Alibaba by Duncan Clark (Part 1)

The House that Jack Ma Built

Jack was a former English teacher. The IPO in Sep 2014 raised $25 billion on the NYSE. Now, it is the largest virtual shopping mall. The company is worth at least 300 billion. He is the richest man in Asia. Online shopping has given the Chinese many more options and quality products. Taobao is its online shopping website. The middle class group in China is expanding fast. Jack has massive appeal on the global stage. The company was founded in 1999. He wagered his home for the business. I was the advisor for Alibaba in its early years. I founded BDA China, a Beijing-based investment advisory firm. His ambitions and unconventional strategies make him famous. He has high hopes for his company to tackle major challenges, like health care and education. Is the Chinese government on his side? Some of the core strengths of the company are in commerce, logistics and finance.

The Iron Triangle. Massive purchasing data are tracked. It was 11 Nov 2015. The total sales for that day was $14 billion, 4 times greater than Cyber Monday. It is known as Singles Day in China. This is the day when people shop like crazy. This shows the power of the Chinese consumer. In the past, the Chinese saved too much and spent too little. You can literally find everything on Taobao. It is known as the Everything store. Tmall is the sister site. In the past, Taobao sold to WalMart etc. However, after the 2008 crisis, they sold more domestically. Jack Ma attributed his success to luck. Their websites do not carry inventory, unlike Amazon. The goods are stored with other merchants. Taobao makes money from selling advertising space. This is similar to Google’s Adwords. This is pay-for-performance advertising. They have many client service managers to manage disputes between customer and merchants. The customer is always placed first. Tmall.com is more up-market and for luxury products. Almost 80% of the $10 billion revenue is from these sites. Many foreign brands like Costco, Apple, Zara are on Tmall. Amazon has just 2% of the Chinese market. China also has Juhuasuan.com, which is the equivalent of Groupon. It is very convenient to shop online. The traditional retailers have to buy land, which is expensive. The government taxes heavily for land users. Grocery chains account for little of the total sales. Offline stores are losing their appeal. E-Commerce is a lifestyle in China. You can return clothes if they don’t fit. 40% of people buy groceries online. Household appliances and even cars are sold online. You can even buy islands in Canada, Fiji etc. Cosmetics and skin care products are huge. However, counterfeit goods are the problem. Taobao tracks fake products and punishes merchants who try to sell fakes. The company has the logistics edge. Packaged deliveries volumes are growing. Couriers are not employed by Alibaba. 4 companies carry out most of the delivery. They are Shentong, Yuantong, Zhongtong and Yunda. They are known as the Tonglu Gang. Alibaba’s success can be attributed to their efficiency. China is building on their smart logistics network. The aim is for same day delivery. JD.com is Alibaba’s competitor but invests in their own logistics. They run an end to end system. Alibaba analyzes big data to make decisions. There might be possibility of drone delivery in the future. In terms of finance, Alipay is the answer to Paypal. It has 3 times the volume of Paypal. Amounts will be debited from customer only after they are satisfied with the goods. Only after that, Alipay will release funds to the merchant. Alipay is also used to make money transfers, top up cell phone account, cashless purchases at restaurants, utility bills, traffic fines, insurance etc. Alipay is literally the virtual wallet. Alibaba’s online mutual fund offers better returns than bank deposits. This is known as Yu’e Bao. The government tried to stop people from withdrawing their bank deposits and imposed measures to limit transfer to third-part online payment accounts. There are also microloans provided to merchants etc. Sesame Credit Management provides credit ratings on consumers and merchants to third parties. He launched Mybank, an internet only bank. They also have wealth management, peer-to-peer lending etc.

