Why the $200 billion Alibaba IPO matters to YOU

[KurtNYC]

It was announced yesterday that Alibaba, the Chinese mega-web sales platform will be generating around $200 billion via an IPO this year. Alibaba can be seen as a multi-tiered version of eBay. It enables wholesale and retail customers to buy goods from Chinese manufacturers at prices far below US retail.

Typically a chain like Lowes will buy container loads of goods from Chinese manufacturers at the lowest prices they can negotiate. A standard formula for US retail is for the retail price to be 3x the amount that the factory was paid. Now Lowes doesn't make 75% gross margin because they have all the costs associated with the supply chain, transportation, shrinkage, returns, labors, customer service, rent, depreciation, etc. So gross operating margins may be closer to 8%.

Alibaba will offer, for example, an air conditioner that US consumer would see on the shelf at Lowes priced at $300 for $75 USD. A pair of jeans that the Gap would charge $45+ for will be $7. The goods will be addressed labeled and packed in Shanghai and Hong Kong then containerized and shipped to the port of Long Beach. On the US side the containers get opened and the individual packages given to USPS and UPS for delivery.

This will eliminate millions of US based jobs, further devalue US real estate and make US manufacturing and retailing unprofitable (what little is left that is profitable). It moves as much of the retailing and B2B labor as possible to China. Alibaba will use the money they raise to globalize the economic structure of China and leverage the low cost of labor, environmental compliance and raw materials they enjoy. It will force vertically integrated companies and small US business to compete on cost with Chinese labor which will necessitate a 75% reduction in their operating costs and that seems un-doable.

http://www.alibaba.com/

[Erich Bloodaxe BSN]

1. I had no idea they did retail.

The only time I've stumbled across ali baba in searches for things I was looking to buy, they wanted to sell me 2000+ yards of a fabric I needed maybe 2 yards of, so I thought they were totally resalers.

BUT if Lowe's is selling air conditioners at $300 that cost less than $75 to make overseas, couldn't someone in the US manufacture them for, say, $225, and sell them for $275?

[pipoman]

3. no, the margin must be much higher than that

For all of the reasons listed in the article.

[Erich Bloodaxe BSN]

4. What's 'margin' specifically?

In relationship to 'net profit'? I'm thinking $25-50 net profit per unit. Personally, as long as you were any profit per unit, I'd consider you a successful business, just not one that would draw a lot of shareholder interest.

[KurtNYC]

7. There is gross margin and net margin

If you have a lemonade stand and all your costs -- cup, lemons, sugar, ice cubes -- are 30 cents per cup and you sell at $1 then your gross margin is 70 cents or 70%.

Net margin would factor in returns, rent and permits, labor, benefits (healthcare), spoilage, etc. so net margin would be $1 minus the 30 cents minus all those other costs.

[pipoman]

10. If you buy something for $100 and sell it for 200

You have a 100% markup, or a 50% margin.

No, your example would be gross profit. Net profit would be after all expenses are taken out for the seller. If in your example the item is manufactured for $225, there is shipping to Lowes warehouse, there is overhead and labor at the warehouse, there is shipping to the store, there is overhead and labor at the store, and there is interest lost on the actual purchase from the manufacturer until the item is actually retailed. As the article states, after all of this, given the $75 purchase price and the $300 retail, the retailer is in the single digit percentage of gross profit....net profits will be half of that...it costs lots of money just to have that multi million dollar building, with multi million dollars of merchandise, and multi million dollars of labor, lights, heat, maintenance, etc. sitting down the street waiting for you to come buy something. All said and done I suspect Lowes actually ends up with less than 5% corporate profits.

[taught_me_patience]

22. Gross margin - Revenue minus cost of goods n/t

[dipsydoodle]

2. Whereas presumably US farm subsidies don't matter to "you"

Harm to the Poor in Developing Countries.

Subsidies lead to overproduction of certain crops in developed countries, causing prices to fall, sometimes below the cost of production. Oxfam International notes that the more than 10 million people in Central and Western Africa countries who rely on the production and sale of cotton lose up to $250 million every year due to subsidies. According to the Congressional Research Service, the United States spent about $24 billion on cotton subsidies over the past 10 years. In response to U.S. subsidies, Brazil filed a complaint in 2003 with the World Trade Organization (WTO) Dispute Settlement Body, alleging the United States did not comply with its commitments as a WTO member. In 2005, the WTO ruled that U.S. cotton subsidies are illegal.5 Yet the United States continues to violate its WTO commitments, seven years after that ruling.

