Rating Qualities

8
Innovative

Alibaba
The House That Jack Ma Built
Duncan Clark | Copyright © 2016 by Duncan Clark. Published by
arrangement with Ecco, an imprint of HarperCollins Publishers

Calling Alibaba “the Amazon of China” understates its influence. Chinese shoppers visit Alibaba’s
Tmall and Taobao sites for everything from groceries to SUVs to fake girlfriends. Alibaba has
more customers than the US has citizens. The heart of the Alibaba story is founder and CEO Jack
Ma. Author Duncan Clark, an American working in China, notes that he foolishly decided not
to invest in Alibaba, a move he figures has cost him some $30 million. Clark also offers useful
commentary, particularly about Alibaba repelling eBay’s incursion into China. From his not-quite-
insider’s perch, he engagingly conveys Alibaba’s rise. getAbstract recommends the Alibaba story
to investors and managers seeking insight into China’s economy.

Take-Aways
• Global giant Alibaba grew from modest roots to become even more than the “Amazon of
China.”
• Some 400 million people buy goods on Alibaba’s Tmall and Taobao sites every year.
• Alibaba is revolutionizing China’s economy as the nation transforms itself from an industrial
giant to a technological power.
• Alibaba holds no inventory; instead, it gives merchants a way to market to consumers.
• Jack Ma, a former teacher who boasts of his technological ignorance, founded Alibaba.
• Ma’s “Six Veins” of success are “customer first,” “teamwork,” “embrace change,” “integrity,”
“passion” and “commitment.”
• The US auction site eBay competed in China by buying the auction site EachNet.
• Alibaba countered with Taobao, which charges no fees to buyers or sellers.
• Taobao caters to Chinese tastes with a cluttered, content-laden design.
• Alibaba has more customers than the US has citizens.

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 Summary

Bigger than Amazon

Alibaba is a global giant that grew from modest roots. From origins in founder Jack Ma’s
apartment, the Chinese firm expanded rapidly – up from 27 merchants in 2009 – raising a record
$25 billion in its initial public offering on the New York Stock Exchange in 2014. Alibaba soon
became the world’s second-most-valuable Internet firm, trailing only Google.

“Alibaba has transformed the way Chinese shop, giving them access to a range and
quality of items that previous generations could only dream of.”

Some 400 million people buy goods on Alibaba every year. With its Tmall and Taobao sites,
Alibaba is China’s biggest retailer. On November 11, 2015, which amounted to China’s equivalent
of Cyber Monday, Alibaba shoppers spent $14 billion.

Alibaba is the fulcrum on which China pivots from an old-school model of factories, exports and
buildings into a higher-value economy serving an emerging middle class. Alibaba’s rise reflects
China’s transformation into a modern power. And Alibaba has room to grow. Consumer spending
accounts for two-thirds of the US economy, but it’s only a third of China’s, so far.

But Not Amazon

Alibaba’s business models differ from Amazon’s. Alibaba holds no inventory; it gives merchants
a place to market their wares to consumers. Buyers and sellers pay no fees; merchants purchase
display ads or paid listings akin to Google’s AdWords. Alibaba merchants sell electronics, clothes,
groceries, cars, and more. General Motors markets no-interest car loans on Alibaba.

“Household spending in the United States drives two-thirds of the economy, but in China
it barely accounts for one-third.”

Alibaba sells some 40% of China’s groceries online, while online sellers move only 10% of US
groceries. Alibaba sells personal services. On Taobao, a man can hire a phony girlfriend or pay
someone to do the dirty work of a breakup.

Like Amazon, Alibaba uses big data to analyze its logistics networks and it’s testing airborne
delivery drones. In a nod to PayPal, Alibaba launched Alipay, which handles hundreds of millions
of dollars a year. The service holds deposits, so it competes with China’s state-run banks, which
consumers regard as indifferent to customer service.

Jack Ma

The star of Alibaba is Jack Ma, a savvy entrepreneur, expert executive and charismatic public
speaker fluent in English and Chinese. Born in 1964, Ma grew up in Hangzhou, 100 miles from

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 Shanghai. His father is a factory worker and his mother a photographer. Ma struggled at math and
remains no whiz at technology. He learned English as a boy by listening to English broadcasts on a
shortwave radio.

“Forged in the entrepreneurial crucible of Zhejiang and fueled by his faith in the
transformative power of the Internet, Jack is the ultimate pragmatist.”

In the late 1970s, when China opened to tourism, Ma gave free tours to English-speaking tourists
to further his language skills. Ma’s poor math scores kept him out of prestigious universities. He
attended Hangzhou Teachers College and spent years as a teacher.

