Alibaba

by Duncan Clark

  But Jack’s teaching days were coming to an end. Swept up in the enthusiasm that Deng Xiaoping’s southern tour had fanned, he resolved to launch his own business before he turned thirty. Working part-time on his new business, after class, he named his first company “Hope.”

  Chapter Four

  Hope and Coming to America

  China has a million companies that want to sell abroad, but they don’t know how.

  —Jack Ma

  In January 1994, at the age of twenty-nine, Jack founded the Hangzhou Haibo Translation Agency. When the company first started there were only five staff members, mostly retired teachers from the institute. He rented two rooms at 27 Qingnian Road, not far from West Lake in a converted church that once housed the YMCA. Today the sign for Hope Translation still hangs outside, where the translation agency maintains a meeting room, adjacent to what has become the YMCA International Youth Hostel.

  Jack convinced some students from his English night school to lend a hand with the business, largely to help find his first clients. On opening day, his students went to Wulin Square with banners to help publicize the company.

  A few of these students ended up joining the company full-time. One of the early employees was Zhang Hong. She met Jack in 1993, when he was teaching advanced oral English at the YMCA. She recalled, “Nobody else saw the opportunity in this business. . . . We didn’t make much money at first, but [Jack] persevered. . . . I respect him tremendously for he has a great ability to motivate people and he can invest things that seem hopeless with exciting possibility. He can make those around him get excited about life.”

  Jack’s first business was focused on helping local companies find customers overseas. Jack later recalled, “I had to teach during the day, and had no time to help others do translation work. But lots of retired teachers had nothing to do at home, and their pension was low, so I wanted to found a translation company, to be an intermediary.” With its narrow focus on translation, Jack would not find commercial success with Hope. But his first venture gave him direct exposure to the entrepreneurial revolution that was transforming Zhejiang and his first tentative steps as an entrepreneur himself.

  The Chinese word for Hope was Haibo, which literally translates as “vast like the sea.” Popular slang for leaving a government job and entering the private sector at the time was to xia hai, or to “jump into the sea.”

  Jack wanted to get his feet wet as an entrepreneur, but he wasn’t quite ready to take the plunge and abandon his public sector job as a teacher. Entrepreneurship is such a well-established part of modern Chinese business and culture today that it is easy to forget how much things have changed in the last few decades.

  In the earliest days of China’s economic reforms, entrepreneurship was viewed as a highly risky, even illegal undertaking. Memories then were fresh of those imprisoned or even executed during the Cultural Revolution for carrying out commercial activities.

  From 1978, the establishment of a “household contract responsibility system” allowed farmers to sell surplus crops on the open market. The first embers of private business started to grow with the township and village enterprises (TVEs). The TVEs were nominally state-controlled but in effect privately run rural enterprises. The spark was lit for a rapid expansion of private sector employment in China.

  From the early 1980s, the Chinese government began to recognize entrepreneurs,1 first individual entrepreneurs then businesses run by entrepreneurs.

  The first entrepreneurs, the getihu, were not leaving behind a stable government job, but rather were those with nothing to lose. They were mostly agricultural laborers, their low status inviting the pejorative association of “peddlers.” As they grew richer they were resented and mocked for their success and lack of class. One early getihu even papered the walls of his home with banknotes.

  Some of the richest businesspeople in China today started out as lowly getihu, many in Zhejiang Province. To understand Alibaba’s rise, it is helpful to understand how Jack’s home province became the source of so much wealth.

  Zhejiang: China’s Crucible of Entrepreneurship

  Hangzhou, the nearby port of Ningbo, and other industrial clusters dotting northern Zhejiang and southern Jiangsu Provinces form the economic powerhouse of the Yangtze River delta, with Shanghai as its center.