Subsidies also invite retaliation under WTO rules. In 2009, a WTO arbitration panel granted Brazil the authority to collect $147.3 million damages, to impose punitive tariffs, and to lift patent protections on $829 million worth of United States goods.6

Sugar, another heavily subsidized crop, is grown in both developed and developing countries. According to the World Bank, over the 1999 to 2001 period, aid to sugar producers in developed countries belonging to the Organization for Economic Co-operation and Development (OECD) averaged $6.35 billion, while the total value of developing countries’ sugar exports averaged $6.5 billion annually.7 Thus, the World Bank found [see the table]:

http://www.ncpa.org/pub/ib126

[pipoman]

6. The obvious answer is to move US producers to the economic level of

"Developing countries"...Most of which aren't actually developing at all, their government officials are developing, their upper castes are developing, their warlords are developing, but there are no plans for the rest of their society to join a middle class. This is the most fundamental flaw in the unfair trade agreements, including the TPP.

[Spider Jerusalem]

15. Closer to the level of developing countries, yes

the USA consumes 30% of the world's resources with 5% of the global population. This is severely imbalanced and it's completely unreasonable for Americans to expect that they can continue doing it.

[pipoman]

16. Let me know when you have begun walking everywhere

Disconnected from utilities, growing and grinding your own grain...which is your only food, and are living in a one room structure built from garbage with a dirt floor. ..

[Spider Jerusalem]

19. I walk and use public transit

because I live somewhere that's possible.

And...walking everywhere isn't the alternative to driving everywhere, public transit is. Growing your own food isn't the alternative to being hopelessly wasteful, it's not throwing out half of the food you buy (half of all food in the US goes to waste). Living in a shack isn't the alternative to wasteful energy consumption, not having more house than you actually need and building for the environment and insulating properly is.

[JimDandy]

20. +1

[pipoman]

25. And none of these things are available to our labor competition

The labor competition our labor is being reduced to. Pretending that China, India, Mexico, etc. is a model for the us population is tragic.

[TreasonousBastard]

5. So, they'll be doing what Amazon has been doing...

just better.

BTW, in case no one noticed, part of the point of the TPP is a trade bloc to counter China.

[KurtNYC]

9. Amazon started by selling IP -- books, DVDs and music

Low production cost items with high IP fees built in.

You can't counter a low cost producer without lowering production (labor) costs.

[TreasonousBastard]

12. Chinese labor costs are rising, although...

it will be a while before they get up to our level. Anyway, labor costs as a percentage of overall costs is what's looked at. If you're paying $1 an hour, but labor is only 15% of your overall costs, your advantage isn't so great.

More to the point would be the cost of capital, which in China has been ridiculously low with government subsidies. Their ability to wait longer for profit than we do has an effect-- American companies insist on quarterly returns, which limits our choices.

[KurtNYC]

14. Yes and this new push by Alibaba moves as much labor as possible to China

Amazon still has their fulfillment centers in the US for overnight delivery. Alibaba's model for US sales moves that to Hong Kong.

When Alibaba raises billions in an IPO their cost of capital will be nil and they will be pushing with everything they have to open every market they can. Jerry Falwell flipped the US government for $10 million in 1980. So allowing for inflation, it should cost the Chinese about $100 mil or so to get everything they want from our cash-and-carry government.

[Lasher]

8. Tariffs, anyone?

People nowadays think it's just a quaint old custom but some of us still believe it's a good idea. But there's not much chance of that, what with Obama's FTAs.

[pipoman]

11. If the tariffs were based on workers compensation and benefits

Trade agreements may actually work. As it is there is no requirement on participating countries to bring workers to a middle class income. The result is that middle class workers in developed countries are put on the same plane as those in *non*"developing countries".

[KurtNYC]

13. Perhaps a worldwide minimum wage would help

We're all in this mess together after all.

[Lasher]

18. The problem with that approach is, it's not realistically enforceable.

For just one example of why this is so, consider Mexico, where 6 out of 10 work in their underground economy. How could the US government possibly hope to enforce a minimum wage requirement there, when most of them are paid under the table? And with so many economic neoliberals in our government, how could we be sure our representatives would even want to try?

The thing is, when we find ourselves in a situation where we must police standards in other countries, we end up chasing our tails. How about we try to make China and India improve their environmental standards? An exercise in futility.

