A Brief History (and Future) of Alibaba.com

Jack Ma, the founder of Alibaba, is reportedly the first to have launched a commercial website in China. In September 1995 Chinapages.com, a directory of companies, goes online and within ten years Ma grows it in one of the most successful Internet companies of China. In Beijing’s Shangri-La’s Kerry Centre Hotel I interviewed Porter Erisman, Vice President of Alibaba, to hear the story behind this success. Porter, who has been with Alibaba since 2000, was hired after Alibaba had raised $25 million from several big VCs and its 18 founders, led by Jack Ma, decided to hire foreign experts to come in and help the company globalize. Attracting foreigners to run the company was important since according to Porter during that time people in China had very little management experience. Alibaba could not have decided to join the scene on a better time. Its model smartly anticipated on the market situation; around 2000 the Internet penetration in China just started to become significant and also the total export volume was growing vastly. As the manufacturer of the world an increasing ammount low-cost producers and suppliers were entering the marketplace in China (and other South-East Asian developing countries) while buyers from all over the world lined up to profit from the low wages.

The Uprising
Alibaba has been very successful in the Chinese domestic market. To begin with in 2003 Alibaba launched Taobao, now the largest online shopping marketplace for consumers in China with more than 80 million registered users. After Taobao was established it did not take long before in 2005 Taobao overtook its U.S. rival eBay, the previous market leader in the consumer-to-consumer market in China. Furthermore Alibaba has launched Alimama, China’s largest online advertising exchange platform, and Alipay, China’s leading online payment service. In 2005 Yahoo! handed over the running of its China operations to Alibaba in a transaction whereby Yahoo! Inc. paid $1 billion for a 40 percent share of Alibaba.

The initial business model of Alibaba was simple; facilitate a 24/7 meeting platform for suppliers and buyers around the world. From the start Alibaba did not just connect Chinese suppliers with international buyers, but it had the goal of connecting all importers and exporters around the world to each other. Although other B2B websites have always said “You can not have a global company out of China, it makes no sense.” From the very beginning Alibaba was “the first global Internet company emerging from China.” says Porter. Despite skeptics and fierce competition, the global model where buyers use the site for free and sellers pay, proved very feasible: currently Alibaba’s international marketplace has over 4.4 million registered users from over 200 countries and territories. In 1999 it operated offices in the U.S. and Hong Kong that are mostly for marketing in order to attract buyers to the site. More recently in 2008 Alibaba opened up offices in Taiwan and Switzerland. Working in these overseas offices Alibaba’s marketers visit trade shows in Taiwan, Europe, Hong Kong and the U.S. to promote Alibaba to potential buyers.

Unlike most other Internet companies, language was no barrier for Alibaba. Its membership base has always been communicating in English even before Alibaba arrived on the scene, so its non-English members were already used to communicating in a different language. Porter points out: “We are lucky that our market is country independent, it is inherently global.” Alibaba basically functions as a matchmaker and provides a cheap and efficient platform where sellers from all over the world – in practise mostly China – can find appropriate foreign buyers and visa versa. In a 2007 interview for Radio86, Porter comments on the growth of Alibaba: “We’re really just getting started” and “given that the internet is growing and international trade increasing, and more and more people are coming online, there’s plenty of room to grow for the next fifteen to twenty years.”

Bumpy Road
As easy as it seems at first glace, the road to success has been long and sometimes painful for Alibaba. The impact of cultural differences between the Chinese management and so-called foreign experts was greatly underestimated which, from the very beginning of the cooperation, resulted in friction and numerous conflicts. Porter, who in 2000 started in Alibaba’s Hong Kong office, worked with a diverse international team, but none of them could speak Chinese. “We all came from big companies, had a traditional background and did not really understand China.” Porter says. During that time no attempt was made to integrate anything at all with the China operations which seemed no problem since “We were building a global website.”