  Home to Alibaba’s e-commerce empire, Hangzhou has a long tradition as a trading center. The city once served as the southernmost point of the 1,100-mile-long Grand Canal, whose full name in Chinese is Jing Hang Da Yun He, or the Beijing-Hangzhou Grand Canal. For more than a thousand years, the Grand Canal was the main trading artery between south and north China, making Hangzhou one of the most prosperous cities in China.2

  Hangzhou and the nearby port of Ningbo lie on relatively flat land. But much of Zhejiang Province is mountainous, its elevations and rivers creating a patchwork of isolated communities and dialects. The need to trade and the distance from the country’s political rulers have helped make Zhejiang the cradle of private enterprise in China. Today many of the province’s entrepreneurs sit atop China’s rich list. Most, like Jack, started out living hardscrabble lives.

  Zong Qinghou, worth more than $11 billion, is the founder of Wahaha, China’s largest beverage manufacturer. From the age of four, Zong grew up in Hangzhou, later working on a salt farm on an island off the coast of Ningbo before graduating from secondary school. In the 1980s he sold ice pops on the street for less than a penny. Li Shufu, worth more than $2 billion, founded Geely, China’s first non-state-owned car manufacturer. He started out assembling refrigerators using spare parts, then in 1988 founded Geely. In 2010 Geely purchased Sweden’s Volvo Cars. Lu Guanqiu, worth more than $7 billion, is the founder of Wanxiang Group, the Hangzhou-based auto parts manufacturer. He started out as a farmer, then started buying scrap metal from villagers.

  Jack’s friend Guo Guangchang, a man worth an estimated $7 billion before his unexplained disappearance for several days in December 2015, is the founder of investment firm Fosun. Guo survived the Cultural Revolution only by eating moldy, dried vegetables, later winning entry to Shanghai’s prestigious Fudan University, where he sold bread door-to-door in the dorms to make ends meet. Prior to his surprise absence in 2015, Fosun had been described by the Financial Times as the “Berkshire Hathaway of China.” Guo is an active supporter of Alibaba’s forays into logistics and finance.

  As we saw in the logistics edge of the iron triangle, one cluster of Zhejiang entrepreneurs has played an important role in Alibaba’s success. The Tonglu Gang of logistics companies, located in the town of Tonglu to the southwest of Hangzhou, account for more than half of all package deliveries in China. Tonglu was the birthplace of the late Nie Tengfei, founder of courier giant Shentong (STO Express). Born into poverty, Nie raised pigs, planted grain, and sold firewood before moving to Hangzhou to work in a printing factory. He moonlighted as a courier delivering bread on his tricycle before spotting an opportunity at the age of twenty to beat China Post,3 delivering customs forms for trading companies in Hangzhou to the port in Shanghai. Nie died in a car crash in 1998, but Shentong continued to thrive. Two of Nie’s relatives and one of his classmates each founded three other large courier companies in the Tonglu Gang.4

  Hangzhou, the provincial capital, and Ningbo, its largest port, have long been prosperous trading centers. But two other cities in Zhejiang, Wenzhou and Yiwu, though less well known overseas are renowned in China for their newfound wealth. Wenzhou helped legitimize the role of entrepreneurs in society, and Yiwu established the wholesale markets that extended their reach to all parts of the country and indeed the world. Wenzhou and Yiwu have played as important a part in China’s entrepreneurial revolution as the cotton mills of Lancashire did in Britain’s industrial revolution.

  Wenzhou and Yiwu provided the dynamism that inspired Jack to launch his own entrepreneurial career. Innovations in Wenzhou opened the door for Alibaba’s future forays into financial services, and the massive wholesal
e market in Yiwu was a template for Alibaba’s first business model, connecting merchants in China with global buyers. Let us take a brief tour.

  Wenzhou

  Wenzhou lies two hundred miles southeast of Hangzhou. Hemmed in by mountains on one side and the East China Sea on the other, Wenzhou had always looked to trade, including tea exports, for its livelihood. But after 1949, its proximity to nationalist Taiwan became a liability. With Shanghai a three-hundred-mile ferry ride away, the city suffered from its isolation.

