Some time in the mid-1990s, Jack Ma decided to solve a problem. In the West, people were discovering the World Wide Web, an online space filled with all sorts of promise. In China, he had started his own website, among the country’s very first. But it seemed no one else was talking about the Internet, which meant there wasn’t much demand for his “China Pages,” an online business index.
Mr. Ma wanted to get them talking. To do so, he first needed first to persuade the keepers of the Chinese conversation. So, he made an appointment with the People’s Daily, the newspaper that is one of the central organs of the Chinese propaganda apparatus.
He made an offer: I will help you build a website for your newspaper if you will start writing about the Internet. They accepted. And people started talking.
“Once the People’s Daily reported on the Internet, the rest of the media in China began to report on the Internet,” said Porter Erisman, a former Alibaba vice-president who was among its first 150 employees, an experience he documented in a film Crocodile in the Yangtze.
Mr. Ma was effectively nobody. He was not yet the billionaire who has steered Alibaba Group Holding Ltd. into a Chinese e-commerce colossus, a company with a shot at becoming the world’s most valuable as it prepares an initial public offering. He was just an English teacher who had practised his language skills with tourists – not to mention a geek who liked showing off to friends his ability to load web pages through a long-distance phone connection.
But not only was he personally convinced that the Internet heralded a vastly changed future, he managed to convince the propagandists of the Chinese state that he was right. And in doing so, he seeded the ground for his own business to flourish.
“Jack has always had a history of pushing the frontier,” Mr. Erisman said. “He does have a Steve Jobs reality distortion field. He has a way of convincing people that something is possible that you never thought was possible.”
There are countless reasons why Alibaba rose to become a company with 231-million annual active buyers, $248-billion (U.S.) in 2013 gross merchandise volume and $6.5-billion in revenue over the last nine months of 2013 – of which $2.9-billion was net income.
The company caught one of the biggest waves to rise out of the retail ocean, with a shopping-mad Chinese middle class swelling by hundreds of millions as the Internet swept over the country. About 618 million are now online, including 500 million through smartphones. There are now 302 million online shoppers in China.
Alibaba savvily mimicked – and, often, out-competed – companies such as eBay, Amazon and Paypal, and before them Ariba and Commerce One. It became an expert in speedily transforming an idea into a national-scale business, quickly building up eBay-like Taobao, Amazon-like Tmall, Paypal-like Alipay and Yu’e Bao, an online-only bank that in less than a year has attracted more than 81 million investors and nearly $90-billion in deposits.
Alibaba also managed to keep alive the energy of its early days in a small apartment, embracing entrepreneurial drive and providing an outlet for smart young Chinese unable to find expression in politics or arts. (The company still owns the apartment, which it uses as a mini-Skunkworks lab to nurture projects.)
But in a way, the rise of Alibaba is little different from Mr. Ma’s decades-old visit to the People’s Daily office: It is a story about a company’s ability to leap over the pitfalls of building a business in China.
With Taobao, it convinced skeptical consumers that they could trust online vendors they had never met by allowing them to pay in escrow, releasing funds only on successful delivery of goods (an idea eBay had briefly tried in South Korea.) With Tmall, it persuaded western brands to sell in a piracy-laden marketplace. With Alipay, it found ways to access money from consumers without credit cards. With Yu’e Bao, it carved out a space for a new model of banking – with far higher interest rates – in a country with heavily-restrictive banking policies.
“While Alibaba is of course a technology company, so much of its success came first from unlocking the barriers preventing China’s emerging consuming class from shopping online, and then keeping them interested in coming back,” said Jeff Walters, managing director of Boston Consulting Group in China.
The stable of very different companies has made Alibaba difficult to define at a glance. Mr. Walters calls it “shopping” – with the company single-handedly processing more than 70 per cent of online sales in “what may be the largest e-commerce market in the world.” He added: “It is Taobao that has introduced most of China’s netizens to online shopping.”
Mr. Erisman prefers “e-commerce innovation conglomerate” as an unwieldy descriptor.
Ricky Lai, an analyst with Guotai Junan Securities Co., Ltd., said much of the empire is tied together by a single factor: consumers. Different services have been added “to their platform to enhance the users’ experience, and make it a one-stop solution,” he said.
Outside the factory, a widget’s life largely can be lived through Alibaba properties, from parts supply, to wholesale, to retail, to payment. As the company puts it: “Our ecosystem has strong self-reinforcing network effects.”
Alibaba got this big by maniacally chasing growth, largely by giving things away. Mr. Ma famously pledged to make Taobao free for three years at the outset of a corporate battle with eBay, which he tidily won. Taobao now spins off billions, but largely through the sale of advertising.
In Alibaba’s hands, free has been a potent tool to market domination. Mr. Ma went so far as to pledge punishment for the head of Taobao if he exceeded revenue goals in its early days, Mr. Erisman recalls. The idea was to have a flourishing group of online vendors who were themselves making money, and would stick with the site. It worked. In Africa today, the digital generation is more likely to say it wants to build the new Taobao than the new eBay.
In China, meanwhile, the room for growth remains ample. Last year, 7.9 per cent of retail yuan were spent online. That could rise to as much as 20 per cent by 2015, Mr. Lai estimates. “The penetration rate is quite low right now, so that is a robust growth in the coming year.”
For Alibaba, the trick will lie in keeping atop the wave, particularly as it changes. The company was criticized for being late to the mobile web; a few months ago, under 20 per cent of its gross merchandise value moves through cell phones, which are much more common in China than desktops. Its constant push against China’s entrenched interests also carries inherent risks, as does the ungainliness that comes when any company merits description as a conglomerate.
And in many ways, the Internet remains in its infancy, a place where the space between life and death can still be terrifyingly short.
“They are the clear leader in the marathon. But they are only a few miles into it,” Mr. Erisman said. “They have to manage the growth and not overexpand, so they can’t get too caught up in the euphoria of all this attention. They need to stay focused and disciplined, and not overexpand.”