But no controversy was quite as big as the spin-off of Alibaba’s AliPay unit as a separate entity owned and controlled by Jack Ma and Simon Xie, an Alibaba cofounder. When I first read a headline saying that AliPay had been spun off, I was relieved. Throughout my time at Alibaba I had always conservatively valued AliPay at zero. Although it was the circulatory system of Alibaba Group’s ecosystem, it was the one business unit that was operating in a regulatory gray area without an official license from banking regulators. The risk was that China’s banks would lobby their government allies to have AliPay shut down. And if this happened, the result would have been disastrous, in effect shutting down the majority of transactions on Taobao and imperiling millions of jobs that depended on Alibaba’s ecosystem. So when I read that AliPay had been spun off, I assumed that Jack and Alibaba had at last found a way to navigate the banking regulations and that spinning it off was simply a prelude to AliPay’s obtaining a license.
But the way in which the transfer was handled led to an acrimonious and highly public battle between Yahoo! and Alibaba about whether or not Jack had secured proper board approval before transferring AliPay into a separate company. Although I understood Jack and viewed his motivation as simply to comply with local regulations by transferring AliPay to a local entity, to outside observers the transfer fit all too neatly the stereotype of Chinese business people who would try to cheat their foreign partners. After months of negotiating, Alibaba and its investors ultimately solved the problem, but the controversy left a black mark on Alibaba’s record and damaged a lot of the goodwill that Alibaba had generated over the years.
By the time I sat down with Jack again, three years after I left Alibaba, it was clear that the controversies had taken their toll. In the fall of 2011 I met with Jack in Berkeley, where he was taking time off from China and in many ways Alibaba as well. The good news was that Taobao and its sister site Tmall were continuing to grow exponentially; Taobao alone had surpassed eBay’s global transaction volumes. But running such a large company that so many people’s livelihoods depended upon forced Jack to confront the reality that he was never going to please everyone. Jack looked worn out and spoke without his usual spark. “When you have 400 million people using the Internet in China,” he lamented. “If we set a policy that 99 percent of the people like but only 1 percent of the people don’t like, that still means there are four million people angry at us.”
The only time I’d ever seen Jack so down was when we had traveled to the US to lay off the Silicon Valley staff. But he’d foreseen this winter of discontent. And he’d always told us, “Today is tough. Tomorrow is tougher. The day after tomorrow is beautiful. But most people die tomorrow night and don’t get the chance to see the sun rise the day after tomorrow.”
As dark as the winter was, the global currents that had set Alibaba on its path all those years ago were still in force. I knew it was only a matter of time before spring returned to Alibaba.
Spring
I settled into my hotel room for the night, unpacked my bags, and flipped on the TV. 2013 had gotten off to a good start and I’d had a busy week of traveling around to universities to screen the documentary film I’d made, Crocodile in the Yangtze: The Alibaba Story. For the 12 months I’d been showing the film audiences seemed to like it but there was one person whose opinion of the film I was not quite sure of—Jack Ma. After I’d completed the film and was preparing to screen it at festivals and universities, I had shown it to Jack as a courtesy. His original response was lukewarm, so as I sat in my hotel and saw my cell phone ringing with an unexpected call from Jack, I was nervous.
“Porter, where are you these days?” Jack asked.
“In Pittsburgh. What’s up?”
“Can you be in Hangzhou on May 10?”
“Maybe,” I hedged, waiting to see what he had in mind. “What’s going on?”
“We’re having a big celebration for Taobao’s ten-year anniversary. I’d really like you to come back to attend the party and show your film to the team in Hangzhou.”
I was relieved. I’d made my film to inspire entrepreneurs, not to please Jack. But I was always a bit worried about whether Jack thought it was a fair portrait. It was nice to know I hadn’t burned any bridges and that, despite his initial reservations about the film, it had grown on him over time. So I was honored that he’d invited me back to the company for Taobao’s birthday celebration.
