Alibaba: Opening global markets for small businesses

• Source: Global Times
• [14:19 July 27 2009]
• Comments

By Sherman So and J. Christopher Westland

Editor’s note:
This article has been adapted from the book Red Wired: China’s Internet Revolution co-authored by Sherman So and J. Christopher Westland. The to-be-published book is aimed at helping the readers gain a firsthand understanding of how the Chinese combined successful components from their Western counterparts with innovation, to accommodate the unique characteristics of the Chinese market.
 
Of all the China Internet companies, Alibaba is the most original. While others replicated successful western models, there was no booming western company doing what Alibaba does. Jack Ma, an ex-English teacher, become one of the most successful entrepreneurs in the country by having the simple idea of setting up an electronic message board for small businessmen in China and entrepreneurs around the world to exchange trade information.

“Made in China” is a familiar label in supermarkets, electronic stores, fashion outlets, and department stores. But how do those shoes, toys, TVs, and so on actually find their way onto the shelves?

Traditionally, they had to pass through a long chain of intermediaries: Factories -> trading companies -> importers -> distributors -> retailers -> consumers.
 
A middleman takes a cut every time the goods change hands, which is how a pair of shoes sold by a Chinese factory for $8 to $10 wind up costing $50 to $100 in a shoe store in the west.

Buyers always want to go up the food chain and find cheaper suppliers. Factories always want to go down the food chain and find buyers who pay better. But the opaque process of traditional trade made it difficult for both parties to achieve their ends.

Low margins have long been a problem for small factories in China. Without a way of marketing themselves globally, they are often at the mercy of a few large trading houses.

Open sesame

Alibaba’s solution was simple – let Chinese suppliers put their information online, the products they make, their prices (optional), and their contact information.

Overseas buyers can read these messages and contact the factories directly, either by e-mail or phone and fax.

Similarly, buyers who need certain products can put their requirements online and wait for interested suppliers to contact them.

It is basically an electronic message board, but for trade, both domestic and international, rather than chit chat about the latest movies.

The site has become a fantastic way for buyers to find suppliers. It is also an easy way for suppliers to market themselves globally. 

As more suppliers put their information on Alibaba’s site, more buyers used it, which attracted even more suppliers to register. The network effect kicked in and Alibaba.com quickly became a popular destination on the early China Internet landscape.

The free claim

Alibaba also had a most striking proposition – it promised not to charge users, neither sellers nor buyers for the first three years of operation.

By not charging users, Alibaba was able to grow its user base rapidly and wipe out most of its competitors, who were less well-financed and unable to survive for long without a revenue stream.

As a result, Alibaba was lucky to have deep-pocketed backers. In 1999, not long after the site was launched, Ma got $5 million from Goldman Sachs. Shortly after, Softbank of Japan threw in another $20 million.

Flush with cash, Ma set out to implement his global vision. He opened offices in San Francisco and Hong Kong. A group of highly paid US executives and engineers were hired to build the technology platform and oversee global expansion. Commercials appeared on CNBC, the international business television network, urging the world to come to Alibaba.com to trade with China.

But its failure to get a listing on the Nasdaq before the Internet bubble burst in 2000 caused Alibaba to stumble.  Its no-charge policy had helped it grab market share, but the lack of revenue left it with a net loss every month. 

By 2001, the company only had $10 million in the bank and was spending $2 million a month.  ¹

There was no choice – it had to downsize. The highly paid US executives were let go, the offices in San Francisco were closed. Management took a voluntary salary cut and the company retreated to Ma’s hometown of Hangzhou.

B2C = Back to China

“It was our B2C strategy – Back to China,” an Alibaba employee recalled. Monthly expenses, or the so-called burn rate were cut by three-quarters, to $500,000. 

 

¹ Silicon Dragon, by Rebecca A. Fannin, published by McGraw Hill, 2008