  Wenzhou had little arable land and many unemployed or underemployed agricultural workers. But once Deng Xiaoping launched his economic reforms in 1978, the private sector started to boom. Wenzhou’s entrepreneurs, often working with family members, started out in light manufacturing. In the 1980s they were some of the first merchants to fan out across China to sell their wares, including knockoffs of Western brands. For many, Chinese goods from Wenzhou were the first items they ever purchased that were not made by the state.

  Wenzhou has played a pivotal role in legitimizing entrepreneurship in China. In 1984 the Wenzhou municipal government invited the city’s most successful private entrepreneurs to a conference. Although the government wanted to help them showcase their success, many entrepreneurs refused to attend, fearing arrest. Only two years earlier a number of entrepreneurs in the city had been arrested for speculation. They still languished in prison. Of the entrepreneurs who showed up for the meeting with the government a number brought along their toothbrushes, in case they too were detained. But the entrepreneurs were not jailed. After releasing those arrested two years earlier, the Wenzhou government published an unprecedented admission in local newspapers that it had erred. Professor Yasheng Huang at the Massachusetts Institute of Technology writes that “many entrepreneurs cited these two episodes as having convinced them of their personal security.”

  For decades in China, the country’s state-owned banks ignored private enterprises and individuals, making politically directed loans5 to the state-owned enterprises (SOEs).

  Starved for lending, the private sector in Wenzhou began to devise its own private credit market, often adopting illegal structures. The local government actively supported the establishment of private credit associations, cooperatives, and money houses—a form of local financial broker that derives profits from the spread between rates of interest on deposits and loans—forming a system that came to be known as the “Wenzhou model.” Wenzhou paved the way for Alibaba’s own foray into banking. When Alibaba received its banking license in 2014, two of the other five recipients were from Wenzhou.

  Raw entrepreneurial spirit, plus access to capital, fueled an explosion in the city’s private sector, which so dominated Wenzhou’s economy that the state became completely marginalized. Facing a huge demand for new roads and bridges, the entrepreneurs of Wenzhou didn’t wait for funds or instructions from Beijing. They simply built their own, in a surge of construction that bordered on anarchy, lacking any coordinated plan.

  In 1990, acting on their own, entrepreneurs even funded the construction of the city’s airport. One year later the country’s first private carrier, Juneyao Airlines, was launched in the city. In 1998, Wenzhou created China’s first privately funded railroad.

  Today in China, Wenzhou is synonymous with wealth. The city’s residents are resented by some for their mass shopping sprees, always paying cash, which have driven up the prices of apartments in Beijing, Shanghai, Hong Kong, New York City, and beyond.

  Yiwu

  Yiwu is an unlikely location for one of the world’s key trading nodes. It is located inland, far from Hangzhou, Ningbo, or the East China Sea. Like Wenzhou, it was dirt poor, with little cultivable land. Lacking any alternative, local farmers since the sixteenth century turned to trade. Their main product was brown sugar, which they cooked with ginger and cut into chunks. This they bartered for chicken feathers, which they used to make feather dusters or mulched to make fertilizer.

  In the winters, when the farmers had little to do and food was scarce, local men would hoist a pole with bamboo baskets on their shoulders and travel the country as peddlers. They carried out sugar chunks, sewing needles, and thread, and brought chicken feathers back to Yiwu. As they walked they would use a rattle drum to attract customers. They became known as “Sugar Shoulder-Pole Men”—a precursor to today’s million-strong courier workforce.

  Soon there were so many itinerant merchants in Yiwu that they formed a veritable mobile army. To supply them with wares in the 1700s, the first wholesale markets started to appear in the city. Trade flourished for centuries until the dislocation of the Japanese invasion and the communist revolution.

  When Deng Xiaoping’s reforms started to take effect, the wholesale trade came out of the shadows. In September 1982, traders in Yiwu were allowed access to a patch of land—a ditch that they had first cemented over—to set up their stalls. Seven hundred stalls popped up almost immediately and Yiwu became one of the first wholesale markets of its kind in postrevolutionary China.

  Today the city is home to the largest wholesale market in the world and its population has shot up to over two million people. An estimated 40,000 people visit the wholesale market every day. The 700 stalls have become 70,000 outlets, housed today inside the Yiwu International Trade Center. This colossal building spans more than 40 million square feet, generating a turnover of more than $6 billion per year.

