Alibaba's World

by Porter Erisman

  Geographic Expansion

  Outsiders often overlook or forget that Alibaba has always been a global business, from the day it began in 1999. Because Alibaba’s domestic China retail business has so dominated recent headlines about the company, people often forget that, of all of China’s Internet companies, Alibaba has the greatest international presence. Alibaba Group already has nearly ten million users in the US, three million in India, two million in Brazil, and half a million in Germany. Thus the question is not whether Alibaba will go global but how Alibaba will continue to go global, especially in its consumer businesses.

  As Alibaba headed toward its IPO in New York, a number of journalists asked me whether Alibaba would be “invading” the US and taking on eBay or Amazon directly. My opinion is that Alibaba has learned from the mistakes of its competitors. Just as eBay’s US models didn’t fit the China market, Taobao’s and Tmall’s model don’t fit the US market. It would be hard to imagine that Alibaba could parachute into the West and compete directly with its Western counterparts. More likely is that Alibaba will first focus on cross-border trade, helping Chinese companies sell abroad through AliExpress and foreign companies sell in China through Tmall. And it’s likely that Alibaba will use its growing war chest to make strategic investments in similar e-commerce businesses in other countries.

  While I don’t expect Alibaba to pose a threat to Western e-commerce giants on their home turf in the near term, one tantalizing possibility should not be ruled out—that Alibaba might acquire one or more of the US giants, such as eBay. These businesses would be entirely complementary, with little overlap. Back in 2003, when reporters asked Jack if he would sell his company to eBay, he would often joke in response: “No, but we might consider buying them.” With eBay valued at over $30 billion at the time, and Taobao yet to earn any revenues, it seemed a preposterous claim. But not anymore.

  Challenges

  Retaining Customers within Its Ecosystem

  Alibaba must continue to innovate and provide relevant and powerful services that encourage its buyers and sellers to stay within its ecosystem. Despite all the great opportunities before Alibaba today, Jack and his management team are well aware that the tech road is littered with failed companies who had their brief moment in the sun before they were overtaken by new technologies and entrepreneurs. Alibaba needs to look only as far as its major partner, Yahoo!, which saw Google and Facebook speed past it in search engine usage and social networking, opportunities that Yahoo! had been well positioned to grab for itself, if only the company had had the vision and foresight to do so. In my early days at Alibaba, Jack Ma often quoted Intel’s Andy Grove: “Only the paranoid survive.” In the tech world at any moment a new idea or gizmo or app can cause a massive industry shift that renders old business models instantly obsolete. Maintaining a healthy level of paranoia will be important for Alibaba’s senior management.

  An early risk for Taobao was that it might educate the China market about e-commerce only to see retailers break away over time and create their own online retail presence, bypassing Taobao altogether. The introduction of Tmall helped make this less likely by giving sellers the option to create a deeper and much more customized brand experience for their users. Meanwhile services such as AliPay, whose customers have gone to considerable trouble to link their bank accounts to Alibaba’s infrastructure, encourage shoppers to stay within the Alibaba ecosystem. Still, some specialized retailers have done well enough to leave the Taobao and Tmall platform and create their own websites, selling directly to customers. Alibaba will have to use all its data, technology, and innovation to offer the best shopping experience in China for a diverse set of products and brands.

  Outside Competition

  eBay’s withdrawal from the China market left several years’ worth of running room for Taobao to gain a foothold in the market. But as e-commerce went mainstream, it was only natural that homegrown competition emerged. The most prominent of these competitors is Jingdong.com, whose business-to-customer retail store went live in 2004 and ten years later had about 22 percent of the B2C e-commerce market in China. Unlike Alibaba’s marketplace model, whose only inventory is the bits and bytes in its servers, Jingdong is a large retailer modeled after Amazon.com. It has an inventory of products and delivers them through an extensive warehouse and distribution system. Following Amazon’s long-term investment strategy, Jingdong spent heavily on expanding its infrastructure, losing money as it grew to scale. By being able to control the customer experience from order to fulfillment, Jingdong is banking on providing a more reliable customer experience than users receive through Taobao or Tmall. It will be interesting to see whether Jingdong’s retail model or Alibaba’s marketplace model will triumph in the long run. For now investors are betting on Alibaba, but with a market cap of approximately $40 billion at the time of Alibaba Group’s IPO, Jingdong is a formidable force in China.

  While Jingdong takes on Alibaba directly, others, most notably Tencent, are moving into Alibaba’s territory from the side. Like Alibaba, Tencent is a vast conglomerate of Internet businesses, from social networks and messaging to online gaming. Led by its steady and unassuming founder, Pony Ma, Tencent was valued at nearly $150 billion at the time of Alibaba’s IPO. Its popular WeChat mobile phone messaging and social networking platform dominates the China market and has allowed Tencent to move aggressively into e-commerce, forcing Alibaba to play catch-up on mobile. Tencent’s 15 percent stake in Jingdong brings Alibaba’s two biggest competitors together in an alliance that foreshadows the battle ahead.

