by Duncan Clark
When it was launched in 2013, Cainiao announced plans to invest more than $16 billion by 2020 to develop the “China Smart Logistics Network,” comprising three networks—Peoplenet,26 Groundnet,27 and Skynet. Cainiao has not merged the courier companies, instead its strategy is to integrate the data that each generates—focusing on data packets, not physical packages. The idea is that by sharing orders, delivery status, and customer feedback each member company can improve efficiency and service quality, while remaining separately owned.
By investing in Cainiao, Alibaba aims to lock in vital relationships with its logistics partners while finding outside investors to fund the expansion of the networks themselves. Cainiao neither owns the physical infrastructure of the networks nor employs the personnel who make the deliveries. Those assets are contributed by the consortium’s members and partners, allowing Alibaba to pursue an “asset-light” strategy.
A lot is riding on this approach. Alibaba’s principal e-commerce competitor, JD.com,28 is pursuing an “asset-heavy” strategy, investing directly in its own logistics infrastructure. JD’s mascot is Joy, a gray metallic dog, chosen no doubt to give symbolic chase to Tmall’s black cat. Today JD has built up the largest warehousing capacity29 of any e-commerce company in China, offering speedy delivery services including same-day30 delivery in forty-three cities. JD.com runs a truly end-to-end system, controlling its own procurement, inventory, distribution, and warehouse systems, with goods delivered to customers by uniformed couriers riding JD-branded vehicles.
With annual revenues topping $11 billion, JD has a growing share of the consumer e-commerce market. The company is especially strong in tier-one cities like Beijing and in product categories such as home appliances and electronics.
Alibaba’s investment in the electronics retailer Suning, which it watches warily, illustrates its concern. Both Alibaba and JD are vying to ensure deliveries in as little as two to three hours in a number of cities.
Alibaba is attempting to build a whole a new competitive playing field by harnessing data technology, including Big Data—the ability to analyze and drive business decisions from the huge volumes of information generated every day on its websites. On Singles’ Day, the delivery paths of most of the courier companies within the Cainiao network were analyzed and rerouted in the event of traffic jams. Alibaba justifies its investment in Cainiao by arguing that demand would otherwise have run ahead of the courier companies’ ability to deliver the packages. This is borne out by feedback from merchants selling major appliances, such as refrigerators, during Singles’ Day in 2015 who reported that less than 2 percent of the shipments handled by Cainiao arrived late or were damaged, compared to 15 percent of the shipments handled by other courier companies. From some 30 million packages on a typical day at present, Alibaba expects it will generate more than 100 million packages of orders a day by 2020.
An estimated 30 percent of current delivery routes are inefficient or uneconomic. Like Amazon in the United States, Cainiao member companies are experimenting with deliveries by drone aircraft—although higher population density in China, especially in coastal areas, means this is not as big a priority as in the United States. In 2015, YTO, one of the Tonglu Gang companies, ran a three-day trial involving deliveries of ginger tea by drone to a few hundred customers within one hour’s flight of Alibaba’s distribution centers in Beijing, Shanghai, and Guangzhou. For now drones in China remain just a gimmick. Innovations in logistics—such as shaving off delivery times or cutting costs—are likely to be more incremental than revolutionary.
Yet with Cainiao Alibaba has shored up the most important asset of all: trust. Customers and merchants know they can count on the products getting where they need to be, on time.
The Finance Edge
The final edge in the iron triangle is finance. In financial services, Alibaba’s most important asset is Alipay, its answer to PayPal. By far the most popular online payment tool in China, Alipay handles more than three-quarters of a trillion dollars a year in online transactions,31 three times the volume of PayPal and one-third of the $2.5 trillion global online payments market. In the peak early minutes of Singles’ Day 2015, Alipay handled over eighty-five thousand payments per second.
As a form of escrow, Alipay diffuses trust throughout Alibaba’s e-commerce empire. Consumers know that when they pay with Alipay their accounts will be debited only when they have received and are satisfied with the products they have ordered. Only then, after freezing the amount on the account, will Alipay release the funds to the merchant. Customers buying on Alibaba’s consumer sites can return goods up to seven days after purchase, provided they are not damaged.
