by Duncan Clark
But in the latter half of 2000, it looked like there was something wrong with Alibaba’s strategy. Although it had raised $25 million and signed up more than half a million users, its revenues that year wouldn’t even hit the $1 million mark. Alibaba did start to charge some fees—helping build and host websites for some of its members—but expenses were increasing far more rapidly than revenues. Alibaba’s hiring spree was creating more problems than it solved, as new recruits arrived before reporting and budgeting systems had been put in place. The international nature of its business was also a challenge, both in dealing with clients and in managing human resources. Trying to market a Chinese company with an Arabic name to clients in the United States and Europe wasn’t proving easy, and Jack admitted that “managing a multinational organization is no easy task with the language and cultural gaps.”
As the tech downturn continued into 2001, Jack and Joe recognized that things needed to change. In January 2001 they brought on board as chief operating officer Savio Kwan, a fifty-two-year-old veteran of GE,7 who gave a frank assessment of the company: “We need to ground [Alibaba] in reality and make it into a business.”
Back to China
Kwan’s arrival heralded a new management structure that became known internally as the “Four O’s”: Jack as CEO, Joe Tsai as CFO, John Wu as CTO, and Savio Kwan as COO. To signal to the company how serious he was about change, Jack divided his own office in Hangzhou in two, giving the other half to Kwan.
Kwan slashed monthly expenses by as much as half, stepping up the “Back to China” retrenchment. A joint venture in South Korea was scrapped and Alibaba’s Silicon Valley presence drastically scaled back. Many of the higher-paid foreign employees were let go. Expensive advertising campaigns were abandoned and replaced with word-of-mouth marketing. Reducing expenses overseas allowed Alibaba to increase its hiring at home, leveraging Hangzhou’s deep pool of lower-cost talent. It rapidly expanded its sales team to focus on promoting fee-paying services such as TrustPass, which provided credit information and authentication services, and Gold Supplier, which gave exporters in China their own presence on Alibaba’s English-language website. For $3,600 they could use this to display their products and prices and be linked to Alibaba’s search engine. Gold Supplier was explicitly designed to undercut the $10,000–$12,000 in annual fees that Global Sources charged for its online listings.
Despite the early promise from these new revenue sources, Alibaba was taking a beating. Since it was still a private company the negative sentiment couldn’t be measured in dollars and cents, unlike the three portals, whose shares had by now been reduced to penny stocks. BusinessWeek ran an article in April 2001 titled “Alibaba’s Magic Carpet Is Losing Altitude,” which concluded that the “former professor will have to work hard to ensure his company doesn’t flunk out.” The company had initiated a restructuring that it hoped would turn things around, but in the years following the dot-com crash Alibaba was resigned to a very uncertain future. Jack even floated the prospect of quitting, so he could return to teaching before he turned forty.
In his darker moments, he took to comparing his struggles to those of the revolutionary Mao Zedong after the Long March, even calling for a “rectification movement” to set Alibaba on a new course: “Once many well-known managers in America came to Alibaba to be vice presidents. Each of them had their own opinions. . . . It was like a zoo at the time. Some were good at talking while others were quiet. Therefore, we think the most important purpose of a rectification movement is to decide a shared purpose of Alibaba, and determine our value.”
Alibaba’s reversal of fortunes had been dramatic, but it didn’t break the bond between Jack and Joe Tsai. I asked Joe what kept him at Alibaba when everything seemed so bleak. “Alibaba,” he explained, “was my fourth job. I wanted this job to work.” Unlike the three portals, Joe also saw the advantages for Alibaba of not having had an IPO. “I knew all of this was a bubble, and even if we had gone public in 2000 we would have to live with the consequences, the delivery. You would have had to grow into your valuation; it was a quick-buck kind of thing.”
The dark days of 2001 and 2002 would later become part of Alibaba lore. Jack later referred to the period in one of his pep talks to the team: “At that time, my slogan was ‘Be the last man standing.’ Be the last person to fall down. Even on my knees, I had to be the last man collapsing. I also believed firmly at that time [that] if I had difficulties, there must be someone who had worse difficulties; if I had a hard time, my opponents had an even harder time. Those who can stand and manage will win eventually.”
