Executive Summary
The business report presented encases in-depth research on the One Belt One Road Initiative conceived by China. It looks at the opportunities, risks, costs, and threats associated with the One Belt One Road Initiative. Nonetheless, it is found that the One Belt One Road Initiative offers an astounding number of opportunities in the overall business of the OBOR countries. The most benefiting sectors, however, include the construction and transportation sector, telecommunication sector, e-commerce sector, consumer goods and retail, energy and power, mining, and financial services. The funding is majorly from the Chinese policy banks and AIIB. However, with the passage of time, private owners will also come forward with major investments. The major investments to be made are in the top 5 largest markets including Turkey, Russia, Korea, Indonesia, and India. For Alibaba Group, there is a vast number of opportunities available with the mention of alongside Information/Digital Silk Road. The project of Smart city in Malaysia is one such opportunity. However, the company has to consider the challenges as well in entering into these new markets in the form of political instability, power struggles, non-supporting bureaucracy, corruption, and cultural differences. The resulting emphasis of the analysis is shown on the benefits and opportunities which can make Alibaba bigger and greater. Thus, OBOR initiative can be considered as beneficial for Alibaba.
Introduction
This report will analyze the initiative taken by China identified as the One Belt One Road Initiative. The report will look into a business entity, i.e., Ali Baba Group and the effects of the One Belt One Road Initiative to the company’s financial prospects. The report will first cover the areas under One Belt One Road Initiative. The various countries involved in the One Belt One Road Initiative and the investment made in this gigantic project will be evaluated. The One Belt One Road Initiative Summit, which has been attended by many world leaders, will also be discussed. The report will then highlight on the industries which will be most affected by the initiative of One Belt One Road. The next section analyzes the prospects for E-Commerce industry specifically. The organization selected; the Ali Baba group is then shown in its background and current operations. After describing the organization profile, the next section explained looks for the benefits expected to be gained from the One Belt One Road Initiative for Ali Baba Group. The report then looks for the factors in the external environment affecting the business of Ali Baba Group after the implementation of One Belt One Road Initiative. In the end, the report concludes by assessing if the execution of One Belt One Road Initiative can benefit Ali Baba Group or not. The report looks at the political, legal, social, and economic factors of the external environment which affected the business prospects for Ali Baba Group in detail. These effects will better predict the overall scenario for the company helping it to strategize for the future in advance.
The One Belt One Road Initiative
The One Belt One Road Initiative is a combined initiative of 21st Century Maritime Silk Road and Silk Road Belt. The President of China Xi Jinping has firstly announced the initiative in the year 2013. The goals of One Belt One Road Initiative are;
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- Improving policy coordination
- Improving connectivity
- Financial integration
- Trade with no barriers
- Bonding among peoples
Existing and new bilateral and multilateral cooperation mechanisms among the economies and countries will be channeled to speed up the economic integration process among countries lying along the route and provide facilitation of trade. The One Belt One Road Initiative is technically open to all countries; however, the documents emphasize more on some 60 plus countries located in Asia, Europe, Middle East, and Africa. Major investments which have been made are in the sector of infrastructure, mining, and energy. The maritime Road that is one part of the initiative holds much importance as it is about 63% of the world population and about 44% of the Gross Domestic Product not including China. On the other hand, the Belt joins two major economies, China, and Europe. The corridor will represent key opportunities for energy, mining, infrastructure, and commerce sectors along with its route (Baker McKenzie, 2017).
Introduced by President Xi on its state visits to Indonesia and Kazakhstan, One Belt One Road Initiative aims to promote the economic development which is mutually beneficial, and prosperous to China as well as its neighboring countries. The prime aim is to facilitate the development and the financing of the hard and soft infrastructure which will aid in the connectivity enhancing for easy flow of goods, services, information, capital, and people along the linked geographies (The Economist Intelligent Unit, 2018).