  These three major players constitute about 75 percent of the Chinese B2C e-commerce market, with the remaining 25 percent split between a number of players, none of which has more than 5 percent. Moving forward, the most likely scenario is that more e-commerce players will emerge to take a greater share of the market. But however it shakes out, the heavy investment and intense competition will grow e-commerce in China, to everyone’s benefit. And the biggest winners will be consumers, entrepreneurs, and brands. They will have a new and effective channel through which to reach the world’s largest market.

  Government Regulation

  When initiating China’s “reform and opening up” policy, Deng Xiaoping famously said, “When you open the door, some flies will come in.” The Chinese government opened the door to the Internet because of the economic benefits it can create—e-commerce is a natural fit with the government’s goals. But when the door to e-commerce opened, some flies did come in, in the form of political content and the ability of ordinary citizens to mobilize opposition that might challenge the Communist Party’s authority.

  Outside China, many people seem to think that the government so controls the Internet that they are surprised that e-commerce could take off in China at all, let alone give rise to the world’s largest e-commerce company. But this perception misses a fundamental point: while the government strictly controls news, information, and communications—areas where flies are most likely to emerge—it was relatively hands-off in the more politically neutral area of e-commerce.

  Looking back at the effect the Chinese government had on the development of Alibaba, I can safely say that at times the government created headwinds and at times it created tailwinds, but neither were strong enough to be a major factor in Alibaba’s success or failure. More important than any relationship with the government was the company’s relationship with customers. Building innovative products and services that fit the needs of entrepreneurs and their customers was what got Alibaba where it is at today. My strong conviction is that Alibaba succeeded despite the government, not because of it.

  The IPO and Alibaba’s size are likely to change the dynamics of its relationship with the government. When it was much smaller, Alibaba was largely below the radar of the government. But with so much of the country’s GDP flowing through Alibaba’s services, the government can’t help but pay attention and prob
ably will approach Alibaba with a giant bear hug in the future, if only to keep it close. Jack’s stated goal of “being in love with the government but not marrying it” will become harder and harder to maintain over time.

  Overall the government is likely to provide Alibaba with a tailwind as it moves ahead. As homegrown heroes, Jack and Alibaba are likely to be first in line for licenses in sensitive areas such as finance and media, despite the heavy presence of foreign investors in the company’s ownership structure. Alibaba’s insistence on leaving the company in the hands of its 27 partners should help allay any government fears that Alibaba could fall into the hands of “outside forces.”

  But as Alibaba gets closer to the Chinese government, it will have to maintain a delicate balance with Western governments. Since his days as an English teacher, Jack has always considered one of his missions to be the creation of a bridge between China and the outside world. But in an era when China and Western governments are at odds on corporate espionage, government spying, and data privacy, being close to the Chinese government may mean that some of its global expansion efforts will meet a backlash from foreign governments or customers. Alibaba is an easy lightning rod for any and all criticism of China, and, whether he likes it or not, Jack Ma has become the face of China Inc.

  The Legacy and Global Impact of Alibaba

  To understand the impact that Alibaba has had in China, look no further than the one million shops based in rural areas that are active on Taobao and Tmall, selling anything from farm produce to furniture to crafts. Although e-commerce first took root in China’s cities among the urban middle class, it has since grown to become a national phenomenon, providing grassroots employment opportunities to drivers, couriers, and web designers deep in China’s hinterlands. Some of these mom-and-pop entrepreneurs have since graduated to building national brands.

  By 2014 the trend had given rise to 20 “Taobao villages”—defined by Alibaba as villages where more than 10 percent of their households engage in e-commerce and total e-commerce transaction volume in the village exceeds RMB 10 million (about US$1.6 million) per year. The emergence of e-commerce in China’s countryside came at an important time, as rural jobs were becoming scarce and the country’s most talented and educated youth left the countryside for the cities. In fact e-commerce opportunities in their home villages have lured recent graduates back home to be part of the local e-commerce boom. More than any foreign aid or government initiative, e-commerce has leveled the playing field for entrepreneurs in remote regions, unleashed the entrepreneurial energy of China’s rural population, and helped lift entire villages out of poverty.

  This trend, along with the emerging middle class, has shown that, although e-commerce was much slower to take off in China, once it finally took root, its impact was much more significant than in the US and Europe. As I noted earlier, while e-commerce proved an evolutionary development for commerce in the US, it proved revolutionary in China. Just as vast swaths of China leapfrogged directly to cell phones, skipping landlines altogether, China’s entire e-commerce ecosystem leapfrogged beyond the West, without first building a traditional and costly physical retail infrastructure.

  The good news for other developing countries is that the e-commerce revolution in China’s emerging markets is not peculiar to China. Now that China has proven that e-commerce can thrive in developing countries, investors and entrepreneurs in other countries can learn from Alibaba’s example. Indeed, while traveling the world during 2014 to screen my documentary film, Crocodile in the Yangtze: The Alibaba Story, I noticed an interesting trend. No longer were e-commerce companies in emerging markets calling themselves the Amazon or eBay of their home country. Whether it’s the founders of Konga.com in Nigeria, Flipkart in India, or Tokopedia in Indonesia, the entrepreneurs I’ve encountered are now more likely to learn from—and compare themselves to—Alibaba.