In the years that followed the dot-com crash, Alibaba slashed costs and found a way to steadily increase its revenues. Even though the venture capital market had dried up completely, Alibaba was able to stand on its own two feet. And thanks to a new business launched in the spring of 2003, it was about to succeed on a scale that even Jack could never have imagined.
Chapter Nine
Born Again: Taobao and the Humiliation of eBay
Among China’s leading businessmen, Ma is known for his bombastic comments. He routinely uses eBay as a dartboard while simultaneously praising it as one of the companies he most admires.
—San Francisco Chronicle
“The pioneers take the arrows, settlers take the land” is a phrase often used to describe the conquering of the American West. As a new frontier known as the Internet unfolded in China, Jack was determined to become one of the settlers. He’d already been a pioneer with his early experience of going online in Seattle in 1995. But with his first Internet venture, China Pages, he’d taken an arrow from his state-owned partner, leaving the portal pioneers (Wang Zhidong of Sina, Charles Zhang of Sohu, and William Ding of NetEase) to become the settlers, the first Internet entrepreneurs in China to lead their companies to an IPO. To close the gap, in September 2000, Jack invited the three portal founders plus Wang Juntao—the chairman of consumer e-commerce venture 8848—to a martial arts themed business conference entitled “Sword Discussion by the West Lake” (xihu lunjian)1 that he hosted in Hangzhou. I chaired a roundtable discussion at the event, held to promote the city as a “Silicon Paradise.” Jack announced that Alibaba would move its China headquarters from Shanghai back to Hangzhou. This was designed no doubt to please the governor of Zhejiang and mayor of Hangzhou, who were among the local dignitaries in attendance. But I quickly understood that the event, in particular the participation of the four leading Internet figures of the day, was convened to demonstrate Alibaba’s continued relevance in China’s Internet sector. Even though the company had not yet secured an IPO, Jack wanted to stay in the limelight. Jack pulled this off with a clever idea: inviting VIP guest Jin Yong, the Hong Kong author who had been an inspiration to Jack since his childhood. He knew Jin Yong would be a big draw to the other Internet founders, too.
Shortly after Jack’s Hangzhou gathering, two of the four China Internet pioneers were felled. Wang Juntao, the chairman of consumer e-commerce pioneer 8848, was forced out by investors nervous about the mounting costs incurred to overcome payment and logistics hurdles. Wang Zhidong, the founder of Sina, was deposed in a palace coup,2 victim of the company’s fractured and fractious shareholder base.
Now only Jack, William Ding, and Charles Zhang remained at the helm of the companies they had founded. Alibaba was surviving, but the business-to-business e-commerce model he had chosen to follow was proving a struggle. In the closing months of 2002, as Alibaba edged toward profitability, Jack started to look at a new direction for the company: targeting China’s consumer e-commerce market. Two models from the United States stood out: Amazon and eBay.
Mimicking Amazon, 8848 had already folded. But two other domestic “e-tailers,” both set up in 1999 when they had successfully raised venture capital,3 had survived, selling books and other products at fixed prices:4 Dangdang.com, run by cofounder Peggy Yu (Yu Yu), who had started her career as an interpreter and secretary at a boiler manufacturer before studying for
an MBA at New York University, and Joyo.com, founded by Kingsoft’s Lei Jun (later of handset vendor Xiaomi fame) and run by Diane Wang (Wang Shutong).
Shao Yibo
eBay had proved an instant investor hit with its September 1998 IPO, its valuation growing from $2 billion to $30 billion by March 2000. Numerous entrepreneurs in China launched ventures that aspired to be the eBay of China. Most prominent among them was a charismatic wunderkind from Shanghai called Shao Yibo, who had founded his firm EachNet5 after returning to China in June 1999 from Harvard Business School. EachNet quickly pulled ahead of the other China clones.