China changed because of us in the past 15 years. We hope in the next 15 years, the world changes because of us. – Jack Ma

When customers post a negative comment about a merchant or a product, they can expect to receive a message and offers of refunds or free replacements within minutes. – Duncan Clark

Taobao is famous for offering all sorts of outlandish items. One university student gained notoriety for offering earrings that feature dead mosquitoes – like the insects, each pair is unique. Another vendor even sold bottled farts online. – Duncan Clark

Young men can hire a fake girlfriend to attend social events, or outsource a breakup with their real girlfriend to a specialist on Taobao. Wives worried about a straying husband can subscribe to a counseling service offering techniques to fend off a mistress. Busy young urbanites can hire surrogates on Taobao to visit their parents. – Duncan Clark

Jack Magic. Jack used to teach and has huge influence over the company. He is the face of Alibaba and looks elfish in nature. Some call him ‘ET’. He certainly doesn’t look like a rich guy. He is down to earth and doesn’t come from a rich family. What’s more amazing is that he doesn’t have a tech background. He is very underestimated. He likes the character of Forrest Gump, a guy who acts dumb but who knows what he is doing. Forrest Gump is Jack’s inspiration. Jack is like Steve Jobs, known for his charisma. Some of his quotes are short, simple and inspiring. He speaks without notes. The content of his speeches haven’t changed much. He uses humor in his speeches. One thing going for him is his strong command of English. Alibaba also invests in some Hollywood films. He has a strong ability to motivate his employees. Shareholders want short term profit, which doesn’t interest him. However, employees who won discounted shares can make money from them. Their office is futuristic and huge. There are lakes and villas etc. He reads novels by Jin Young on sword-fighting. There is a huge library in his campus. There are free bicycles which employees can use. Camaraderie and teamwork is very important for Jack. He offers interest free loans of up to $50,000 to employees. Every employee is encouraged to have a nickname. Employees can give feedback through the online bulletin board. The 6 Vein Spirit Sword consists of the mission, vision vales of the company. They are ‘teamwork, customer first, embrace change, integrity, passion and commitment’. Face to face visits are widely used for sales methods. There are regular outings for employees. Prizes for top performers include branded goods etc. Employees are frequently rotated among divisions so that they can learn more. However, the management structure is rather flat. Even former employees have a network where they can bond with one another. Some of these members have founded start-ups too. Jack contributed a lot of capital, right from the start. How did Jack succeed?

Even today, I still don’t understand what coding is all about, I still don’t understand the technology behind the Internet. – Jack Ma

Customers first, employees second, and shareholders third. – Jack Ma

Today is brutal, tomorrow is more brutal, but the day after tomorrow is beautiful. However, the majority of people will die tomorrow night. They won’t be able to see the sunshine the day after tomorrow. Aliren must see the sunshine the day after tomorrow. – Jack Ma

From Student to Teacher. Jack was born in 1964. His mum worked in a factory and his dad was a photographer. Back then, most production was controlled by the State. It was just after the Great Leap Forward. The Red Guards destroyed cultural icons. Thankfully, his family remained intact. In 1978, China opened themselves up to trade and instituted the ‘open door’ policy. Jack often practised English with tourists from China. He learnt it himself for over 9 years. English has helped Jack a great deal in his business and for understanding the world. To some, Jack appeared like a ‘barrow boy’ or a street hawker, based on his appearance. David Morley, an Australian, made friends with Jack when he visited China. Jack often brought tourists around the West Lake. Jack had a passion for taichi and reading of ‘The Water Margin’. Jin Yong is very popular in the Chinese world. In the past, the Chinese had 3 dreams: 1) wise emperor; 2) clean officials; 3) chivalrous heroes. One of Jack’s heroes is Feng Qingyang, a hero in the novel. His command of Maths was poor when young. Jack failed his exams and had to engage in menial work. He faced many job application rejections in his life. Eventually, he passed and was enrolled in the Hangzhou Teachers College. He stayed with Ken Morley in Australia for a month and his perspective of life changed. Jack always made the Morleys feel at home when they visited China. Jack’s life was not carefree as he had money problems. Jack dated a girl named Zhang Ying. Soon, they got married. Jack is very grateful to the Morley’s for helping him when he had money troubles. After graduating, Jack decided to be an English lecturer. Jack was appealing to his students as a teacher. He resolved to launch a business before he turned 30. He worked on his business part time after work. His first company was named ‘Hope’.

