Last Saturday, I met with the founders of a software company based in Guangzhou, China. At lunch, I asked the question: "Is China communist?" After my question was translated, everyone started to laugh.
Needless to say, there was little discussion about Marx or Lenin. Rather, we talked about business models, cash flows, competitive advantages, and market opportunities.
Yes, this is the type of discussion between Chinese and American businesses lately. After all, look at this week's megadeal, in which Yahoo! (Nasdaq: YHOO) agreed to shell out a cool $1 billion for a 40% stake in Alibaba.com.
Yahoo! will fold its current Chinese operations -- including 3721.com, which it purchased last year for $120 million -- into Alibaba.com. The company will retain current Alibaba.com management but have Yahoo! co-founder Jerry Yang as its representative on the board. It will also have 35% voting rights.
Since the dot-com bust, the phrase business-to-business (B2B) has become a dirty word. But a lot of companies still seem to be doing it -- including Alibaba.com. The company provides an online system to match foreign purchasers with Chinese-based suppliers. Alibaba.com has focused on China's B2B market because it's more developed than the country's consumer markets; Chinese business has been thriving amidst the explosive growth in international trade.
Alibaba.com also has a consumer auction site and an online payment system similar to Motley Fool Stock Advisor pick eBay's (Nasdaq: EBAY) PayPal. In all, the company has roughly $68 million in revenues.
However, with Yahoo!'s large investment, Alibaba.com appears to be taking a Blitzkrieg approach to this immense market. There may be more than 120 million Chinese Internet users by the end of 2005. By 2010, China may become the biggest online market in the world.
True, in dollar terms, the Chinese Internet market is relatively small. Only 4 million users have engaged in e-commerce. But as China's wealth grows, that number will increase considerably.
A $1 billion investment into a tiny Chinese company may sound crazy, but Yahoo! CEO Terry Semel certainly isn't. Several years ago, his huge gamble in purchasing Overture paid off with robust growth as the search market exploded.
Now Semel's placing his next big bet on China. By partnering with a China-based company with a strong management team, Yahoo! has a good chance at absolute domination of Chinese search, commerce, and communications.
Trying to pick a winner right now is pure speculation, of course. Google (Nasdaq: GOOG), Microsoft (Nasdaq: MSFT), Baidu (Nasdaq: BIDU), and eBay are all angling to capitalize on this still-nascent market's development. But given Semel's past, investors can rest assured that the Alibaba.com investment was done with a lot of analysis and strategic thought -- placing Yahoo! in a prime position to seize opportunities.
Further pan-Pacific Foolishness:
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Fool contributor Tom Taulli does not own shares mentioned in this article.
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