No longer owned by Alibaba,32 Alipay is the largest asset of a company, controlled personally by Jack, which has been valued by one analyst at $45 billion. Alibaba websites account for more than one-third of its revenues, but other sites also rely heavily on Alipay to process their online payments. People use Alipay to make money transfers, top up their cell phone accounts, and make cashless purchases using bar codes at retailers and restaurants, like KFC. Twenty percent of all Alipay transactions involve paying for utilities, such as water, electricity, and gas bills. Customers can also buy train tickets, pay traffic fines, or purchase insurance using Alipay, making it the de facto currency of an increasingly digital China. Thanks to commissions on payments it handles, Alipay, which is already highly profitable, is expected to generate almost $5 billion a year in revenues33 by 2018.
With the growth of smartphones in China, used by more than 830 million people, the value of Alipay goes far beyond that of a simple payment tool. Because consumers keep cash balances on their accounts, Alipay has become a virtual wallet for over 300 million people, the thin end of a wedge that Alibaba is driving into China’s financial services market.
In the same way Alibaba has exploited the inefficiency of offline retail, offline banking has proved a ripe fruit for it to pick. Just as state-owned shops paid little interest in their customers, China’s state-owned banks paid little heed to the needs of individuals and small businesses. Until recently, they had no choice but to place their cash deposits with the banks that were focused on state-owned enterprises. The political masters of the SOEs are also their own.
The “big four” state-owned banks—the Industrial and Commercial Bank of China (ICBC), Construction Bank, Bank of China, and Agricultural Bank of China—control about 70 percent of the market. The disdain of these banks for their customers has fueled popular jokes such as the one about ICBC’s initials standing for, in Chinese, “ai cun bu cun,” translating loosely as “who cares if you save with us or not, whatever.” Traditionally, these and other state-owned banks paid out very low rates of interest, at times below the rate of inflation. This “financial repression” has skewed China’s economy, transferring wealth from consumers to the SOEs, which have squandered much of it in the loss-making investments of the Old China model.
The Chinese government recognizes the need for reform, and the need for more rational capital allocation. But to do so it has to take on a powerful vested interest: itself. Alibaba has already been caught in the middle. Offering much higher returns on deposits than the meager returns paid by the banks, Alibaba’s Yu’e Bao online mutual fund proved so popular when it launched in 2013 that it stirred China’s stagnant financial service industry into a frenzy of activity. Yu’e Bao, whose name translates in English as “savings balance treasure,” sounds innocuous enough: a place to deposit your loose change. But when it launched the product Alibaba set no limits on the amount customers could deposit. Not only were the rates it offered much higher than the banks—as much as two percentage points higher—but Yu’e Bao allowed customers to make withdrawals at any time without penalty. As a result, individual customers transferred tens or hundreds of thousands of dollars into the fund. The banks became alarmed at the outflows. By February 2014, Yu’e Bao34 had attracted over $93 billion from 80 million investors, more than the combined total accounts
of all other money managers in China. The inflow was so huge that in only ten months Yu’e Bao was ranked the fourth largest money manager in the world, closing in on global industry stalwarts such as Vanguard, Fidelity, and J.P. Morgan.
Prior to the fund’s launch Jack took the unusual step, for a private sector entrepreneur, of penning an opinion piece in the Communist Party journal People’s Daily arguing, “The finance industry needs disrupters, it needs outsiders to come in and carry out a transformation.” Soon after, the SOE empire struck back, denouncing the fund managers behind Yu’e Bao as “vampires sucking blood out of the banks.” Starting in March 2014, the state-owned banks, holding collectively more than $100 trillion in deposits, imposed limits on the amounts their customers could transfer into third-party online payment accounts. Other government-imposed restrictions followed soon after. Pulling no punches, Jack posted a message on social media criticizing the banks by name and blaming them for failing to participate in China’s market-oriented financial liberalization: “The decision of who wins and who loses in the market shouldn’t be up to monopoly and authority, but up to customers.” Jack deleted it soon after, but the message was reposted widely. Alibaba has continued to push the boundaries of private sector involvement in financial services, including providing microloans to the merchants and consumers trading on its platforms. Still relatively new, the lending business is expected to grow into a billion-dollar business within a few years. Offering credit also increases the “stickiness,” or loyalty from customers, of Alibaba’s e-commerce platforms.