To launch his consumer e-commerce attack, Jack opted to go the eBay route, setting up a contest with EachNet. But in Shao Yibo, known as Bo to his friends, Jack could very easily have met his match.
Bo came from a modest background. His parents were teachers. His father sparked Bo’s interest in mathematics with a deck of cards. Bo recalled, “With fifty-two cards, and scoring a king as thirteen etc., the deck adds up to three hundred and sixty-four. My father hid one card and asked me to add up the rest. If I did it right, I would know what the hidden card was.”
Bo practiced relentlessly. By the age of twelve he could add up a deck in twelve seconds. After winning more than a dozen high school mathematics competitions across the country, Bo became one of the first students from mainland China6 to be admitted directly to Harvard College on a full scholarship. After graduating he worked for two years at Boston Consulting Group before returning to Harvard and enrolling at the business school. While Jack had already settled on business-to-business e-commerce, Bo looked at a range of U.S. Internet businesses that might work in China and found that “The only business model that got me excited was eBay.”
Before leaving Boston, Bo auctioned off his unwanted possessions—on eBay—and in June 1999, then twenty-six years old, returned to Shanghai to build the eBay of China.
Before he even landed he had raised almost half a million dollars in funding.7 Nonetheless, “my parents thought I was nuts, to turn down very lucrative job offers and a green card and become self-employed,” Bo recalled. “I was very naïve and totally unprepared for business in general and the huge challenges of bootstrapping a start-up company in particular.”
Bo rented a cheap apartment in Shanghai and hired a high school classmate as his first employee—unemployed, his friend was the only person he could afford. Unable to shell out on expensive engineers, he arranged for two employees of the Shanghai Electricity Bureau, who had some IT experience but had never built a website, to moonlight for him. After 5 P.M., when they got off their shift at the electricity utility, they came to the EachNet apartment and worked until 1 A.M., sleeping there before they clocked in back at their day job. Soon after, Bo convinced a fellow Shanghai-born Harvard Business School classmate, Tan Haiyin, to come on board as cofounder. Before business school Tan had been one of the earliest employees of McKinsey in Shanghai. After Harvard she had taken a job at Merrill Lynch in New York. She was traveling on a business trip in China when Bo called her up to ask her if she wanted to join him, and stay in China. She agreed.8
Bo attracted the attention of foreign media early on. The Washington Post quoted him vowing that EachNet would gain “even greater dominance in China than eBay has achieved in the U.S.” Bo quickly commanded the attention of investors, too. The angel investment was followed swiftly by a $6.5 million venture round.9
I got to know Bo soon after he returned to Shanghai. We were neighbors on Hengshan Road in the city’s former French concession district. Despite his impeccable résumé, Bo lived modestly, moving in with his parents. This was seized upon as a sign of his humility—although greater attention was given in local media to the fact that this handsome, Harvard Business School returnee was still single.
Although a relative latecomer to the China Internet scene, he made an instant splash and moved to quickly outmaneuver his rivals.10 Bo doesn’t suffer fools gladly. In 2000, onstage at an Internet conference in Shanghai at which we were both speakers, Bo demolished a rival who had just given a presentation stuffed with inflated website traffic and exaggerated transaction data. Bo calmly but methodically exposed all of the flaws in the other presenter’s math and logic, demolishing him so effectively that the audience almost felt sorry for the hapless competitor, who did not ride out the dot-com bust.
EachNet, by contrast, bucked the downturn and surprised everyone by securing a massive $20.5 million investment in October 2000. The lead financier was Bernard Arnault, the French luxury baron of LVMH, via his dot-com investment vehicle Europatweb. But as the market crashed the fund got cold feet and tried to pull out entirely; it finally ponied up $5 million. Bo demonstrated his considerable powers of persuasion by cobbling the remaining $15 million from existing investors and others even as the public equity markets continued their downward slide. China was entering its “Internet winter,” but EachNet had gathered a large stack of acorns.