Map of the countries Involved has been taken from KPMG International (2017)
The One Belt One Route Initiative includes a land and sea route. There are six corridors in these routes. About more than 60 countries are involved in the entire project. All countries and organizations around the world are welcomed to join the One Belt One Route Initiative; however major partner countries are located in the regions of Asia, Eastern Europe, Eastern Africa, and the Middle East. The route will cover almost 69% of the world population and about 51% of the world GDP. One Belt One Route Initiative will center on the main markets. The top five largest markets targeted by the One Belt One Route Initiative are; Turkey, India, Korea, Russia, and Indonesia. Saudi Arabia, Thailand, Iran, Poland, and Taiwan are among the top 10 target larger market of the One Belt One Route Initiative. These ten markets will account for about more than 50% of the total region opportunities. Chinese firms have already tried to tap most of these regions. However, they have failed earlier. Now, for success, these firms will need to have support from foreign and local partners, technologies, and suppliers for sustainable growth.
The initiative will hit about 4.4 billion of the population and approximately about a third of the whole world’s economic output. The plan has two phases. The first phase will be dedicated to lay down the infrastructure, regarding transportation, power, and communications. The second phase will word in the softer sectors like education, healthcare, e-commerce, and financial services. The whole plan has started its first investments and projects. The plan will finalize at least until 2050 (Wijeratne et al., 2018).
Investment Involved in One Belt One Route
The Chinese government, of course, is one of the major players of the initiative. The government statements have shown that about 50 Chinese state-owned Enterprises have participated and invested in about 1700 projects in various countries along the route in the last three years. The major investors include the
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- Power China
- China State Construction
- China Railway Group
- China Communications Construction
- State Grid
- CNPC
The major investors in the project include:
Major Financiers of One Belt One Route (OBOR)
The major financier of Chinese companies is funded by the Silk Road Fund, which was established in 2014 with an initial total capital of USD 40 billion. The AIIB was established in 2015 with the initial capital of USD100 billion. The new development bank was founded in 2014 for OBOR countries (Wong, 2017).
China is not going to be the sole financier of this project. By 2030, it is expected that over more than 50% of the projects of the OBOR will be sourced from the private capital, multilateral banks, and foreign governments. China is expected to invest about USD 350 billion in the next coming years in the OBOR project. The Chinese State-owned Enterprises are only initiating the process. A new wave of Private-owned firms will come which will account for the major share of the outbound activities. Many are currently succeeding deals in the targeted OBOR markets. Other than these foreign companies are also going to benefit from the opportunities provided by the OBOR initiative. The multilateral Banks like the World Bank are currently the major financiers of the OBOR initiative (Baker McKenzie, 2017).
China’s Rationale Behind One Belt One Route Initiative:
The economic rationale behind the One Belt One Route Initiative can be deduced from the following aims that it is thriving to achieve from it;
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- Support China’s “Go Global” Policy”
- Increasing exports to the BRI Countries
- Strengthening of the geostrategic position of China
- Strengthening the Currency of China
- Decreasing the oversupply of the industries of China
One can see how this whole project is aimed at benefiting China in its aims. However, it is not at the cost of other less-developed countries. On the contrary, the initiative is based on building and benefiting other neighboring countries as well.
The economic rationale of China to push the One Belt One Route Initiative is also:
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- China wants to push the Chinese economy by addressing the slowdown in its GDP growth through the creation of new markets.
- It also aims to promote international level cooperation. It intends to raise the cooperation level between the continents of Asia and Eurasia.
- China also aims to strengthen the nations through growth in trade, which is located along the route through railways, ports, and roads.
- The Chinese Renminbi is also aimed to get strengthened by its increased use in the global trade and investment
There are also some strategic rationales as well behind the Chinese One Belt One Route Initiative, these are:
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- Expanding the Going Global strategy of Chinese firms for catering with the economic slowdown.
- Reducing the cost of doing business in the region by investing hugely in the regional infrastructure
- Resolve the overcapacity issues in the Chinese steel, aluminum, and cement industries for utilization in the infer-deficient economies
- China aims to grow its international operational capabilities by working on large scale projects (KPMG International, 2017).
Risks Involved in One Belt One Route
Like all the new endeavors which focus on the emerging markets, the companies participating in these markets often face challenges and risks in the state. These risks can lead to major investments without any payoffs. There are many types of risks involved with such types of projects (Wijeratne et al., 2018).
Operational Risk:
Projects like One Belt One Route Initiative involve suppliers and contractors, which belong to multiple geographies. The conforming of the Chinese companies to the norms of the varied countries is expected to cause delays and barriers to the operational activities.