Ma came of age when China was a closed society. Entrepreneurship was illegal and people
considered it unsavory. When China eased its restrictions on private commerce, Ma pursued
entrepreneurial ventures. In 1994, he launched a translation company. When its expenses
outpaced its income, Ma branched into selling flowers, books and other items. In 1995, he visited
the US and used a computer for the first time.

“Alibaba benefited from Hangzhou’s relative isolation. There weren’t really any rivals to
poach [Jack Ma’s] employees.”

Ma launched his first Internet venture, China Pages, registering the name in 1995. He hoped to
create an index of Chinese firms seeking to do business overseas. Ma compiled data about Chinese
firms and translated them into English. At the end of 1995, the entire Hangzhou province had only
204 web users. As China broadened Internet access, China Pages became partners with Zhejiang
Telecom. Then Ma discovered that his partner had registered a domain name similar to his and
was competing with him. By late 1997, he gave up on his first Internet venture.

Alibaba’s “Six Veins” of Success

Ma launched Alibaba in 1999. China had only two million Internet users, a personal computer cost
a prohibitive $1,500, and Chinese phone connections were expensive and slow.

“In the earliest days of China’s economic reforms, entrepreneurship was viewed as a
highly risky, even illegal undertaking.”

Ma inculcated his corporate culture with Six Veins, the principles he considers crucial to success:

1. “Customer first” – While rivals Baidu and Tencent hire mostly technical workers, Alibaba
seeks sales employees, reflecting its focus on customers.
2. “Teamwork” – Alibaba workers sing songs, play games and join group outings. Alibaba
focuses on people’s efforts over their results. People meet their goals by breaking them down
into small steps. High-performing teams receive generous bonuses as rewards.

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 3. “Embrace change” – Alibaba shuttles staff members between assignments. Chinese culture
teaches that failure is “shameful,” but Alibaba encourages workers to accept failure as part of
life.
4. “Integrity” – Corruption is endemic in China. Merchants who sell on Alibaba try to
compromise the site’s overmatched “referees.” To maintain integrity, Alibaba rotates workers
constantly, not only as part of it ethos to embrace change, but also to prevent them from
establishing “alternative centers of power.”
5. “Passion” – Employment at Alibaba requires hard work and dedication.
6. “Commitment” – Ma tells his employees to “work happily but live seriously,” to reinforce
their bonds with the company.

Vanquishing eBay

Ma looked to eBay as a model. When eBay went public in 1998, it had a $2 billion valuation, and
its market cap soared to $30 billion by March 2000. Ma wasn’t alone in hoping to create China’s
version of eBay. EachNet jumped into the top spot among Chinese auction sites, and in 2002, eBay
paid $30 million for a third of the company. Meg Whitman, CEO of eBay, viewed the deal as a
foothold in China’s fast-growing economy.

“The reality was that Jack, late to the portal game now dominated by Sina, Sohu and
NetEase, had to find his own niche in the China Internet market.”

When eBay tried to expand to Japan, it found that Yahoo Japan had a head start and a smarter
strategy. Unwittingly, eBay had required consumers to register online using credit cards, but at the
time only very few Japanese consumers had them. It survived in Japan for barely two years. But
when eBay took control of EachNet, it dominated China’s nascent online auction market.

“Country Bumpkins”

In 2002, Alibaba created a business model to launch an eBay rival. Ma was concerned that eBay’s
power sellers would compete directly with Alibaba. His first attempts to resist eBay seemed futile.
After all, Alibaba was “a group of country bumpkins from the backwaters of China,” while EachNet
had the backing of a Silicon Valley giant. Undeterred, Ma handpicked a team of employees to
design a competing e-commerce site.

“eBay just wouldn’t take Alibaba seriously, questioning the reliability of mounting data
that showed Taobao was selling more goods than eBay in China.”

Invoking martial arts imagery, Ma aimed to spring a last-minute surprise on EachNet. Putting his
own twist on Silicon Valley culture, Ma encouraged his software engineers to take breaks to play
video games and perform handstands – which Ma thought spurred creativity by changing one’s
perspective. Alibaba named its auction site Taobao.com, after the Chinese phrase for “hunting for
treasure.”

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 “eBay’s China adventure, lasting from 2003 to 2006, is today a case study in how not to
go about managing a business in a distant market.”

As Alibaba worked on Taobao in 2002 and 2003, the SARS virus swept southern China. An
Alibaba staff member died after apparently contracting the disease. The organization sent all
of its workers home for a week and compelled them to wear face masks. SARS could have been
disastrous for Alibaba. Instead, it turned out that the member of the staff had died from other
causes. The outbreak spurred the development of online communication in China.