This is why tariffs work. If a country's employee compensation and environmental standards are generally equal to ours, their production costs will be similar, so tariffs would not be necessary when trading with them. But in countries where manufacturing costs are artificially lower because employees are being victimized and they are poisoning their environment (our environment too), then tariffs are needed to level the playing field. Once they have improved in these areas, tariffs could be lowered or eliminated.

Tariffs place the onus for improvement on a country's own representatives, and they can reverse the race to the bottom that is so prevalent in the global economy today.

[Octafish]

17. But-but-but it's good for Wall Street.

And the neo-cons.

[Tierra_y_Libertad]

21. Workers of the WORLD Unite! It still rings true.

[Xithras]

23. Even with the cost savings, most consumers won't wait a month for their product to arrive.

That's the downside to Alibaba. They don't ship Fedex, or UPS, or USPS from China. They get your order, and the items are placed in a shipping container. They sit in that shipping container, in their warehouse, until the container fills and it get transferred to the port. Once at the port, it sits on the concrete until an appropriate cargo ship is identified to take it across the ocean. After that, it spends a couple of weeks at sea. When it finally reaches the U.S....probably Long Beach...it will sit under the blazing sun for a few more days while they unload it from the ship and wait for the local distribution center to pick it up. When it makes it to the distribution center, it waits (along with hundreds of other containers) for their minimum wage employees to open the container, pull the contents out, stick them in the box, and drop it in the mail. Now tack on 3-5 more days for USPS to get it to your door.

So Alibaba is basically saying, "We're going to charge you today, and you'll get it in a month or so...but we don't know exactly when because of port congestion and weather uncertainties."

American's are used to buying everything in an afternoon, or at worst waiting a few days for Amazon or another etailer to deliver something via UPS. If an Ebayer doesn't have someones auction item to them in a week, the buyer is screaming bloody murder. I don't see our culture adapting to Alibaba's "You'll get it eventually" mentality. They may pull some sales for larger and more expensive items (your air conditioner, for example), but I don't see people waiting a month to try on a pair of jeans.

Oh, and then there's the fact that 90% of Alibaba sales are "no refunds". If it doesn't fit, you're f***ed. Most Alibaba suppliers WILL refund your money, but ONLY if you can get the item back to them in CHINA. Do you have any idea how much it costs to ship a faulty air conditioner to China?

[JCMach1]

24. Most Alibaba products are offered in bulk quantities...

[Rider3]

26. and whatever you buy from them will be counterfeit.

Beware.

[BrotherIvan]

27. As a small business that manufactures in the US, I found this alarming at first

Companies have gotten away for so long with selling cheap crap at markup, for instance jeans, which have some the highest possible margins and are totally dependent upon advertising. Larger companies will have to rethink their supply chain. If the GAP pays less than $1 for a tee then turns around and sells it for $30, if a consumer can buy the same crappy article from Alibaba, they will. I know someone who bought jeans from alibaba for $20. The fit was way off, but I assume they will be fixing that. It only took two weeks to come. It is impossible to return anything, so he just threw them away; disposable, like tissue.

And yes, I often bemoan the fact that people are not willing to pay for Made in the US. They are buying slave made goods from the likes of Walmart and complain when something costs a bit more. Walmart made this model and now they will get sunk from it. US consumers are addicted to cheap goods, well now they can get it straight from the source.

Maybe those stores will have to figure out a way to distinguish themselves by selling QUALITY. And folks, quality is Made in the USA. Because in the US, the cost of the item is driven by labor, so adding all the best touches doesn't drive up the cost that much. In China and slave labor countries, the cost of the item is driven by materials and shipping because labor is so low. They try to save fractions of pennies by using the cheapest thread, by shorting the weight of the fabric, or any number of costs savings. Ever wonder why tees are basically see-through now or the new "slub" trend--it's because of expense, not style. Not to mention the harmful chemicals sprayed on goods so they don't rot on the boat, or the terrible health risks associated with goods from these countries.

Made in the USA should become a status symbol and people should be taught the old time idea of quantity over quality. Make it a fashion statement to have your amazing jeans tailored or fixed, rather than throwing them away. Demand quality, Made in the USA goods and retailers will carry them. The whole ripped kneed jeans thing makes me laugh because that came from Levi's lasting so long, you could wear them until the knees ripped. But since new jeans last less than six months, you have to buy them pre-ripped or you're out of luck. Especially women's jeans which because of all the lycra are not truly jeans at all and just fall apart in the wash.

Anyway, I am always surprised at how little responsibility is given to the consumer. We can vote with our wallets. But like a frog in a pot, it seems we're just too stupid to save ourselves.