Financial Risk:
The very large size of the investment involved in projects like this with most being the debt requires regular servicing. Also, the demand for the project’s completion is quite difficult to predict (KPMG International, 2017).
Political Risk:
The changing governments of the countries involved in the OBOR initiative route may lead to newer and changed frameworks, policies and compliances. Chinese companies have experienced relaxed regulations in the less developed countries; however, these countries also have a history of political instability and armed conflicts. These risks may force China to remain more on just the top ten countries in the world.
Legal and Regulatory Risk:
There is also a major difference in the regulations and legalities followed in the different OBOR countries. It can make it challenging to replicate the similar projects in different countries within a similar time frame and costs. Undeveloped legal regimes may cause barriers for the investment. Moreover, the judicial and social corruption also poses problems if legal disputes arise (Baker McKenzie, 2017).
The One Belt One Road Summit
State leaders of almost thirty countries have backed the One Belt One Route Initiative. The 30 state leaders have agreed to work on building roads, ports, railways, and infrastructure. It was agreed upon in one of the largest summits hosted by Beijing. Leaders all over the world attended the Belt and Road summit, which was hosted in Beijing. This initiative is one of the biggest economic diplomacy programs in China. Delegates from more than 100 countries participated in the summit, including from North Korea and USA. The participants of the summit agreed upon fostering cooperation in the sectors of railways, ports, maritime, roads, aviation, electricity, telecommunications, e-commerce, and inland water transport. They also agreed on working to establish a sustainable financial system. The summit also announced that the initiative is open to all countries and organizations. The participants also agreed on the commitment to inclusive trade and an open economy. The summit also announced that it would oppose all kinds of protectionism (Reuters, 2017).
The Industries Most Affected by One Belt One Road Initiative
The industries which are going to be most affected by the One Belt One Road Initiative include:
Technology, Media, and Telecommunication
The One Belt One Road Initiative has been aimed at investing initially in the technology, media and telecommunication sector across the region. The rising incomes alongside the route will cause the demand for Smartphones, and net-based services to rise. The private firms of China are well enough regarding cash flow to not only fully fund their activities abroad, but also leverage their partners in the OBOR countries as well.
Consumer Goods and Retail
The investment of China in roads, infrastructure, power, and railways is evidently accelerating across the African countries. These are facilitating in supporting the household incomes and provide growth in the retail and food services sector.
The FMCG’s brands of China are also expected to venture abroad, which had captured the local markets of China. Southeast Asia is the easiest entry point to enter new markets abroad.
Industrial Manufacturing, Transportation
Chinese companies are expected to have increased expansion and acquisition plans of firms and technologies which will enhance the strategic expansion plans of China in OBOR countries. Also with the rise of the domestic protectionism and going global policy, the Chinese manufacturers will be seem going abroad in the larger markets of India and Indonesia to build local plants.
Financial Institutions
Most of the projects currently going have been funded by the Chinese policy banks. However, this will change with the passage of time and increment in scale. Policy banks can get bothered of sustaining losses on making investments. The Chinese securities firms will acquire and arrange joint ventures for regional corporations. The main focus is going to be South East Asia and South Asia.
Energy, Mining, and Infrastructure
Chinese major investments in the energy sector are going to be accounted for the major portion of the OBOR projects. In denser countries, land acquisition is relatively easier as compared to the building of the railways, and ports. With the increase in the scale of the projects, the Chinese workers would have the requirement of dealing with market mechanisms rather than relying on the government relations.
Opportunities for E-Commerce
The One Belt One Road Initiative can be seen from two aspects; the Silk Road and for the Marine Silk Road. However, there is another aspect of this initiative which is not given much attention. It is the digital Silk Road or calls the information Silk Road. Digital connectivity regarding telecommunication, e-commerce, and internet technology infrastructure is embedded in the One Belt One Road Initiative. The white paper that articulated the idea of One Belt One Road Initiative mentioned it as well. It mentioned optical cables between countries and the expansion of the communication networks for the aim of development of the Information Silk Road. It focused on the rise in e-commerce trade among the OBOR countries. The 2017 forum included the aspects of the digital connectivity and promised to support the action plans aimed at e-commerce, smart cities, digital economy, and technology parks under various regional cooperation frameworks.