Soon cultural differences started to shape different strategies. Porter points out: “Their working styles are very different and their way of thinking is very different.” He likes to compare the team of foreign experts with a group of Soviet military advisors that were brought over to China during the communist revolution in 1949. In China these Soviet advisors were highly valued and were looked at as all-knowing experts since Russia was the first to follow the path of socialism. But in practice relying on the input of Soviet experts did not work out as planned. It turned out that China had a completely different military strategy that collided with the Soviet strategy. In China the guerilla strategy – small tactical hit-and-run actions – that Mao had applied since the start of the revolution proved to be so much more effective than a head-on strategy, which was advised by the Soviet experts.

Culture Clash
Though less historic, a similar misunderstanding has taken place shortly after the team of foreigners was installed at Alibaba. Porter points out that the strategy formulated at the time was very Western: “Very critical, like analyzing everything to death before taking action.” Such a strategy might have worked in the U.S. or Europe but it did not suit the Chinese market very well. Porter points out that In China “Internet entrepreneurs just do it, jump out there and try a million things and let’s see what sticks. After all you are not spending that much money, you just do it!” Relying on a strategy that was not very effective due to different cultures and market characteristics resulted in a growing tension between the headquarters in Hangzhou and the Hong Kong operations.

Even though the foreign experts were attracted because the founders felt that they did not have the skills to manage the company the Chinese team soon realized that something was wrong and things had to change fast. Then in 2000 a “crucial strategic mistake” as Porter calls it, was made. In an effort to attract good engineers and tackle the problem of ongoing friction the English language operations were moved to Silicon Valley. But moving to a different time zone made the situation worse than before as a smaller overlap in business hours made it harder to coordinate things with the China headquarters.

B2C: Back 2 China
Soon after the English language operations were moved to the U.S. the dot-com crash kicked in and Alibaba nearly went bankrupt. The team in China saw that the choice of moving to the expensive U.S. really did not work as planned and a drastic turnaround was launched for the survival of the company. This shows that although important decisions were to be made by the international team, in reality the power still remained with the Hangzhou team. A new COO was hired, Savio Kwan, a former General Electric top executive, and subsequently the freshly hired and expensive engineering team was cut from 40 to 3 people in only one day. Almost all teams were cut back and the operating expenses were drastically lowered by moving the English website operations back to China. Porter: “We quickly adopted a B2C strategy which meant back to China!”

After the most urgent and extensive cutbacks Alibaba slowly started to strengthen its organizational charts and management systems. “He [Savio Kwab] built the framework, we had all the entrepreneurial energy and he stabilized and made sure the company could mature.” Porter explains. In the meantime more costs cutting measures were taken: the marketing budget was axed to zero and primarily focused on word-of-mouth in an effort to attract paying suppliers. With the goal of generating revenues as quick as possible the strategic direction was radically simplified and the focus was scaled back to only a few business areas. In 2002 the cost cuts, weeding out of employees and drastically narrowing down the online strategy finally paid off and the revenues started to climb again.

International at last
Then in 2003 as revenues and cash flow continued to rise, Alibaba started to slowly pick up its global strategy again. “We started our marketing again, attending 40 trade shows in Europe and in the U.S.,” says Porter. Operations in Hong Kong were intensified, feelers were put out in high potential markets, international partnerships were set up and at last, after several rough years Alibaba was able to live up to its pay off again: ‘global trade starts here’. Porter: “We finally started to truly go global again and this time with a different kind of team and a more focused strategy.”

Recently in an effort to increase operations in India, Alibaba started a multi-year strategic partnership with Infomedia India Limited, a leading media company particularly strong in offline Yellow Pages and physical media, in April 2008. The Indian market is the second fastest developing major economy in the world and the amount of small and medium-size enterprises is exploding so there is plenty of growth potential. David Wei, CEO of Alibaba, is optimistic about the future. His reaction on the partnership: “India is a very important and strategic market for Alibaba.com and is a top priority for our global expansion plans.” In another comment on the deal, David points out that Alibaba can make good use of Infomedia’s customer base that is mainly established through traditional offline networks rather than the through the Internet that has not yet caught on in India to the same extend as it has in China. In a reaction on Alibaba intensified India operations David told the Financial Times: “I don’t believe it is possible to go into India with a 100 per cent online platform today,” So to anticipate on the situation Alibaba is using a different strategy for India with its relatively low internet penetration than they used to in regions with a more developed Internet infrastructure.