Because it has access to the entire trading history of its customers, Alibaba is in a much better position to assess credit risk than the banks. A new business, Sesame Credit Management, provides credit ratings on consumers and merchants to third parties.
Other financial services offerings35 include wealth management, peer-to-peer lending businesses, and insurance.36 In 2015 Jack launched an Internet-only bank called MYbank, which gets rid of the need for branches entirely. MYbank plans to use smartphones to authenticate customers’ identities.37
The iron triangle is a key factor in making Alibaba such a dominant player in China’s e-commerce market. But it is the charisma of the company’s founder—his “Jack Magic”—that bound together the people and capital who would build on these foundations.
Chapter Two
Jack Magic
Come up with an idea, make it fun, and breathe something into it which otherwise is still just an idea. That’s Jack Magic.
—Jan Van der Ven
Most companies bear the imprint of their founders, but few more than Alibaba. Jack Ma’s outsize influence stems from his passion for teaching. Although he left the profession two decades ago, Jack has never really stopped being an educator. He used to joke that in his case CEO stood for “Chief Education Officer.” Fourteen years after founding the company Jack relinquished the title to become chairman. But the switch served only to heighten his authority. His chosen successor as CEO lasted barely two years in the job.
E.T.
Jack is, without doubt, the face of Alibaba. Short and thin, Jack has been described in the media over the years as an “imp of a man,” “a tiny figure with sunken cheekbones, tussled hair and a mischievous grin,” his looks “owlish,” “puckish,” or “elfish.” Jack has turned his distinctive looks to his advantage. At the launch of MYbank, which aims to sign up customers exclusively through facial recognition technology, Alibaba showcased the fact that Jack “who had been unable to live off his face was now going to live off his face.”
Some in China like to refer to Jack as “E.T.,” after a supposed resemblance to the lead creature in the Steven Spielberg movie. Even his Zhejiang-born billionaire friend Guo Guangchang1 has called Jack an “alien,” but only before dismissing himself as “just a normal guy . . . no one is as smart as Jack Ma.”
So, Jack doesn’t look the part of a corporate chieftain. He possesses all the trappings, including luxury homes around the world and a Gulfstream jet, but otherwise Jack doesn’t really act the part, either. One of the most circulated images of Jack on the Internet is a photo of him sporting a Mohawk, nose ring, and makeup, including jet-black lipstick. On that occasion, a celebration of Alibaba’s tenth anniversary, Jack sang Elton John’s “Can You Feel the Love Tonight” to a stadium full of seventeen thousand cheering employees and ten thousand other spectators.
Jack combines a love of showmanship with a relish for defying stereotypes. Where other business moguls like to talk up their connections or academic credentials, Jack enjoys talking down his own: “I don’t have a rich or powerful father, not even a powerful uncle.” Having never studied abroad, he likes to describe himself as “one hundred percent Made in China.” He stands out as a tech company founder with no background in technology. At Stanford University in 2013 he confessed, “Even today, I still don’t understand what coding is all about, I still don’t understand the technology behind the Internet.”
Jack has made a career out of being underestimated: “I am a very simple guy, I am not smart. Everyone thinks that Jack Ma is a very smart guy. I might have a smart face but I’ve got very stupid brains.”
Blarney Meets Chutzpah in China
His achievements have proved otherwise—this dumbing down is of course just a feint. Jack once explained2 that he loves the lead character of the movie Forrest Gump because “people think he is dumb, but he knows what he is doing.” In his early speeches promoting Alibaba, Jack referred so often to Forrest Gump that I came to think of his stump speech as his “Gump speech.” Much has changed for Alibaba, but Gump’s appeal endures. On the first day of trading of Alibaba’s shares, Jack was interviewed by CNBC live on the floor of the New York Stock Exchange. When he was asked which person had most inspired him, Jack replied without hesitation, “Forrest Gump.” His interviewer paused, then said, “You know he’s a fictional character?”
