Alibaba: The House That Jack Ma Built

by Duncan Clark

The fall of the Qing dynasty is popularly attributed in part to its failure to adapt to modern military and industrial technologies, leaving it vulnerable to domination by Western powers.

Yet the distributed, bottom-up nature of the Internet was inimical to China’s traditions, both imperial and Leninist, of top-down control of information.

The structure allows foreign investors a degree of control over the revenues generated by a Chinese company (through a complicated arrangement of interlocking contracts) that, thanks to the personal engagement of Chinese entrepreneur founders, continues to treat that company as Chinese.

TV ad campaigns aside, Jack continued to be Alibaba’s most effective marketing tool. Despite the dot-com downturn, people came in droves to hear his speeches.

Jack was gaining profile overseas, too, invited as a global Internet luminary to an Internet event in Barcelona, Spain.

“Today we are focused on revenues from online marketing services. Tomorrow, we will add revenue sharing with third-party service providers. And the day after tomorrow, we will add transaction-based revenues.”

“If you can’t tolerate your opponents, you will be definitely beaten by your opponent. . . . If you treat your opponents as enemies, you have already lost at the beginning of the game. If you hang your opponent as a target, and practice throwing darts at him every day, you are only able to fight this one enemy, not others. . . . Competition is the greatest joy. When you compete with others, and find that it brings you more and more agony, there must be something wrong with your competition strategy.”

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.

Therefore, we think the most important purpose of a rectification movement is to decide a shared purpose of Alibaba, and determine our value.”

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.”

Even though the venture capital market had dried up completely, Alibaba was able to stand on its own two feet.

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.

Now only Jack, William Ding, and Charles Zhang remained at the helm of the companies they had founded.

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 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.

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.

eBay had failed to understand the needs of local customers in Japan but Whitman was determined not to repeat the experience in China.

The decision to own EachNet outright set the stage for Alibaba’s triumph, and eBay’s humiliation.

“eBay thought it was a done deal, but it turned out it was not.” eBay had a leading position at the outset, but the market was growing so fast that all that really mattered was grabbing the dominant share of the millions of new online shoppers. Incremental users, not incumbency, was the name of the game.

Jack’s ambitious plans for Alibaba also gave him a different perspective: “eBay wants to buy the Chinese market, but we want to create China’s Internet trading market.”

Throughout the project, Jack emphasized that their target was not EachNet but eBay itself. Once the project became public knowledge, he wanted to ensure the fight was seen as a David versus Goliath struggle. One team member18 recalled the mood: “We were just a group of country bumpkins, and our competitor was eBay.”

To keep up morale the small group of software engineers took breaks between coding to play video games or do exercises. Jack encouraged the team to do handstands. As a child, he explained, looking at the world upside down had given him a different perspective on life.

“We care for each other and we support each other. We never forget the mission and obligation of Alibaba, in face of the challenge from SARS. Tragedy will pass, but life will continue. Fighting with catastrophe cannot prevent us from fighting for the enterprise we love.”

SARS validated digital mobile telephony and the Internet, and so came to represent the turning point when the Internet emerged as a truly mass medium in China.

However, SARS also boosted the three Chinese Internet portals thanks to revenue-sharing agreements with the telecom company. As the shares in Sina, Sohu, and NetEase began to climb, investor interest in Chinese technology companies was suddenly reignited.

Instead people looked to their cell phones and PCs to learn about the virus and the best ways to protect themselves. Crucially for Alibaba, SARS convinced millions of people, afraid to go outside, to try shopping online instead.

Taobao made a virtue of its start-up status by relying on word-of-mouth marketing to popularize the site, including postings on the many free bulletin board systems and other online forums popular in China at the time.

The cat was out of the bag, and with the full resources of Alibaba at its disposal Taobao was now free to take on eBay. Yet Jack wanted Taobao to maintain an innovative, start-up culture, something aided by a preemptive move by eBay to try to sew up the market. eBay signed exclusive advertising contracts to promote its site on all the major China Internet portals, preventing them from displaying ads promoting rival sites. This forced Alibaba to adopt a series of guerrilla marketing techniques, including reaching out to hundreds of small but fast-growing sites and online communities that eBay had deemed unimportant.

