ALIBABA REPORT ON FINANCIAL RISKS IT IS EXPOSED TO AND

RECOMMENDATIONS TO OVERCOME THEM

Executive Summary

Based on the specific situation of Alibaba's case, this paper analyzes the problems in its
financial risk management in depth. At the same time, by analyzing the causes of the
financial risk management problems, it puts forward some suggestions to optimize the
financial risk management of company. Through the case study of this paper, it provides
some suggestions for the development of Internet industry. Looking forward to the
future, Internet companies will occupy an increasingly important position in the
economic development of our country. Their pace to expand overseas markets has
been advancing along with the process of economic globalization, but there still exists
the problem of financial risk management, and international competitiveness needs to
be improved. At present, the problem of financial risk management is hidden in the
process of company management, and its long-term impact remains to be observed.
There are still uncertain factors in global economic development, but the Internet
industry in our country should seize the opportunity, formulate a feasible financial risk
management strategy and make adequate preparation for dealing with financial risks.

Introduction

Since Premier Li Keqiang proposed to formulate “Internet +” action plan in 2015,

through continuous development and innovation, Internet enterprises have no longer
been confined to the previous web portal and instant messaging. Their business scope
is constantly expanding, combining the Internet with traditional enterprises to find a new
development direction for traditional enterprises. The development of Internet
enterprises in China has the innate advantages of strong government support, sufficient
market potential and high investment enthusiasm, but the boom bubble formed by this
has masked many existing problems. Internet companies have created many myths, but
in 2000 when the Internet bubble burst, the development of Internet enterprises had
encountered obstacles. After experiencing setbacks, people have to think deeply about
the risks of Internet enterprises, and the financial risk management of Internet
enterprises has been concerned. Alibaba is the leader of Internet enterprises in China.
Its successful profit model has become the research focus of many scholars, but few
scholars have explored and studied the risk problems in the process of its development.

Financial Risk Analysis of Alibaba Company

Founded in 1999, Alibaba has successively set up the Alibaba website, Taobao, Alipay,
Alimama, Tmall, Aliyun, Taobao APP and Alipay APP. After more than a decade, it has
become the world's largest online and mobile e-commerce company. The ecosystem
established by the company provides operation platforms for the third party.

Even though it is the world largest online and mobile e-commerce company, it faces
some financial risks which include.

Operational Risk

Alibaba's operational risk is hidden in its established business ecosystem which is

formed by the variety of its business model and industrial chain. From the point of view
of the time axis, the functional attributes of each of Ali's companies at different stages
are in line with the urgent needs of the market at that time, as well as needs of Alibaba's
pursuit of development. Operational risk is a fatal blow to the development of Internet
enterprises. Once customers change their consumption habits, a huge Internet
enterprise is likely to be destroyed. Alibaba's various platforms have cultivated the
network consumption habit of the user, and other network platforms duplicate this kind
of business model, which can cause certain operational risk to it.

Credit Risk

Alibaba's Taobao website is the largest e-commerce platform in China, in which traders
need to pass real-name certification to open online stores. Buyers buy fake and shoddy
goods on the platform, indirectly lowering Alibaba's credibility. Alibaba should play a role
in checking the quality of products provided by merchants, but the actual situation is that
it determines the reputation level of merchants only through transactions reflected by
data. If it can’t guarantee that buyers buy quality products on Taobao, it will lose a large
number of customers with high requirements on quality. The loss of more customers will
lead to a gradual decline in the appeal of the platform.

Cash Flow Risk

Alibaba needs a lot of money to develop new markets, cultivate user habits and
research and development of cloud computing technology. The money that Ali spends
to cultivate user habits when investing in new areas is often referred to as "burning
money" by others. For example: Alibaba's Didi car-hailing and Tencent's Kuaidi car-
hailing have respectively invested more than 1 billion to invite the vast number of users
to experience ride-hailing software with the purpose of seizing the taxi service software
market. This behavior is designed to cultivate customer habits and establish a market
order for ride-hailing software. The fluidity of network platform users is strong, whether
price changes or product performance can keep up with the pace of demand or not may
lead to a large loss of users. Cash flow risk management needs to start from the internal
of company to improve the accuracy of market forecasting and constantly adjust the
sales strategy. Externally, it needs to expand its channels and speeds up the cash flow-
back.

Investment Risk

The development of Alibaba Company has its unique advantages, that is, large market
scale, sufficient market potential and optimistic market expectation. The speed and
scale of its development mask many deep-seated problems, such as blind expansion.
Its reasons are various, which may be following suit of investment or overconfidence of
managers. However, this kind of blind expansion has become normal state in Alibaba's
enterprises. The Alibaba Group has invested in entertainment, e-commerce, finance,
education, tourism, enterprises, real estate, health care, hardware, games, and so on,
and the investment efficiency remains to be discussed. About investment projects, it
does not strictly assess the risk of a single project, basically takes the individual will of
the manager as the investment standard.
Recommendations

Improvement of the Internal Control System of the Company

The board of directors, management and other operational management staff jointly
implement the internal control process to avoid the potential factors that may have
harmful impact on the company, and finally realize organizational goals. If the internal
control environment fails to meet the requirements for implementation, other elements
will not work. The construction of the internal environment needs to build the internal
workflow and grasp the key nodes of risk control, thus forming a good internal control
environment. The corresponding departments in the internal of Internet enterprises can
hold regular internal meetings to inform the current important situation of financial risk
management.

Company executives and business departments as well as risk related departments

should effectively communicate financial risks which may be triggered on a regular
basis and adopt appropriate means to manage financial risks as soon as possible.

Construction of a Culture-oriented Risk Management Model

The fundamental purpose of financial risk management is to serve the company to

achieve its objectives. When constructing the financial risk management culture, we
should take the corporate goal as the guidance, let the employees have the sense of
identity and participation in the corporate culture, and finally achieve the aim of
compliance with the code of conduct of financial risk management. Once the enterprise
financial risk management culture is formed, it will have a long-term impact on
enterprise and its various levels of employees. In order to construct culture-oriented risk
management, firstly, it is necessary to propagate the culture to the employees and
enhance their awareness of financial risk management. Secondly, standardize the
behavior of employees from the action, carry out the work of self-evaluation, and
investigate the degree of understanding and acceptance of the employees about culture
Introduction of Big Data Thinking Control

Big data not only has a large total amount, but also has the characteristics of many
kinds, low data value density and timeliness. The financial risk of big data thinking
control regards the whole company as well as the internal and external environment as
the whole dataset and abandons the thought that limits the financial risk to the financial
department. First, risks should be digitized. Transform the process of managing risks
directly into managing risks through data. Risk management through data is divided into
two steps. The first is to translate risk into data. First of all, we need to subdivide the risk
dimension. The second is to manage the data. After the risks are transformed into data,
there is a need to strengthen the management of the data itself, such as data storage
risks and operational risks.

Enhancement of Real-name Authentication Inspection

Alibaba platform has implemented the real-name system for a period of time and has
basically set up the real-name system of user. But the quality of real-name users has
certain hidden trouble. In the Internet financial system, when auditing the lending in loan
business involved by Alibaba, users need to upload company information, but there are
loopholes in real-name information. In the process of handling business, the user should
be required to upload the photo in which personal identification card and face appear at
the same time, and a technology should be introduced that can identify whether the
photos are synthesized by photo retouching software.

Is the company adequately hedged? Yes, because hedging can create high returns in
both good and bad markets. But I would recommend avoiding hedging because high
returns only come at the expense of high risk.