Jack’s ability to charm and cajole has played an important role in attracting talent and capital to the company, as well as building his own fame. Jack has a unique Chinese combination of blarney and chutzpah. One of his earliest foreign employees3 summed up for me his qualities in two words: “Jack Magic.” In this respect, Jack shares a characteristic with Steve Jobs, whose charisma and means of getting his way were famously described by a member of the original Apple Macintosh design team as a “Reality Distortion Field.”
Central to Jack’s own distortion field are his skills as a communicator. Jack’s speaking style is so effective because his message is so easy to agree with, remember, and digest. Collections of his quotes circulate widely online, in English as well as in Chinese. Most are bite-size messages of inspiration, words that wouldn’t be out of place on a motivational poster, such as “Believe in your dream and believe in yourself,” or “Learn from others the tactics and the skills, but don’t change your dream.” Other popular quotes read more like an Aesop fable: “If there are nine rabbits on the ground, if you want to catch one, just focus on one. Change your tactics if you need to, but don’t change the rabbit. . . . Get one first, put it in your pocket, and then catch the others.” People have even taken to inventing carpe diem–style quotes from Jack to justify, for example, the purchase of a pair of expensive shoes.
Jack always speaks without notes. His oratorical skills are so effective because his repertoire is so narrow. Jack can dispense with notes because he already knows much of his material: a well-honed stable of stock stories, mostly tales from his childhood or Alibaba’s own infancy. A close inspection of all of his speeches reveals he has essentially been giving the same speech for the last seventeen years. Yet by subtly tweaking his message to match the mood and expectations of the crowd, he somehow manages to make each speech sound fresh.
Jack is a master at appealing to people’s emotions, which is not something you’d expect from the founder of a company that started out focusing on international trade. Sometimes, as he’s launched into a familiar story, I have turned around
to look at the faces of the audience, trying to understand what explains his enduring appeal.
Humor is a big part of it. As a quick look at any of the hundreds of videos available on YouTube of his most popular speeches will reveal, Jack is very funny. Back in the early days, after he came offstage at an event we’d both spoken at, I joked to him that if his day job at Alibaba didn’t work out he had a promising career as a stand-up comedian.4 Jack’s set pieces, his one-liners and anecdotes, and the way he combines them are essentially the same as the “bits” that comedians use to make up their routines.
With his tales of overcoming challenges and defying the odds, Jack regularly drives some in his audience to tears, even hardened business executives. After giving a talk to a group of students in South Korea, Jack himself appeared to be consumed by emotion when asked about his biggest regrets in life, replying that he regretted not spending more time with his family. After composing himself, he added, “Normally I make other people cry.”
Jack’s speeches, like that one in Seoul, reach a much wider audience than speeches by many public figures in China in part because he is able to deliver them in fluent English. Other tech executives in China speak English, too, many having been educated overseas, but Jack’s message has much greater resonance in both languages. Jack’s long-term business partner, Joe Tsai, told me: “Jack today is still one of the only international businesspeople who is as attention-grabbing in both English and Chinese.”
To build a connection to foreign audiences, Jack often peppers his speeches with pop-culture references—including citing more recent movies than Forrest Gump, some of which Alibaba is now financing. As his company expands its presence in Hollywood, Jack now regularly enlists the support at his public appearances of famous actors like Daniel Craig, Kevin Spacey, and Tom Cruise, the star of Paramount Pictures’ Mission: Impossible franchise—in 2015 Alibaba invested in Rogue Nation, the franchise’s latest title. To audiences in China, Jack often draws on stories from his favorite martial arts novels, or Chinese revolutionary history. An American colleague once asked Jack about his references to Mao in his speeches in China. Jack explained, “For me to motivate you I would talk about George Washington and the cherry tree.”