Taobao

Taobao launched in May 2003, and Ma’s insistence on secrecy was so successful that many
Alibaba staff members didn’t know that the organization had backed it. To create the illusion
of a bustling marketplace, Ma and his staff members rustled up 30 items and sold them to one
another. In February 2004, SoftBank invested $82 million to gird Taobao for competitive battle.
Fidelity Investments and other backers ponied up as Taobao readied for expansion.

“In the upside-down logic of the unfolding dot-com boom, losses were not only acceptable
but worn as a badge of honor: The bigger the loss, the grander a firm’s ambition.”

Despite Taobao’s big-name backers, eBay ignored the upstart. It recognized China’s potential, but
overconfidence was just one of its many mistakes. When the tech bubble burst, eBay’s stock had
plunged. Subsequently, Wall Street saw China as a driving force in eBay’s return to prominence. At
home, eBay’s US customers griped about its ever-rising commissions. They dubbed it “FeeBay” or
“GreedBay.” In 2002, eBay bought PayPal and in 2005, it acquired Skype.

“Alibaba is playing a pivotal role in China’s economic restructuring, helping move the
country away from a ‘Made in China’ past to a ‘Bought in China’ present.”

Taobao’s cluttered site looked like the polar opposite of the minimalist design Google and other
Silicon Valley stalwarts preferred. Chinese Internet users found clean website layout dull. They
preferred pages packed with images and information. Taobao was designed for Chinese, not
American, tastes. Taobao gained market share and eBay lost it. Managers at eBay questioned the
credibility of numbers showing Taobao in the lead.

“In website design, culture matters.”

Taobao’s local knowledge of China gave it a pronounced advantage over eBay in its approach
to fees. After initially charging no fees, EachNet began imposing commissions, which led to a
decline in auction volume. Taobao recognized Chinese merchants’ aversion to fees and charged
no commissions. Taobao’s strategy was risky. By foregoing fees, Taobao remained unprofitable
for years. However, it reaped a benefit: Merchants came to Taobao because of the lack of fees and

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 shoppers came because of the large numbers of merchants. This self-perpetuating cycle drove
Taobao to exponential growth.

“Jack likes to make fun of his shareholders and investors…to burnish his credentials as a
maverick with his employees and the general public.”

Arguing as late as 2005 that “‘free’ is not a business model,” eBay refused to concede. EachNet
fretted about how to stop its buyers and sellers from connecting offline to avoid commissions.
Ultimately, eBay stopped charging fees to EachNet users, but it lost so much market share in
China that this belated concession made little difference.

More of eBay’s Unforced Errors

In 2004, eBay miscalculated once more when it decided to host EachNet’s website in California
rather than in China, whose “Great Firewall” subsequently saw EachNet as a foreign site. This
barrier subjected buyers and sellers to the logjam of Chinese censorship.

“Nature abhors a vacuum and in China the Internet is filling the voids created by a
legacy of state ownership and state planning.”

Chinese authorities were touchy about the “three T’s” of Tibet, Taiwan and Tiananmen Square.
The Tiananmen Square uprising culminated on June 4, 1989, or 6/4/89. When EachNet moved to
California servers, China blocked users who had 64 or 89 in their usernames. EachNet became a
slow, clunky site because of censorship restrictions, and user counts plunged.

PayPal – which eBay bought for $1.4 billion – didn’t work in China’s tightly regulated banking
system and in handling its currency, which resists easy conversion. The eBay brain trust seemed
not to realize that China was in a different time zone than California; eBay conducted routine
maintenance of its San Jose servers on Thursday at midnight, local time. That’s Friday afternoon
in China, when traffic runs high.

Meg Whitman made China a priority, and investors bought shares based on a potential windfall,
but no one bothered to relay the extent of EachNet’s woes to eBay’s CEO. Whitman was livid when
she finally learned the extent of the debacle. She later said eBay should have taken only a minority
stake in EachNet and left local ownership in charge.

After outsmarting his towering rival, Ma marveled at eBay’s unforced errors. He summed up
Taobao’s experience: “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River.
If we fight in the ocean, we lose; but if we fight in the river, we win.” Over time, eBay squandered
several hundred million dollars on its EachNet foray. As the extent of its defeat became clear,
eBay shares dropped by nearly 50% from early 2006 to August of that year as Jack Ma’s Alibaba
continued its stratospheric growth.

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 About the Author
Mandarin speaker and former Morgan Stanley investment banker Duncan Clark founded an
investment advisory firm in Beijing. He has lived and worked in China for more than 20 years.

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