Hope and Coming to America. His first business was a translation agency. His employees knew his ability to motivate others. However, the business failed. In the past, government jobs were cushy and Jack was not willing to give it up. Village enterprises were state-controlled but were privately run rural enterprises. Entrepreneurship was starting to take off in a big way. It was common for poor people in the Zhejiang Province to rise and be rich through starting of businesses. Hangzhou is one of the most prosperous cities in China. Zhejiang is like a hub of entrepreneurial activity. Wahaha is the largest beverage manufacturer in China. Geely is the first non-state-owned car manufacturer. Fosun is touted to be the next ‘Berkshire Hathaway’. Wenzhou and Yiwu are new up and coming Chinese cities. These two cities have helped Alibaba’s expansion strategy. Wenzhou is too near Taiwan and too far from Shanghai. As a result, it suffered in the past. Private enterprise boomed since 1978s. In the past, banks didn’t lend to SMEs, but only to state owned enterprises or politically directed loans. Due to the lack of credit, illegal structures emerged. There were private credit associations, co-operatives, money houses that formed. The entrepreneurs built their own roads. A privately funded railroad and private carrier were born. Yiwu has become one of the key trading nodes. Wholesale markets boomed after 1978 and its population has shot up. It is now home to the Yiwu International Trade Center. There are all sorts of products on sale. It is now the home of traders, especially the Muslim community. There are even different Chinese cities which specialize in different type of goods. Jack saw that this region had potential and was very strong. When the translation agency was failing, Jack started peddling goods and it became a trading company. Translation services would not be able to match his ambitions. Later on, he made his first trip to America. He was ‘virtually kidnapped’ and it was a horrible trip, to say the least. In Seattle, Jack tried the Internet. He stayed with the Selig family in the US. He searched for the word beer on the Internet, but found no Chinese matches. Jack started a website about his translation business. Jack was someone who was very focused on his work and he didn’t engage in random interests. Jack wanted the exclusive right to make web pages in China but had to pay a huge fee. He brought the Intel 486 processor back to China. Now, the concept of the ‘online yellow pages’ was beginning. Now, he was willing to quit his teaching job.

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

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. – Jack Ma

China is Coming On. Jack wasn’t keen on being the Dean. He wanted to build an index of Chinese companies in English and publish them on a website. He translated names of Chinese companies to English before upload. China Pages was launched. Jack borrowed money from relatives and friends to fund the start-up. Some of his former students also helped his business. They spread the word about China Pages. They had a few leads. The issue was that not many people had Internet access and couldn’t see their listing on China Pages. It was a challenge explaining what the Internet was. By 1995, internet was made available. It was surprising to be able to connect to the Internet as the Chinese government usually clamps down on information. Soon, the government rolled out phone lines and broadband connections to millions of people. The Chinese government saw value in the Internet. China Unicom, a state owned enterprise, was launched. James Ding was a guy who profited from the Internet and became a tech entrepreneur in the telecom market. Edward Tian was another. They helped to build the data network for Chinese telcos. China Pages was having a hard time because PCs were very expensive. Bill Gates also saw the potential of the Internet. Jasmine Zhang founded Yinghaiwei. The Zhejiang government invited China Pages to build their website. This helped to boost Jack’s profile as an entrepreneur. The problem with China Pages was that even though companies could list products there, they could not sell it directly to customers. There was no way to collect money from the website directly. China Pages was struggling badly. Dife (unit of a Telecom) tried to buy a stake into China Pages. However, it tried to register the domain name which was similar to China pages and act as a competitor. Jack was initially optimistic of the deal. As they had more board members, Jack couldn’t operate as they would vote against his ideas. This was bad and he learnt many lessons from this episode. He learnt that he didn’t want a controlling stake of a company but wanted to manage it. He gave up his stake in China Pages and moved to Beijing. The issue was that China Pages was launched too soon. He took a government job, but planned to re-enter the market when the Internet grew bigger.

It is difficult for an elephant to trample an ant to death, as long as you can dodge well. – Jack Ma

