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  • Alibaba as a disintermediator, a step toward America 3.0?

    Posted by Chicago Boyz Archive on October 7th, 2014 (All posts by )

    Alibaba

    It will be a long time until we have the truly decentralized, additive manufacturing (a/k/a 3D printing) we discuss in America 3.0.

    But in the meantime, Alibaba allows an extraordinary level of business to business contact, permitting smaller scale businesses to find suppliers.

    This is the kind of disintermediated, non-hierarchic, Web-enabled change that has long been predicted, finally coming true.

    This podcast is an interesting introduction to Alibaba.

    One friend said that Alibaba was going to allow Chinese manufacturers to somehow overrun the USA. But if you go on their site, you see that firms from anywhere in the world can become verified supplier members.

    More importantly, the rise of B2B direct contact on this scale is a genie that is now out of the bottle.

    Take a look at this recent post from Zero Hedge entitled “Could The Alibaba Model Undo The Wal-Mart Model?”

    How much would I pay to have the item I want delivered to me rather than have to drive miles to the Superstore? if I add up the maintenance costs, fuel and other expenses of operating my car, and the time wasted in traffic, standing in line, etc., how much cheaper is the Superstore price?
     
    How much would I pay to direct my money went to a local worker/shop owner I know and trust rather than to some supplier in a distant city?
     
    These are questions that arise as a consequence of the digitization of the global/local supply chain in the peer-to-peer model. Just as we have reached Peak Central Planning and Peak Central Banking, we may have reached Peak Centralization not just in government and finance but in the corporate-cartel model of “low quality at high margins.”

    The centralization represented by Walmart may be past its peak.

    Alibaba’s recent IPO, which was almost certainly over-hyped, should not distract us from the importance of the underlying model, or from speculating about what its long term impact may be.

     

    17 Responses to “Alibaba as a disintermediator, a step toward America 3.0?”

    1. Grurray Says:

      I certainly hope this decentralized model plays out. With 1/3 of the population now not participating in the labor force, something new had better come along.

      I’m not sure if Alibaba is going to lead the charge.
      Mexican costs and wages are now on par or better than China, so it looks like Alibaba is expanding worldwide just at the right time.
      However, while they’re a big success in China, you wonder if they can handle competition in other markets. It looks like they had a lot of help in their home country.

    2. Lexington Green Says:

      “I’m not sure if Alibaba is going to lead the charge.”

      The model is more important than the firm.

    3. MikeK Says:

      Amazon is the US example of this model. What is sad is the fact that Sears had the infrastructure but not the intelligence at the top to see this. They closed their catalog system just as Amazon was going into the general merchandise business. Kodak was undone by technology which they had discovered, the digital camera. Sears was undone by lack of imagination.

    4. David Foster Says:

      Not sure why Alibaba would be an example of disintermediation. It is providing an intermediary service between, say, the Gerbilator manufacturer and the supplier of a particular gear or microchip that is required as a Gerbilator component. The role that it is playing is analogous to a traditional manufacturer’s representative who carries several lines. I’d think of disintermediation more as the case where the gear manufacturer operates his own on-line system and facilitates purchases directly with no need for an Alibaba or an Amazon.

    5. MikeK Says:

      A couple of quibbles on the Zero Hedge piece.

      This model gained supremacy because it lowered costs to consumers by outsourcing the production of most of the inventory. Generally built outside of towns, the superstores thrived in an era of low gasoline costs and cheap credit, i.e. the past few decades.

      My understanding of the Wal Mart model was that it cut the cost of inventory by establishing instant communication with suppliers to create “just in time” supply chains.

      In the peer-to-peer market (the Alibaba Model), my bid for the 100 bicycle wheels is visible to a universe of makers/suppliers. Maybe some supplier has an overstock, or a manufacturer has piled up some extras or has a slack day to fill on the production line. There are any number of reasons why a maker/supplier might be able to get close to Wal-Mart’s price for a small batch order.

      This makes more sense as the communication network is open. However, the supplier might have less incentive to work with the buyer as there is no next order to rely on. Is that a better system ? It certainly is more open market style but supplier-buyer relationships are gone. Toyota got suppliers to improve processes by loyalty in buying. Would the suppliers have the incentive to fine tune processes when there might be no next order ?

      Toss in the ongoing revolution in affordable desktop 3-D fabrication machines, and it’s not too hard to discern the price advantages of the Superstore Model eroding fast, especially if consumers wise up that “low prices” are not low if the quality is so poor the product must soon be replaced.

      This looks like disruptive technology but less of an advantage to one company, except maybe the 3D printer makers. The Amazon model still looks as good to me.

    6. Dan from Madison Says:

      “Mexican costs and wages are now on par or better than China,….” I sell industrial goods, and much of the manufacturing that was in China is slowly shifting to Mexico. This will be an obvious problem for the Chinese sooner rather than later.

    7. Lexington Green Says:

      Alibaba is not like Amazon at all. It holds no inventory. It is disintermediating because it puts the manufacturer and the end user in touch, rather than acting as a retailer in between the two. “… the gear manufacturer operates his own on-line system and facilitates purchases directly …” No doubt we will see more of this as well.

    8. Grurray Says:

      My problem with the Zero Hedge article was this:

      The Alibaba Model is not limited to China. After reading Shenzhen trip report – visiting the world’s manufacturing ecosystem, Correspondent Mark G. observed: The injection mold making they discuss as a strength in Shenzhen is precisely what Phil Kerner teaches at hisThe Tool And Die Guy website. Resurrecting that supporting skill community ecology is why I regard such teaching materials from Kerner and Tubal Cain on Youtube as so vital: Index of Tubal Cain “Machine Shop Tips” videos on YouTube.