  If the last 20 years was the story of e-commerce in the West, the next 20 years will be the story of e-commerce in the East. Whereas China was once known as an Internet imitator, it is increasingly being rightfully recognized as an e-commerce innovator. China’s e-commerce pioneers have become an inspiration for e-commerce entrepreneurs around the world, and China has become an exciting laboratory for new ideas that will have a global impact on e-commerce.

  Whether Alibaba succeeds or fails in the long run, Alibaba’s greatest contribution to e-commerce may ultimately be that it has developed a new business model that better fits the local conditions of developing markets. By demonstrating that the barriers to e-commerce in the developing world can be overcome, Alibaba has shown that e-commerce entrepreneurs can create a reliable ecosystem for commerce where governments and other institutions have failed. In the past China was best known for its export of cheap goods. But China’s most recent export—the Alibaba model—gives hope that the rest of the developing world may be about to enter its own golden era of e-commerce.

  Alibaba and the Forty Lessons

  Working inside Alibaba taught me a lot about both business and life. The experiences challenged some of my own assumptions about what people are capable of and taught me that, if they are working in the right conditions, ordinary people with no special backgrounds can go on to create great things. More than anything, it taught me what it takes to achieve a dream and that—yes—some of those corny clichés we learn as children turn out to be true even in the business world. With this in mind I’ve boiled down what I learned from my experience at the company to the following 40 lessons from the Alibaba story.

  On Chasing a Dream

  Dream Big—Really Big

  Whenever Jack asked his managers to set goals for the company, we would provide our most optimistic projections. Jack would usually come back and triple or quadruple our goal. Despite initial resistance from managers, Jack dared them to dream: “If you don’t imagine it will happen, it will never happen,” Jack told us all. At the end of the year we nearly always found that we had not only met but exceeded those lofty goals.

  Never Underestimate Yourself

  When I first joined Alibaba, Jack was regularly telling the world that he would resign in four years. “I was trained to be an English teacher, not a CEO,” he would say, stressing that he would have to make way for a professional CEO to take over the company. At the same time he told his cofounders that they should not expect to be senior managers in the company, since they had no business experience. Through hard work, self-education, and openness to new ideas, Jack and his cofounders grew and developed into CEOs and senior managers, surprising even themselves. This taught me that in a fast-changing environment such as the Internet, there are no experts and the first place to look for talent is in the mirror and on your existing team.

  Never Overestimate Your Competitor

  When we started Taobao in Jack’s apartment, it would have been easy to be intimidated by our mighty competitor, eBay. It was the market leader and media darling, and it had way more resources. But while large companies like to project an image of strength and dominance, on the inside they typically are much weaker than they look. Just as one should never underestimate oneself, one should never overestimate a competitor.

  Make Sure You Have a Great Idea

  Jack was an incredibly inspiring leader, but at the core of Alibaba’s business was a good idea—connecting buyers and sellers online. All too often entrepreneurs have the passion, the values, and the dream, but they don’t have a real core idea for a business. It seems like common sense but no amount of lofty ambition can compensate for an idea that simply doesn’t work.

  Build a Company to Last 102 Years (at Least)

  When I joined Alibaba, Jack was claiming that he wanted us to build a company that would last 80 years—“the length of a human life,” he said. Soon thereafter he decided 80 years wasn’t long enough and extended the time frame to 102 years, “so that Alibaba would span three centuries.” Setti
ng such a long-term goal changes everyone’s mind-set. Rather than working quarter to quarter, people strive to achieve the long-term vision.

  Remember: The Bigger the Problem, the Greater the Opportunity

  E-commerce took off much more quickly in the West than in China, building on an already highly efficient market. In the US and Europe there were far fewer problems to solve. But when Alibaba opened for business in China, the barriers to e-commerce seemed almost insurmountable, and many skeptics said that China simply had too many problems for e-commerce to take off. But after spending years building China’s e-commerce infrastructure from the ground up, Alibaba was positioned to capture a greater share of the rewards than its Western counterparts. It had created the market from scratch. As a result, it captured a greater share of the spoils.

  Today is Tough but the Day After Tomorrow is Beautiful

  One of Jack’s favorite sayings proved to be true: “Today is tough, tomorrow is tougher, and the day after tomorrow is beautiful. But most companies die tomorrow evening and can’t see the sunshine on the day after tomorrow.”

  For people to remain oriented to the long term, they must recognize that just as joy is part of a start-up company, so is pain. But the only way to build something great is to endure a lot of struggles.

  On Strategy

  Focus on the Customer and the Rest Will Follow

  Alibaba’s credo was always “Customers first, employees second, and investors third.” This was a stark contrast to those who argue that a company’s primary responsibility is to its shareholders. But the two perspectives are not mutually exclusive. During the B2B Internet bubble, we watched as our competitors followed the expectations of investors and analysts right off a cliff. And in our competition with eBay we recognized that pressure from Wall Street investors would not allow eBay to focus on the long term. It’s more important to build products and services that your customers want than to cater to the latest investment fad popular among investors. If you do what is right for your customers and employees, investors will be rewarded in the end.