Bubble and Birth. Alibaba was founded in 1999. Other Chinese companies were emerging too. The state-owned entrepreneur kicked Jack out of China Pages. Large SOEs wielded their power. Many companies started building their base and the dot-com boom was taking shape. Yahoo was listed in 1996. These dot-com companies did not have any earnings, thus there was no P/E ratio. Jerry Yang became a hero. Wang Zhidong was the founder of Sina, a language software that allowed people to use in Windows. Sohu was another hit. It was founded by Charles Zhang. He launched a Chinese-language search engine. He worked on e-commerce in the government. However, he mentioned that there was too much red tape which was holding him back. Jack realized he couldn’t fulfil his dreams as a public servant. Jack met Jerry Yang. Jerry founded Yahoo already. Jack started Alibaba even while holding the government job. He chose the name because it was easy to pronounce and it started with the letter A. It also meant ‘Open Sesame’. He had to buy the domain name from a Canadian guy. All along, he had plans for it to go international and be huge. He wanted to stick to small businesses. Dell helped to bring the PC more accessible to the masses and Internet penetration improved. Some tech companies started catching the eye of VCs. Victor Koo founded Youku, China’s YouTube. Jack risked losing out to other start ups like Sohu. He wanted to IPO in 3 years. Alibaba was co-founded by 18 people. Jack met Joe Tsai in 1999, a Taiwanese born investor. They eventually became business partners. Jack’s goal was to find an outlet for all the Chinese factories and not through state-owned trading companies. Joe saw great potential in Jack and his vision. Jack was a clear leader who treated his friends as important as his family. Joe kept Jack’s exuberant ways in check. Jack gave out a lot of equity at the start. Customer information was being stored on paper. Joe helped organize the right corporate structure in order to receive venture capital investments. NetEase and 8848 were experimenting with consumer e-commerce. MeetChina was a B2B site which received huge funding. However, despite this, he felt these companies didn’t focus on the customers, but more on networking with government officials. Alibaba’s main competitor was Global Sources, an old school publisher of trade magazines. Jack attracted attention from the media for his persuasion and public speaking skills. Like Jeff Bezos, Jack also exploited the Internet’s potential. China.com raised an incredible amount of capital.

If we go to work at 8am and get off work at 5pm, this is not a high-tech company, and Alibaba will never be successful. – Jack Ma

Team spirit is very, very important. When we charge forward, even if we lose, we still have the team. We still have each other to support. What on earth are you afraid of? – Jack Ma

Backers: Goldman and SoftBank. There were hundreds of people attending networking events, trying to get VCs to invest in their start-ups. The number of new ventures were emerging rapidly and Alibaba had to stand out. Jack was incredibly charming and enthusiastic. Their initial trip to Silicon Valley failed. Goldman invested in Alibaba in 1999. Shirley was working in Goldman and she knew about tech companies. Shirley knew Joe and Joe introduced her to Jack. Jack’s idea was certainly not new and many other countries have tried it. However, Jack was ever determined to make it work. His team worked like revolutionary comrades. However, Jack retained the rights over key decisions. However, Goldman later reduced their investment to 33% (3.3 million). Fidelity, Venture TDF, Transpac took the remaining 17%. Venture TDF and Fidelity made huge fortunes from their investment. Sohu, Sina and NetEase were all way ahead in terms of investments. All of them raised tens of millions. Alibaba got a better office space. They wanted to be the biggest website in China for B2B leads. Many of the companies that signed up were Chinese companies. Everything was translated to English and properly categorized. Posting items for sale was free too. There was also an issue of staff turnover. There were also very few tech firms in Hangzhou to compete with him. He hired fresh grads from the universities. The pay was low and Jack hired one level below the cream of the crop at universities. Employees were issued share options, with a 4 year vesting period. Lucy Peng was the first HR director. Back then, transactions and money collection were still taken offline. Alibaba soon needed new capital. He received $20 million from investment firm SoftBank, giving away a 30% stake. Masayoshi Son backed Jack. He, too, came from humble beginnings. This was year 2000. He poached John Wu from Yahoo and made him the CTO. Alibaba’s idea was an original one at that time. Many people have been to the US and then who go to China who do a start-up. Jack has always been in China. The bubble was about to pop.

The Internet (is like) beer…the good stuff is at the bottom. Without the bubbles, the beer is flat and nobody would want to drink it. – Jack Ma

The earliest hires earned barely $50 per month. They worked 7 days a week, often 16 hours a day. Jack even required them to find a place to live no more than 10 minutes from the office so they wouldn’t waste precious time commuting. – Duncan Clark

I did not get an education from Harvard… I went to Harvard to educate them. – Jack Ma

It is not necessary to study an MBA. Most MBA graduates are not useful…unless they come back from their MBA studies and forget what they’ve learned at school, then they will be useful. Because schools teach knowledge, while starting businesses requires wisdom. Wisdom is acquired through experience. Knowledge can be acquired through hard work. – Jack Ma

Be the last man standing. – Jack Ma

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