Jack also insisted that Taobao maintain a distinctively local culture, including choosing nicknames20 from Jin Yong’s novels or other popular tales. Taobao was successful at developing a whimsical culture and instilling a strong sense of teamwork.

Along with SoftBank, other investors committing fresh funding to Alibaba included Fidelity Investments, Venture TDF, and new investor Granite Global Ventures (later known as GGV Capital), backed by Rockefeller affiliate Venrock. The deal was announced as part of a move to “aggressively expand” Taobao to make it the “most popular online marketplace for Chinese retailers and individuals to list their products on the Internet.”

Despite the fresh backing for Taobao, eBay itself remained oblivious to the rising threat, considering itself far superior to this quirky, local rival.

Jack reveled in being ignored. “During the first year, eBay didn’t consider us their rival. They didn’t even think that we could be their rival. They thought, We haven’t even heard about Alibaba. Such a strange name. Chinese all know what tao bao means, foreigners don’t.”

The lesson is that you make the most money when you buy stuff that’s out of consensus.”

Worse, before the company had even secured its position there, a “we’re winning in China” attitude, at both eBay and its newly acquired business, PayPal, ensured a form of collective denial even when confronted with signs that things were not going to plan.

No matter how skilled the new arrivals, most spoke no Chinese. They faced a steep learning curve to understand the local market.

eBay moved quickly to align the EachNet site with its global site, revamping how products were categorized and altering the design and functionality of the website. This not only confused customers, but also alienated a number of important merchants who saw their previously valuable China account names had been deleted.

In website design, culture matters. In the West, websites like Google had become popular for their clean lines and uncluttered “negative space.” But to the mass market of Chinese Web users, accustomed to pop-ups and floating banner ads, they seemed static and dull.

It’s not just the graphics that helped Taobao connect with consumers. Taobao structured its website like a local bazaar, even featuring innovative ideas such as allowing male or female shoppers to click on a button to display products most suited to their interests. The design of the site makes it the virtual descendant of the Yiwu wholesale market, where Jack and many other Zhejiang entrepreneurs draw their inspiration.

All the smaller, mom-and-pop stores selling nonstandardized products are more accommodating, more flexible in supplying goods. That’s unique to China. The lack of national supply chains removed the barriers to entry that exist in the West, making it possible for individuals to make money.

Again aided by its roots in Zhejiang, Taobao outsmarted eBay by having a better understanding of the country’s merchants, for whom membership has been free of charge from the outset.

But making the site free for both shoppers and merchants turned out to be the key factor in ensuring Taobao’s triumph over eBay.

A research paper25 that analyzed more than a decade’s worth of transaction data on Taobao concludes26 that in the early phase of the company’s history, attracting merchants, who in China are especially allergic to paying fees, was more important than attracting shoppers.

Designed with input from Taobao users, AliWangwang is an early example of the type of “consumer-driven innovation” that drives successful technology firms in China today, such as the role that cell phone vendor Xiaomi’s fan club plays in suggesting new product features.

In China, the effects of the government’s long-standing efforts to build and extend the “Great Firewall of China” often means websites hosted overseas are much slower to load than those hosted in China itself. All Web traffic accessing sites hosted outside the mainland has to go through a series of chokepoints where the request is screened.

As predicted, as soon as the China site was migrated and integrated into the global site, the impact on EachNet’s traffic was disastrous: It dropped off precipitously. Customers in China started to experience long delays and time-outs on the site. Why would they bother to wait for eBay in China—a site that charged fees—when Taobao was available instantly and for free?

How could eBay be so inefficient? There are two explanations. First, eBay had an effective monopoly in the States, and this bred complacency. Second, despite its Silicon Valley aura, eBay was never very strong at technology. One eBay executive famously once said, in public, “Even a monkey could run this business.” After the embarrassing site outages, stability and process trumped technology.

Although Taobao had its merits, Alibaba could hardly believe its luck as the ineptness of this supposedly world-renowned company became apparent. Jack compared eBay’s lumbering approach to a jumbo jet: “A global technology platform sounds great, like a Boeing 747 flying is great. But if the airport is a school yard, you cannot land.

“You’ve got to have a set of products uniquely designed for this market by Chinese. It is not a market where you can take a product or a system that works in Europe or the United States and export to China.”