At $21.8 billion, China’s biggest e-commerce company, Alibaba, was the largest IPO in US history. Today, the company is worth $657.5 billion, but the road to unprecedented success was marked with significant challenges. Along the way, Alibaba has had to build an entire ecosystem to support its e-commerce business in China and around the globe. One of the challenges the company particularly faced as it built an e-commerce platform was the severe lack of trust that existed between buyers and sellers.
When Alibaba started out, there wasn’t a trustworthy payment system to help Chinese consumers purchase products online. Consumers sometimes paid for products that never got shipped, while sellers shipped products only to find they had been swindled. This was hampering e-commerce sales as it made the process of buying and selling online unpredictable. To solve this problem, Alibaba created Alipay.
Established in 2004, Alipay is a third-party online and mobile payment platform. To address the lack of trust between buyers and sellers, Alipay acts as a third-party escrow system. Buyers pay into an account, the product purchased is verified, and then the seller is credited. For example, when someone purchases an item on Alibaba, the payment is made to Alipay. The seller can see the payment but can’t receive it until the customer has obtained and examined the product to his or her satisfaction. Only then will Alipay release the payment to the seller. Additionally, as a digital payment platform, it provides efficiency, transparency and traceability for both parties to trust and predict the outcome of their transactions promptly.
Alipay is now one of the largest payment platforms in the world. In 2019, the platform had over 900 million active users, and recorded 1.1 billion transactions during Singles’ Day (a Chinese unofficial holiday and shopping season that celebrates people who are not in relationships).
Why did Alibaba create its own payment platform? Modularity Theory provides some insight and could serve as a guide for other companies in growth economies across the world. This theory provides a framework for explaining how different parts of a system fit together. Generally speaking, there are two types of systems; modular and interdependent.
A system is modular when there are no unpredictable elements in the design of its parts. Whereas a system is interdependent when the way one part is made and delivered depends on the way other parts are made and delivered. Interdependency between parts requires the same organization to develop both components if it hopes to develop either component.
The nature of what companies need to integrate can differ. In a Christensen Institute study of 100 organizations that have successfully created new markets in different countries, 84% developed operations in-house that are typically outsourced to other companies. These firms chose to internally integrate these operations even though they were not seen as core to their business. This framework helps us understand why businesses operating in growth economies need to integrate many activities that might not be considered within their core competencies.
This phenomenon is especially relevant for companies operating in lower-income markets, but even in high-income countries, two-thirds of market-creating organizations need to internally integrate when creating a new market.
Many growth-economy governments simply don’t have the resources to reliably provide public infrastructure, social services, and efficient bureaucracies. As a result, market-creating organizations have to perform many of these operations themselves. In the same study, 62% of organizations operating in low income countries needed to integrate externally. The clear lesson is that if an organization intends to create a new market in an emerging economy, it may frequently need to fill infrastructure gaps on its own rather than wait for the government to prepare the way.
In Alibaba’s case, the ability to build trust as well as predict and monitor the transactions on its platform was an essential part of an e-commerce platform that wasn’t readily available in China. The interactions of both parties and nature of the unpredictability in the payment process in China required Alibaba to develop Alipay.
An example of a company in another growth economy that built an interdependent system is Tolaram, the instant noodles makers in Nigeria. They were able to build independent units based on the unpredictability of the quality of some critical services in her economy such as logistics and analytics in Nigeria for its business growth. Tolaram entered the Nigerian Market in 1988, and since then has invested over $350 million while creating a logistics company, packaging operations, and retail outlets.
In order to solve unpredictability in unreliable economic environments in growth economies like China or Nigeria, companies need to invest in creating interdependent systems. This approach curbs lack of trust and guarantees reliable and efficient services. The success of companies that employ interdependent strategies creates significant growth opportunities and wealth in their sectors, as well as in their respective countries.