A couple months later I was walking through the tall stadium arches and onto the field of Hangzhou’s Yellow Dragon stadium to see what had become of the company I’d left five years earlier. The stadium was packed with a crowd of more than 20,000 employees, customers, and their friends and families. The crowd waved flashing neon glow sticks that were like stars sparkling in the night as fireworks shot into the sky. Acrobats suspended in midair flew across the stadium, their martial arts gowns flowing behind them. And then, rising from a trap door in the stage, emerged the star of the night—Jack—dressed in a Bruno Mars costume and singing “China I Love You” to a wild roar of applause.
It was immediately clear that Alibaba’s winter was over. Springtime had arrived. Jack and Alibaba were back.
In the two years since I’d seen the subdued Jack in Berkeley, the company had healed the many wounds it had suffered. Jack’s swiftness in replacing Alibaba.com’s CEO after the company’s sales scandal had helped Alibaba regain the confidence of its customers. As Alibaba.com’s share price recovered, Jack chose to take Alibaba.com private, delisting it from the Hong Kong Stock Exchange and absorbing it back into the Alibaba Group, allowing the website to refocus on customers and exploit synergies with other Alibaba companies. After Marissa Mayer became CEO of Yahoo! in July 2012, her arrival renewed the spirit of partnership between the two companies, allowing them to move beyond the AliPay issue. And the Taobao/Tmall controversy ultimately blew over as well, allowing Alibaba’s consumer arm to continue its meteoric growth.
As Taobao employees and customers gathered that night to celebrate its ten-year anniversary, they had good reason to cheer. From its modest beginnings Taobao’s transaction volumes had grown to become larger than eBay’s and Amazon’s combined. Looking back on my first visit to Taobao, on that hot day with no air-conditioning when the company was nothing more than a few founders trying to make do without electricity, I found it hard to believe just how far Taobao had come. Its impact was stretching beyond China’s cities and towns, transforming entire villages that had begun to adopt e-commerce. Along the way Taobao was fulfilling the team’s goal of creating millions of jobs across China for the entrepreneurs who were setting up shops online. Like a small country, its community of members had taken on a life of its own, giving rise to its own celebrities, opinion leaders, even panels of Taobao members elected from within the user base to arbitrate trade disputes between members.
Taobao’s birthday party was more than just a celebration for Taobao—it was an important milestone for Jack. He had chosen the event to announce his official resignation as CEO of Alibaba Group. At the end of the night he handed control of the company to Jonathan Lu, a former Holiday Inn front desk clerk who had risen up Alibaba’s ranks from a sales position. Jack was stepping down from his CEO position while retaining the role of company chairman. Giving up his title of CEO would allow Jack to manage the company’s vision and big-picture issues without having to get bogged down with the day-to-day operational details. And, just as important, the move cleared the way for Alibaba to pursue an IPO of the entire Alibaba Group.
For the next several months I followed Alibaba’s developments in the headlines. The company’s original goal of having its IPO in Hong Kong proved not to be possible when the regulators of the Hong Kong Stock Exchange refused to approve Alibaba’s unique but controversial corporate structure, whereby control of the company would ultimately remain in the hands of Jack Ma and 26 other members of the “Alibaba Partnership” rather tha
n in the hands of ordinary shareholders. Approving such a structure would mean approving an exception to the Hong Kong Stock Exchange policy that allocates shareholder control according to “one share, one vote.”
Of the many great reasons for Alibaba to list on the Hong Kong exchange, the most critical was that being listed on Chinese soil would help Alibaba with its relationship with the government as Alibaba moved into highly regulated industries such as finance and media. Listing in Hong Kong had the additional advantage of helping Alibaba managers deal with investors and analysts who were more likely to be based in Alibaba’s time zone and thus more familiar with China’s business and regulatory environment. But after Alibaba engaged in a heated public debate with the Hong Kong Stock Exchange, its regulators decided not to make an exception for Alibaba’s structure. Alibaba ultimately chose the New York Stock Exchange for its listing.
