Executive David Wei says another source of growth will be AliExpress, a U.S.-focused online wholesale platform that is geared for smaller orders and in which Alibaba has said it plans to invest $100 million. As part of that investment, Alibaba has already made its first U.S. acquisition by buying Vendio Services, which helps merchants sell goods on sites such as eBay Inc. Alibaba has strived to attract more users with lower membership prices and is in the middle of a three-year plan to boost customer numbers the first year, revenue this year and margins next year.

Mr. Wei was born in mainland China and holds an advanced degree from the London Business School. He has previously served as president of B&Q China, a subsidiary of home-improvement retailer Kingfisher PLC. Mr. Wei shared his strategy in an interview with Owen Fletcher. Edited excerpts:

WSJ: Could you define B2B2C, the business-to-business-to-consumer model?

Mr. Wei: The first B represents a factory, or a supplier. The second B is the merchants, the C is consumer. So it's from factory supplier, online to the online merchants, and the online merchants [going] through online retail to serve consumers shopping online.

WSJ: What types of partnerships are you looking at to keep expanding outside China?

Mr. Wei: First, I think, partnerships regarding the [business-to-business-to-consumer] model. We are also actually looking forward to building more partnerships in areas like trade shows, insurance, banking, logistics, and any trade services which are important to our small and medium businesses. So you won't be surprised in the next few quarters, [if] we keep announcing strategic partnerships with the companies in the areas I mentioned.

[For B2B2C,] the partnerships will be focused on how we boost AliExpress.com. Ninety percent of our buyers buy products online and sell offline. Ninety percent of online merchants sell their products online, but source their products offline. Very few people actually really enjoy full online sourcing and retail. So that's why we are looking to the B2B2C online model, to enable [the full process] from procurement to retail.

WSJ: Do you expect your strategic deals in the next few quarters to include acquisitions?

Mr. Wei: Definitely. The priority will be to further boost AliExpress.

WSJ: How does AliExpress, which you launched in April, fit into your plans as a growth driver?

Mr. Wei: It's a three-month old baby at the moment. We have been improving the payments, we have been improving the logistics by partnering with companies like UPS, we have been securing the buy-side by buying companies like Vendio. We will continue to do these three things. That's part of the $100 million investment behind it. We believe in two to three years' time [AliExpress] will become a very important margin and revenue contribution.

WSJ: In April you said you would accept payments from PayPal on AliExpress. Are you looking to add other payment partners too?

Mr. Wei: Yes. There should not be any reason that you cannot source from AliExpress.com because we don't accept your payment. So anything you can imagine, any payment, we will eliminate the barrier.

WSJ: Which countries is Alibaba targeting most in the next few years for further growth?

Mr. Wei: [The] U.S., Japan and India, these are the three top priorities. And [for] the next three years actually we still see [ourselves] investing in the three countries instead of harvesting the revenue or profit.

WSJ: What are the challenges to growth in the U.S.?

Mr. Wei: The U.S. is a country which has been very buying-centric. We have over two million registered users in [the] U.S. but less than 5% of them register as sellers. In comparison the U.K. [has] several hundred thousand users but more than 14% [are] registered as sellers . We should encourage more U.S. small businesses to build up entrepreneurship and sell more online, sell more outside the US.

WSJ: Have you seen any recent weakening in the U.S. and European export markets?

Mr. Wei: Actually [the] U.S., as always, is less optimistic than most people think, and the European market is less pessimistic than most people think.

The reason is the basic consumption power. In the U.S. unemployment is a very, very big issue. While if you look at most European countries, if you get unemployed, no problem. They have been living with double-digit unemployment for many years. Also the sovereign debt issue is very limited and can be controlled.

WSJ: So you haven't seen much impact on Chinese exporters from the euro-zone debt crisis?

Mr. Wei: No. The European countries in deep trouble, actually, if you look at the [gross domestic product] and the percentage of the whole euro zone, they're very small. And the same with exports from China to these countries, [they] are a very small percentage. Even in that small percentage, we didn't see a big drop.

WSJ: How important are value-added services as a growth driver?

Mr. Wei: There should be two drivers for the revenue growth for the business: membership fees and value-added services. Three years ago, VAS represented single-digit [percentages] of our revenue, and two years ago in the mid-teens.

Now it's 25% for the international marketplace and 20% for the China marketplace. And we anticipate 5% [user penetration] growth year-to-year is possible. The margin behind the value-added service is much better than the membership fee, because the cost to serve one customer is the same, with or without value added service.

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