      That trip report is really odd. Like this part:

      This role reversal is an indicator of how the technology, trade, and know-how for injection molding has shifted to Shenzhen. Even if US has the manufacturing capacity, key parts of the knowledge ecosystem currently exist only in Shenzhen.

      That’s just not true. The knowledge is still here, and it’s expanding. One example is Apple’s new watch is going to use advanced manufacturing methods that can only be done in the United States by suppliers that would run circles around the places in the report.

    9. David Foster Says:

      When Amazon started, it was mainly using a drop-ship model. They may have held some inventory for a small # of high-volume items, but for most stuff (books, at that stage), they accepted the orders and sent a shipping notice to a wholesaler (Ingram, for example.) They were an intermediary in that they handled the payment, maintained the customer shipping data, and took responsibility for the transaction. Over time, they found it made financial sense to operate their own distribution warehouses, but this was pretty much invisible to the end customer.

      For used books and a variety of specialized merchandise, Amazon still does not maintain the inventory, but rather is cognizant of the inventory of its distribution partner ( a bookstore, for example.) One could order from the bookstore directly, of course, but would have to find it, give them all the shipping and credit card info that Amazon already has, and chase them down if not satisfied with the purchase.

    10. MikeK Says:

      “Alibaba is not like Amazon at all. It holds no inventory.”

      So Amazon runs high inventory volume ? That’s not what this says .

      The Telegraph in November looked at the methods employed at one of the company’s U.K. warehouses to see how Amazon manages its inventory.

      When items first arrive, they are immediately scanned and sorted. The Telegraph noted that company policy dictates that a barcode scanner logs and scans an incoming item within the first 12 hours of its arrival. Then, items go into one of 50 receiving areas to be sorted and stored. In some instances, the consumer good is such a hot seller that it will not even be shelved. Rather, the item ends up in “mass land,” an area filled with pallets of goods ready to go out.

      And this:One aspect that the news source noted as interesting is that Amazon does not solely rely on computer systems, but rather uses a hybrid data gathering methodology that utilizes humans armed with barcode data collection software. The system helps to ensure that Amazon can keep up with its shipments, as at peak demand a truck will leave one of the company’s fulfillment centers every 105 seconds. –

      Alibaba is B2B and Amazon is consumer but inventory is not their problem. They are just in a different business. Not better or worse, just different. I was commenting on the Zerohedge piece that compared WalMart which is also consumer oriented.

    11. Bill Brandt Says:

      That would be ironic given that alibaba comes from our friends the communist Chinese. I think the box store concept is already unraveling.

      How many of you prefer the simplicity of doing a simple search on sites like amazon – pushing the checkout button – to driving to a superstore, spending a lot of time walking from the parking lot and aisles – wondering if you will find what you are looking for, then standing in line to buy – and driving home?

      That really isn’t a compelling business model.

      It’s what drove one time powerhouse Tower Records out of business.

    12. Bill Brandt Says:

      @Dan – there was an interesting article I read – somewhere – about how Mexico, through NAFTA – has been grabbing a lot of new car manufacturing. Even the southern states are worried. Not just for export to the US but 30 other countries.

      The following doesn’t address my points, but does tell you what a powerhouse Mexico is becoming

      http://www.bloomberg.com/news/2014-01-31/mexico-surpassing-japan-as-no-2-auto-exporter-to-u-s-.html

    13. David Foster Says:

      Amazon inventory is about $6.6 billion, on annual sales of $74 billion. As a comparison, J C Penney is $11.8 B in inventory for sales of $2.8 B. Wal-Mart is $45 B inventory and sales of $476 B. The corresponding ratios are 11.2, 4.2, and 10.5.

      So while AMZN is by no means inventory-free, it’s considerably less inventory-burdened than an old-line retailer like JCP. It’s actually interesting that the ratio for AMZN is so close to that for WMT.

    14. MikeK Says:

      The Mexico manufacturing boom will help most of the Mexican economy except for the illiterate peasants that are the illegal immigrants to the US. Maybe the boom will stimulate Mexico to improve its schools and educate more of the Mestizo population that is mostly rural and illiterate. Mexico is actually facilitating the Central American immigration as the immigration rules for Mexico are quite rigid and hostile to immigrants. They certainly don’t want them there.

    15. Will Says:

      I take issue with the name, couldn’t we have something less ROP? I doubt seriously there will be much change in Mexico, where’s the incentive?

    16. Grurray Says:

      “J C Penney is $11.8 B in inventory for sales of $2.8 B”

      That’s one company that’s trying to claw its way back after hitting rock bottom because of strategic mistakes. A few years ago, they hired an executive from the Apple Stores and basically decided to fire all their customers. They cut their store inventory, eliminated sales and coupons, and raised their prices. They apparently thought they could remake JC Penney into some kind of a boutique.

      They probably panicked and decided to try something – anything – to forestall this predicted decline of brick-and-morter stores.

      Unfortunately, they learned a hard lesson about the “long game” that established companies aren’t so easy to change. Their success was more a long range, bottom up phenomenon than something that could be decreed from the corporate office. Catching the lightning in a bottle that somebody already caught long ago wasn’t the answer.

      The lesson is that what’s most valuable in retail and what can transcend difficult transitions is the brand, and your brand is sometimes something that you need to understand and work with rather than control and reshape.

    17. MikeK Says:

      Strategic mistakes are common. I had upper middle class friends and the wife always bought her linens at JC Penny because she thought they had the best. They moved to Westport Connecticut some years ago and she immediately looked for JC Penny in the local phone book. She drove to the address and found an estate with a big iron gate. It was JC Penny’s home. We all thought to was funny but it also had a lesson for JC Penny.