For the next 12 months the slow drumbeat heralding Alibaba’s IPO picked up its tempo as the world began to recognize the scale of Alibaba’s business and the impact it was having in China. IPO day, September 19, 2014, arrived at last. I was in Arizona, 2,000 miles from New York, and set my alarm for five a.m. When I woke up, I turned on the TV to watch the entire day of coverage. It was the biggest IPO in history, and when trading started, the company was valued at more than $220 billion. No longer was it just the transaction volumes, but now the company’s entire value exceeded eBay and Amazon combined making Alibaba almost as valuable as Walmart. Watching Jack and my former colleagues triumph on the floor of the New York Stock Exchange was like watching former teammates win the Super Bowl.
As the opening bell rang, Jack was ushered into the CNBC broadcast booth, where US viewers got their first real introduction to the world’s new king of e-commerce.
Jim Cramer asked, “What does this mean for the People’s Republic of China?”
“I think we are giving a lot of people inspiration,” Jack responded. “Fifteen years ago I told my people in my apartment that if Jack Ma and people like us can be successful, 80 percent of the people in China can be successful. And 80 percent of young people in the world can be successful. We do not have a rich daddy or powerful uncle. We started from nothing. . . . A lot of young people don’t have dreams anymore. And we want to tell them, you have to keep your dreams.”
“Jack, this is a great American story that is also a Chinese story. Who are your heroes?”
“The hero I have is Forrest Gump.”
The CNBC team laughed, taken aback by Jack’s surprising choice. “Box of chocolates?” Cramer asked.
“Yeah, I really like that guy. I’ve watched that movie about ten times. It taught me that no matter whatever changed, you are you. And I’m still the guy I was 15 years ago when I only earned $20 per month.”
Well said, Jack, I thought as I watched. Just be yourself. It’s what got you this far.
Alibaba’s World
Despite its transformative impact in China, Alibaba’s first 15 years largely went unnoticed in the West. That all changed with Alibaba Group’s massive IPO. As the West scrambled to understand Alibaba, commentators and analysts reached for an apt comparison. Was Alibaba’s business model the “Amazon of China,” “eBay of China,” “PayPal of China,” “Google of China,” or “all of the above”?
These comparisons might be helpful references, but ultimately they all fall short. That’s because, while Alibaba’s business model does incorporate some characteristics of its Western counterparts, it’s unique—and innovative in the truest sense of the word.
So what is Alibaba? How should we understand it? How might it grow? And what will be its future influence on global e-commerce? To understand this it is helpful to look closely at Alibaba’s core businesses.
Alibaba Group Today
The Alibaba Group today is a vast e-commerce conglomerate that connects buyers with sellers and enables them to do transactions across a wide range of products and services. It operates wholesale and retail marketplaces, which, together with Alibaba’s support services (which range from online payment to logistics), increasingly provides the infrastructure for China’s modern economy. More than just a collection of related e-commerce businesses, Alibaba has become an ecosystem in which the whole is far greater than the sum of its parts because of the synergies among its elements. Alibaba’s ecosystem is comprised of three main elements:
Wholesale marketplaces
Retail marketplaces
Support services provided by ecosystem participants
Wholesale Marketplaces
Alibaba China (1688.com)
Alibaba China (also known as 1688.com) is in many ways the hidden gem of Alibaba Group. I say hidden because it is so little known and understood outside China. Although it is one of the two original marketplaces Alibaba started in 1999, Alibaba China has gone largely unnoticed by Westerners, who rarely venture beyond Alibaba’s English website, Alibaba.com. Yet in China 1688.com is a massive phenomenon and integral to the Chinese economy.
