Alibaba: Innovation chinese style

17 September, 2014 / Articles

After revolutionizing e-commerce in China, Alibaba Group Holding Ltd. may end up becoming the world’s biggest-ever stock-market listing

Now’s a good time to bury the myth that China can’t innovate.

Skeptics abound. Alibaba, they note, was an e-commerce idea borrowed from companies like Amazon.com Inc. AMZN -1.18% and eBay Inc. EBAY +0.08% Its tech peers in China—among them Baidu Inc. BIDU +0.60% in online search and Tencent Holdings Ltd. TCEHY +0.99% in messaging—are themselves derivatives of American pioneers.

They operate in what is less than a level playing field. Yet their very success speaks to a type of innovation, common in China, that’s often underrated but nonetheless groundbreaking. Alibaba has 80% of the e-commerce market in China and Baidu a similar share of search. Tencent most recently reported more than 430 million active users of its instant-messaging service WeChat.

All are examples of what Erik Roth, a partner at McKinsey & Co.’s Shanghai office, calls “innovation through commercialization.”

They figured out a way to dominate their markets by adapting existing technologies and business models.

That’s not the same as invention. Many of China’s most innovative companies don’t arise from a flash of inspiration. Rather, they evolve in a series of incremental changes. In the end, they become uniquely Chinese, says Mr. Roth.

Alibaba’s online shopping platform, Taobao, is a classic case. The American business model stood little chance in China because few people had faith in the Internet to protect their credit card details, or in merchants to deliver the promised goods. Along came Alibaba, which took those insights and developed its own secure payments system, Alipay, and a returns policy. EBay, meanwhile, left China defeated.

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