  On sale inside are an estimated 1.7 million products, from toys to plastic flowers, jewelry to suitcases, clothing to home appliances, anything and everything that is Made in China. Without knowing it, a huge amount of what we consume in the West has passed through Yiwu. Even Christmas is “Made in Yiwu”: More than 60 percent of the world’s Christmas decorations are manufactured in the city. Although traders travel there overwhelmingly for its cheap prices, part of Yiwu’s attraction has been its supply of counterfeit products, for example handbags sold under almost-familiar-sounding names such as “Gussi.” The Financial Times journalist James Kynge traveled to the city in 2005 to research the problem of fake goods, only to find out that even hotels there were fake: He passed by not the Hyatt but the “Hiyat.”

  Yiwu attracts traders from all four corners of the world. The town is a favorite of traders from the Middle East, making Yiwu home to the fastest-growing Muslim community in China. With an estimated 35,000 Muslims in the city at any time—Chinese, South Asian, and Arab—Yiwu features dozens of Muslim restaurants and an ornate $4 million mosque featuring marble imported from Iran.

  Since 2014, Yiwu is the start of the longest freight railroad line in the world. Taking twenty-one days to traverse end to end, the 8,111-mile line links Yiwu with Madrid.

  What makes Yiwu such an essential node is its role marketing the goods of the countless industrial clusters of Zhejiang and other parts of the Yangtze River delta. These single-product towns can represent 80 percent or more of the production of individual commodities—not just in China but worldwide. Shaoxing is “textile city” and Yongkang is “hardware city,” churning out 30,000 steel doors and 150,000 motor scooters every day. Taizhou is known as “sewing machine city” and Shenzhou as “necktie city.” Haining calls itself “leather city.” There is even a “toothbrush city”—in case nervous entrepreneurs get a summons from their local government official—in Hangji.

  Yiwu itself claims to be China’s “sock city,” producing annually more than three billion pairs of socks for companies like Walmart and Disney, although Datang, near Hangzhou, also claims to be “sock city,” producing more than eight billion pairs each year.

  By the mid-1990s, when Jack was starting his own business career, Zhejiang was already an entrepreneurial powerhouse. But the province’s companies were highly labor-intensive and their average size small. From hardly any entrepreneurs at the beginning of the 1980s, by 1994 Zhejiang arguably had too many. In a population of 44 million people, the province was home to an estimated 10 million economic entities.

  Many manufacturer
s struggled to find enough customers to make a profit. Unlike the factories in southern China set up by wealthy overseas Chinese in Hong Kong and Taiwan, the small factories in Zhejiang had to hustle to find customers and finance.6 China’s state-owned banks denied them any credit. This chronic lack of funding created innovations in private finance, such as the Wenzhou model, and led to the rise of industrial clusters that bound together debtors and creditors, who could dole out capital based on the profit they believed would be generated by a specific contract. By 2004, of the top hundred largest domestic private firms in China, half came from Zhejiang Province.

  Jack recognized early on both the region’s strengths and its shortcomings, and is a proud advocate for the province. Since October 2015, he serves as the inaugural chairman of the General Association of Zhejiang Entrepreneurs. In his inaugural speech, Jack talked about the six million Zhejiang entrepreneurs in China and the two million Zhejiang entrepreneurs around the world: “The total number of over eight million Zhejiang entrepreneurs might be the largest business association in the world. They have created another economic entity in addition to the local economy in Zhejiang.” Their successes weren’t won easily though. In an earlier speech to the Zhejiang Chamber of Commerce, Jack summed up the dynamism of his home province: “As entrepreneurs from Zhejiang, our greatest advantages are that we are hardworking, courageous, and good at seizing opportunities. We have these excellent qualities because we were given nothing. We are not like other provinces which have resources of coal and ore. We Zhejiang entrepreneurs have markets. . . . As long as we are in places where there are people, we are always able to find opportunities. It will be the same in the future.”