Alibaba China is China’s largest wholesale marketplace for domestic trade, a community of millions of small- and medium-sized manufacturers and trading companies that buy and sell in wholesale volumes. Members use the site to post products, negotiate through live chat and messaging, and, increasingly, consummate their transactions through AliPay. If you must have a Western comparison, think “eBay of wholesale” for the China market. It’s largely a subscription-based service; members pay an annual fee to become a premium member with access to Alibaba China’s full range of services. It also makes money from pay-for-performance advertising whereby sellers can bid for ads to appear when certain keywords are searched on the site.
The business model is unique, with no clear parallel anywhere in the world (although in certain developing countries with large manufacturing bases and a fragmented wholesale network, there certainly should be).
By the time of Alibaba’s 2014 IPO, Alibaba China had more than 700,000 paying members and generated US$22.7 billion in transactions that were settled through AliPay—and that’s only a fraction of the total number of deals that originate on Alibaba China. But the numbers alone don’t tell the full story. Alibaba China is in many ways more than just a platform—it is a rich and vibrant community whose members regularly post advice on message boards and meet offline to deepen friendships and discuss business. China’s transformation to a market economy happened so quickly that Alibaba China stepped up to bring together business people in specialized industries—a role filled in the West by trade associations that have developed over decades.
Alibaba China’s importance in the larger Alibaba universe cannot be overstated. Wholesalers on Alibaba China provide much of the product sold by retailers on Taobao and by global exporters on Alibaba.com. Alibaba China’s deep links with Alibaba’s other marketplaces create incentives for participants to stay within the Alibaba ecosystem. Alibaba China also provides an attractive customer base for Alibaba’s financial services, as Alibaba ventures into microcredit, banking, and wealth management.
Alibaba International
Alibaba International (otherwise known as Alibaba.com) is the world’s largest wholesale marketplace for global trade, connecting importers and exporters in more than 240 countries and territories. This site is the first thing Westerners see when they click to Alibaba.com, and in many ways it is the flagship site of Alibaba Group. Because its core customers are wholesalers, rather than end consumers, Alibaba.com is not a household name outside China. But nearly everyone in the world has likely used a product sourced on Alibaba.com, which supplies the world’s wholesalers with products ranging from ball bearings to coffee mugs to iPhone cases.
From day one Alibaba set out to connect buyers and sellers from around the world, making it the first global Internet company to emerge from China. It’s often misunderstood as being a website that only connects Chinese ma
nufacturers to international buyers. In truth, while Chinese exporters form the core of the revenue base, the marketplace’s sellers come from all around the world. So, for example, a buyer in France might order shoes from a manufacturer in India. A buyer in Kenya might purchase rugs from a seller in Pakistan. As of the date of the Alibaba Group IPO, Alibaba.com counted more than 120,000 paying members, with millions more who use the website’s free services.
Consumer Marketplaces
Taobao.com
Taobao (treasure hunt) is China’s largest consumer-to-consumer marketplace. At the time of Alibaba Group’s IPO, Alexa.com listed it as one of the ten most-visited websites in the world. Every day more than 100 million people visit Taobao to buy and sell just about every product or service imaginable, accounting for an estimated 80 percent of the online retail sales in China (along with its sister site, Tmall). Taobao has become a part of everyday life for the Chinese, who use it for everything from fashion to movie tickets to groceries from their local convenience store. And as Chinese consumers have increasingly adopted smartphones, Taobao’s mobile app has seen a huge volume of sales and purchases.
Although often compared to eBay, Taobao plays a much larger role in China’s economy than its American counterpart does in the US economy. Most items sold on Taobao are new items sold on a fixed-price basis, as opposed to eBay, which is largely known as an auction site for secondhand goods and collectibles. The difference owes to the early days of Taobao, when China’s retail environment consisted of millions of small- and medium-sized businesses and mom-and-pop shops, as well as large retail chains and department stores. Taobao effectively gave these small retailers a place to market their wares online while also improving upon the offline shopping experience by introducing features such as instant messaging and elaborate seller rating systems that allowed for convenience, communication, and trust building.
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