David says that the success of the partnership with Infomedia has prompted Alibaba to consider extending the new model to other countries with relatively low Internet penetration. Alibaba has received expressions of interest from companies similar to Infomedia in Vietnam, Indonesia and Thailand. This indicates that it is likely that in the future the strategy where online activities are incorporated with offline operations from local partners such as Infomedia in order to cope with low Internet penetration, will be applied in other upcoming regions. When I asked Porter about this, he confirmed that Alibaba is currently putting out feelers in several potential markets. Marketers speak at trade conferences in upcoming countries and based on website statistics a possible growing user base of local suppliers is constantly being monitored. “You can get an early feeling from the activity on the website.” Porter says.

Besides expanding to other developing countries Alibaba is also intensifying its current operations in Japan, the largest trading partner of China. Mid May 2008 it announced a joint venture company: Alibaba.com Japan. The formation was made together with Softbank, a large and diverse Japanese telecommunications and media corporation. Regardless of the huge size of the market this will be a challenge though. According to Porter it is hard to get a foothold since “import and export is kind of dominated by big trading companies.”

Conclusion
Without a doubt Alibaba is the leading international Chinese Internet company. Its English language B2B website is accessed by suppliers and buyers from anywhere across the globe. But as the previous part indicates it has only happened recently. Although at first sight it looks like if Alibaba has always been successfully operating globally this study shows that this is certainly not the case. Porter remarks: “We were bragging about our U.S. operations back in 2000”, while in the meantime Alibaba was “hardly creating any revenue in overseas markets.” In 2000 Alibaba almost went bankrupt because they were too early and eager with rolling out their global strategy. A painful underestimation of the impact of cultural differences resulted in the decision to focus on the domestic Chinese market rather than going international.

Basically in order to succeed internationally Alibaba first needed to succeed domestically. Alibaba would not have survived without the domestic scale they could count on. Gang Lu: “[Alibaba] rapidly grew in the Chinese market so they stopped or at least slowed down with their activities in the international market.” So although going global was, as Thomas Crampton, expressed it “in the DNA of their service”, for their initial operations Alibaba heavily relied on its suppliers in China. Even now, despite the efforts to crank up and invest in international operations, “our main revenue still comes from suppliers in China.” says Porter. Of course growing Alimama, Alipay and Taobao in the domestic market and preserving the market leader position is still of high importance, but things are changing. Regarding Alibaba’s most recent activities and strategic choices made in the past two years the focus seems to have become increasingly global. Their strategy is shifting and in an effort to anticipate on where the market is going Alibaba is gradually growing into the company that the Hangzhou founders have always liked to portray themselves as.

The question that remains is why has Alibaba greatly intensified their international operations in the last two years? Why don’t they, like most Chinese Internet companies, keep focused on the growth of China? After all they are extremely successful in the Chinese market so why waste resources and expand to other reasons? Among others the competition in the C2C market is picking up pace and in the coming years it will be hard for Taobao to keep its market share of around 76 percent. The biggest threat comes from Baidu who has announced to enter the online C2C market in 2008 to compete with Alibaba’s Taobao, the current market leader. Baidu, who has the most traffic among Chinese websites, can take advantage of its powerful position as search market leader and it can leverage its popular community services.

A potential bigger threat is the fact that Alibaba’s B2B services are very dependent on only one market: the Chinese. Mainly relying on Chinese suppliers does not contribute a lot to the sustainability of Alibaba’s international B2B services. David Wei has expressed his concerns about the situation and stipulates on the importance of spreading out the risk and diversifying Alibaba’s portfolio. He said that China is already losing competitiveness to India in metal works and textiles. Overall there is an increasing anxiety about the prospects of exporters in China who are facing rising costs and the possibility of a deceleration in U.S. demand. The amount of paying Chinese suppliers might reach its maximum soon as the competition from other developing nations becomes fiercer every day. The increasing emphasis on a global strategy is aimed at coping with such an event. “If one country is losing, then another country is gaining,” says David Wei.