The increase in information connectivity and telecommunication holds potential for the e-commerce sector of the OBOR countries. As per the Ministry of Commerce of China, the cross-border e-commerce turnover in China has increased by 30% annually for the years 2005 to 2016. Enterprises and firms like Alibaba, Tencent, and the JD.com have seen these as opportunities and geared up for expansion in the OBOR countries.
Organization Profile of Ali Baba Group
The business entity selected for analyzing the effect of One Belt One Road Initiative is the e-commerce Giant Ali-Baba Group. The company was founded in 1999 by Jack Ma with a team of 18 people. He was a former English Teacher from China. He started his Alibaba Group as a commerce and trade enabler by using an internet platform to help in the growth of small businesses. Currently, the Alibaba Group Holding Limited, a Chinese company, is a trade and commerce giant operating in retail and wholesale sectors. The company has expanded into cloud computing, electronic computing, mobile solutions, marketing and advertising services. The main business of the company is selling. It collects revenues by the commission on the sale of products and from advertising services. Taobao, which is an online shopping marketplace, Tmall, which is a third-party platform for other retailers and brands, and Juhuasuan are the three internets-based platforms used by Alibaba. The company then also provides logistics and delivery support to these sold items through its third-party partners who are using the logistics information system owned48% by Ali Baba Group. It then further provides marketing and technology infrastructure to the companies and brands selling its products on its platforms to establish an online presence (Alibaba Group, 2018).
Benefits and Opportunities for Ali Baba Group
The owner of Chinese e-commerce giant Ali Baba, Jack Ma has been witnessed of quoting interests in expansion plans within Europe, South East Asia, and Russia. In an international economic forum conducted in Russia, he mentioned that the most important regions for Alibaba are the OBOR regions. The acquisition of Lazada in 2016, the being e-commerce firm of South East Asia can be accounted to the same plan. In 2017, the company has joined hands with the Malaysian government for the creation of the first Digital Free Trade Zone. This plan is expected to be completed by 2019. The plan will help the small businesses leverage the cross-border e-commerce sales and digital economy. The plan will offer logistics facilities, online services platform, and fulfillment capabilities. A glimpse into the Jack Ma ambitions can be taken from his aim to build a digital World Trade Organization (Armstrong & Wang, 2017) which will aid the traders with reduced trade barriers making them grow through e-commerce platforms at an exponential growth rate (Das, 2017).
Recently, this year, Alibaba has nailed total eight international deals which were worth a total of $2.4 Billion of USD. The company has spent about $7 billion in overseas acquisitions in the last year. Looking at this along with the restrictions posed by Beijing on overseas acquisitions explains the aim of these ventures. The analysts have provided several reasons for the clash in the governmental policies on clamping down acquisition rhinos and these tech giants’ overseas ventures. One of these reasons is stated as the buying of these firms is aligned with the state’s target of champion technology. The analysts believe that these deals are very strategic aimed at being aligned to the larger aims of OBOR initiative (Lucas, 2017).
External Business Environment affects Ali Baba Group
The extensive analysis of the One Belt One Road Initiative conducted was necessary to have the insight of its effect on the organization Alibaba. The opportunities and risks associated with the project have to affect the Alibaba as well. These opportunities represent opportunities for Alibaba as well. The opportunities in the E-commerce, digital connectivity, and internet of Things bring opportunities for the firms operating in this sector. Alibaba being the e-commerce giant in China and the preferred marketer has the potential to cultivate these opportunities. Along with the opportunities, the risks associated with the One Belt One Road Initiative also have a profound effect on Alibaba. The financial risk associated with investing in the new acquisitions and projects like the Malaysian Smart City poses threats for Alibaba.
