INTERNET: Alibaba Finds New Home in Beijing

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Bottom line: Alibaba’s establishment of a dual headquarters in Beijing for its Tmall unit looks like a smart move to improve relations with government regulators, and should help to avoid future clashes over issues like piracy.

Alibaba’ss Tmall opens second HQ in Beijing

Embattled e-commerce giant Alibaba (NYSE: BABA) is finally realizing that only the passage of time will the ease the weight of negative sentiment dogging the company, and is moving on to the important business of laying a more solid foundation for its future development. That’s my interpretation based on the company’s latest major move, which has Alibaba’s Tmall online marketplace set to establish a second headquarters in Beijing.

Media have been buzzing with rumors about the move for much of this week, with some saying Tmall might be preparing to relocate its headquarters completely to Beijing from Alibaba’s hometown of Hangzhou. But the reputable China Business Network (CBN) says it has finally gotten to the bottom of the story, and that Alibaba’s intent is to have Tmall co-headquartered in both Beijing and Hangzhou.

This particular move looks both smart but also slightly surprising. On the one hand, Alibaba clearly needs to be closer to policy makers in Beijing, especially officials from the Ministry of Commerce and State Administration for Industry and Commerce (SAIC) that are 2 of its main regulators. Alibaba’s current slump dates back to early this year, when the same SAIC issued a damaging report that found nearly two-thirds of the goods traded on Alibaba’s C2C Taobao marketplace were fakes.

But the move is also just slightly puzzling, since it would seem more appropriate to have the entire Alibaba Group set up a second headquarters in Beijing rather than just its Tmall B2B marketplace, which is one of its main e-commerce revenue sources alongside Taobao. Perhaps the Tmall move is just a first step, and Alibaba will eventually follow by establishing a full second headquarters in Beijing.

According to the CBN report, Alibaba founder Jack Ma publicly discussed establishing Beijing as the company’s second base as early as April this year. (Chinese article) They add that Alibaba began to execute the plan in June, and it should be complete by November. They say a formal announcement will come soon, and point out that the company’s affiliated Ant Financial unit also uses a similar model with dual headquarters in Hangzhou and Shanghai.

Courting the Government

It’s no secret that government relations are important for any major company, and all big western firms have offices in their respective capitals to lobby on the latest policies affecting their industries. Government relations is even more important in bureaucratic China, leading most major western companies to set up headquarter in Beijing when they first arrived in the 1980s and onward.

State-run Chinese companies are less reliant on Beijing, since most are directly or indirectly owned by their local governments. But the nation’s private companies often lack such connections, and those firms are even more vulnerable to changing national policies in sensitive and emerging areas like the Internet.

Somewhat ironically, Alibaba realized the importance of playing politics quite early in the west, and set up a powerful lobbying organization in Washington to make its case on important issues like its commitment to fighting piracy. I’m sure it has always had big offices in Beijing, but its awkward reaction to the SAIC piracy scandal exposed major shortcomings in its local government relations apparatus.

Rumors of Tmall’s new dual headquarters plan didn’t provide much support for Alibaba’s stock, which tumbled another 3 percent to close at a fresh all-time low of $60, or 12 percent below the price from its record-breaking IPO a year ago. The stock seems destined to slip into the embarrassing $50 range and possibly even lower before the current rout subsides. But at least Alibaba is doing the right thing and turning its attention from the sell-off, and focusing instead on building a stronger company for the future with moves like this dual-headquarters model.

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