Yet making a viable business of EachNet would be no picnic for Bo. Could the eBay model really work in China? In the United States, eBay became popular for offering goods through online auctions, with the transactions often taking place between consumers themselves. In China, although people loved to haggle, the trading of secondhand goods, even offline, wasn’t common. Shoppers were just beginning to exercise their newfound freedoms. Few people had many possessions to sell.
In the United States, eBay served an online population of more than 100 million and could count on a well-developed credit card market and reliable nationwide courier services. In China, the much-vaunted online consumer market of 10 million was a mirage. In 2000, it was too early to build an “iron triangle.” Few people could pay online or access reliable delivery services. More fundamentally there was a complete absence of trust in online shopping. Banking regulations restricted the development of credit cards, which were only allowed in 1999, their use restricted to customers who kept money on deposit in their banks. Debit cards were beginning to gain popularity but each bank issued its own card and there was no central processing network for merchants. Forget about online payment—even buying offline with cards was a mess: Checkout counters at the time were a tangle of cables, connecting or powering a half-dozen individual point-of-sale (POS) machines. Online payment was years away from becoming widely accepted. Courier networks were restricted to individual cities: There was no “China market” to speak of, just a loose collection of local markets. The absence of trust, though, was the biggest hurdle to greater consumer e-commerce adoption, as Bo described: “In the U.S., if you place a bid, it’s a contract, and by law you need to fulfill that bid if you win the auction. That’s very clear. People would be afraid of getting sued if they did not abide by that contract. In China people don’t care. ‘I place a bid, I don’t want it anymore, tough luck.’”
In response, EachNet limited its initial auction offerings to the city of Shanghai, where it had set up physical trading booths for customers to meet. Having first connected online, they would come to meet one another in person to evaluate the goods on sale, ever mindful of being defrauded, then pay for the goods face-to-face. EachNet had to lease and operate multiple trading booths across Shanghai, clearly not a sustainable strategy for a supposed Internet venture. By early 2001 they were all shut down.
EachNet had to find new ways of making money, and so acquired a distributor of mobile phones and launched auction platforms on NetEase and Sina. To broaden its appeal, EachNet started selling stamps and baby clothes.
But with no new VC funding at hand, Bo had no alternative but to find a way to get around the roadblocks to online shopping: the problems of payment, package delivery, product quality, and people’s confidence.
Combining payment and package delivery was one popular method. Cash on delivery allowed consumers to see before they paid. EachNet set up a system for courier companies to act as collecting agents. Cash was a stopgap solution but by 2002 bank cards were finally becoming a viable payment optio
n. China still had very low credit card penetration but the use of debit cards was exploding. Bank cards grew from 150 million when EachNet was launched to almost half a billion cards by the end of 2002. The banks’ IT systems also started to talk to one another, too, because in 2002 China’s banking regulator rolled out a unified card processing system called China UnionPay (zhongguo yinlian). UnionPay’s red, blue, and green logo is today a common sight in shop windows and on ATMs around the world. UnionPay solved a major headache for merchants in China, both offline and online, in making sure they could accept a customer’s card no matter which domestic bank had issued it. The process didn’t happen overnight, though, and for years EachNet encouraged its most active customers to apply for credit cards from one of the big four commercial banks to ensure that they could complete their purchases online.
As Bo had pointed out, China’s legal system offered few protections for merchants, who worried that customers wouldn’t pay for goods already shipped, nor for customers, who were worried that the goods they purchased might never arrive. To address this, EachNet set up its own escrow service, where it would collect funds from customers and release them only after delivery had been confirmed, charging a 3 percent commission as a service fee. Few customers signed up, however, and with an eye on the success of PayPal in the United States, EachNet drew up plans for its own local equivalent.
Product quality issues were also tricky to overcome. In the States, eBay had pioneered a system that allowed consumers to rate vendors, but in China unscrupulous vendors quickly figured out they could game the system by using masses of fake accounts to drive up their positive ratings, or dilute their negatives. EachNet tried to limit the number of ratings one user could post, and set up a team to investigate consumer complaints of fraud. But both efforts were rapidly overwhelmed. A key challenge was how to identify the buyers and sellers on its platform, never mind implementing any sanctions.