External issues faced by Ali Baba Group
Political
All political factors play a vital role in the determination of the success rate of a business. The political system established in a country pretty much enables or disables the business opportunities by providing them with supporting or the non-supporting environment. Alibaba Group operates in the Specialty Retail sector, and the regulations in this sector in each of the OBOR countries can be different and thus can pose risks for the companies operating simultaneously in these countries. The different types of political environments and systems pose different risks. For being successful in these different political systems, the company is needed to diversify the systematic risk of all the political environments. The political instability in these regions can be very gruesome for the business. The risks of military invasions and the level of corruption in the system impact the business sector and therefore have an impact on the Alibaba as well. The taxation systems, favored trading partners, bureaucracy, price regulations, and industry safety regulations varying across these countries have to impact on the operations and potential profits of Alibaba as well.
Economic
Alibaba operation in China has access to the center of cheap outsourced products has the leverage of favorable business location. Moreover, its main enterprise as the chief marketer of China provides it the advantage on other firms. These environmental factors provide facilitation in technological aspects for its intermediary role in the field of e-commerce with the aim of connecting businesses to businesses and consumers in retail and wholesale sectors. The marketer role in China of Alibaba is central to the international success in e-commerce. With the initiation of One Belt One Road Initiative, economic opportunities available for Alibaba are immense. China is the center of this initiative and Alibaba being the central marketer of China gives Alibaba immense leverage over its competitors. As the founder of Alibaba Jack Ma himself mentioned the need for Information Silk Road, the opportunities associated with its effects the present and future strategic and financial position of Alibaba.
With the entrance into various projects of digital connectivity and e-commerce in OBOR countries, Alibaba will have to cater to the different economic systems of the countries and their stability or instability of the system. The exchange rates and the stability of the systems also will affect the operations of Alibaba. The comparative advantage of the host country and its service sector will also affect the company. The inflation rate and interest rate offered in the OBOR countries, the economic growth rate, and their unemployment rate and labor costs will affect Alibaba.
Social
The culture of the societies of different OBOR countries and the way of doing things will have an impact on the culture of the Alibaba organization as well. The shared beliefs and the attitudes of the society have an important role in how the Alibaba Group marketers will approach them and understand these as customers. The marketing message of each culture has to be designed accordingly and separately.
The Demographics and the skill level of the OBOR countries population will hurt the company. The changing demographics in each of the diverse cultures of the OBOR cultures will not be easy to cater. The broad nature and entrepreneurial spirit of the nation of each OBOR country will affect the sale and marketing revenue of Alibaba. The attitudes towards the environment, health, shopping, and leisure activities, the forms of entertainment and acceptance or rejection of various kinds of activities affect the operations and sales of the company. The class structure and the power hierarchy also affect the company operations. The industry norms in the e-commerce industry of the OBOR countries, the education level, and the standard followed in the industry have to effect on the company’s prospects.
Legal
In most of the OBOR countries, the legal framework and the regulating institutions are not robust enough to protect the rights of intellectual property of organizations like Alibaba. Any firm is needed to carefully evaluate such markets before entering into it as it may lead to theft of the secret of the organizations diluting the competitive edge of the company. The legal factors which are to be considered while entering into the new markets of OBOR countries include the anti-trust laws in the countries for specialty retail and other industries. The discrimination laws can vary as well. The laws of copyright, patents and its practical implementation have a major impact on the operations and potential revenues of Alibaba. The need for compliance with safety, health, and data protection laws and the law and control situation in the countries also varies and poses the company to different exposures and risks. The laws for consumer protection and e-commerce will be highly important for Alibaba after the implication of One Belt One Road Initiative.
The Conclusion of Analysis showing Benefit or Loss to Ali Baba Group
The analysis of the opportunities and threats associated with the One Belt One Road Initiative for the company Alibaba has shown that with all the tremendous opportunities this initiative offers, Alibaba will certainly face immense challenges in the form of political instability, economic hurdles, social-cultural differences, and legal barriers in the new markets of OBOR countries. However, it is true that with the collateral and multilateral relationship among the states, many of these hurdles will be dissolved. But the Chinese workers and employees of Alibaba will have to deal themselves with the bureaucracy and cultural differences. The initiatives like digital free trade zone in Malaysia, and acquisitions of tech companies will enable Alibaba for better handling of bigger projects with the support of the governments of China and OBOR countries. No opportunity comes without challenges. Thus, being prepared for these challenges can aid Alibaba to exploit these opportunities and become successful. Thus, OBOR initiative can be considered as beneficial for Alibaba.
References
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