Few Americans knew who Jack Ma was in 2006. But one who apparently had heard of the founder and CEO of Alibaba was the founder and CEO of Amazon.com Inc., Jeff Bezos.
That’s apparent from the anecdote that Porter Erisman uses to begin his book, “Alibaba’s World: How a remarkable Chinese company is changing the face of global business.” Erisman was handling international public relations for Alibaba in 2006 when Ma spoke at the Web 2.0 conference in San Francisco, a breakthrough appearance before a prestigious Internet conference for the then little-known Chinese company.
Erisman noticed a man crouched down at the back of the room, carefully taking notes on Ma’s talk. A check of the man’s badge told him it was none other than Bezos, by then an e-commerce superstar. Erisman introduced himself and arranged a brief meeting afterwards between Bezos and Ma, one that, he says, produced no historic business deals, but left Ma and Erisman a bit awestruck at meeting such an heroic figure.
Times have changed, and today Ma’s company, Alibaba Group Holding Ltd. has a stock market value that exceeds that of Amazon. And few in the Internet world don’t know the story of how Ma, an English teacher with no computer training, led Alibaba from its founding in his apartment in the Chinese city of Hangzhou in 1999 to pulling off the world’s biggest IPO in September 2014, when Alibaba raised $25 billion on the New York Stock Exchange.
Clearly, a lot happened in the intervening 15 years. And Erisman, an American graduate of Stanford who worked for Alibaba from 2000 to 2008, was right in the middle of the tough, early years. During that period Alibaba was a pipsqueak daring to challenge giants, most notably eBay Inc., which dominated the fledgling e-commerce world in China when Alibaba was getting started.
Erisman says he wrote the book, after having produced a film documentary on Alibaba called Crocodile in the Yangtze, in order to share the lessons Alibaba offers to entrepreneurs around the world. And indeed there are lessons aplenty.
Some of the most powerful lessons emerge from the battle between Alibaba and eBay. In 2003, when Alibaba created its first consumer-facing shopping portal, Taobao, eBay claimed that its China site accounted for 95% of online retail sales in China. Three years later, Taobao commanded a majority of the market and eBay would withdraw from China. How could eBay, a dominant force in international e-commerce, suffer such a devastating defeat at the hands of an upstart?
The big takeaway is that nowhere how big you are you have to know your customers and tailor your service to their needs. While eBay charged a listing fee and took a commission on sales, as it did in the U.S. and elsewhere, Ma and his Alibaba colleagues decided they would woo sellers by promising to make the service free for three years. That helped attract many of the small retailers selling on eBay to try out Taobao.
And because Taobao wasn’t charging any fees, it had nothing to fear from buyers and sellers communicating. In eBay’s case, such communication could lead to sellers getting around paying eBay’s fees. For example, a small shop owner might tell a customer that the price of an item is 200 yuan on eBay, but if you come into my shop I’ll sell it to you for 160 yuan because I don’t have to pay eBay’s fees or shipping costs.
Taobao has no such concern. And Alibaba’s team recognized that Chinese shoppers want to know the person they’re buying from. Plus, live chat was taking off among Chinese Internet users at the time. So Taobao created a chat function called Wang Wang that facilitated exchanges between buyers and sellers. That, combined with the growing selection on Taobao, helped to attract millions of Chinese online shoppers to Taobao.
And then eBay made a big mistake. It decided to standardize its global sites on a single technology platform to be based in Silicon Valley. The time difference between China and California meant that the team in China had little opportunity each day to confer with the decision-makers in the home office, slowing down innovation. Plus, by hosting eBay China outside of China’s firewall—the collection of web servers that the Chinese government maintains to monitor and in some cases block information from reaching Internet users in China—eBay’s site became slower in China.
As Taobao grew, eBay cut its prices in a bid to retain sellers, which caused concern among investors in the publicly traded company. Eventually, in January 2006, eBay eliminated seller fees in China. Alibaba, a private company at the time, smelled blood, and moved in for the kill.
Having raised $1 billion from an investment by Yahoo in 2006, Taobao announced that it would remain free for buyers and sellers for another three years, threatening eBay years of limited revenue in China. By the end of the year, eBay threw in the towel, transferred ownership of its China operation to a Hong Kong company for a small sum, and effectively left China. The small, nimble startup had used its local expertise to conquer a foreign power.
One lesson from that competition, Erisman tells aspiring entrepreneurs, is, “Never overestimate your competitor.” “It would have been easy to be intimidated by our mighty competitor, eBay,” he writes. “But while large companies like to project an image of strength and dominance, on the inside they typically are much weaker than they look.”
He also points out that there is a lesson from Alibaba’s longstanding promise to put “customers first, employees second, and investors third.” He says investor pressure prevented eBay from focusing on the future, and forced it to prioritize short-term results, while Alibaba did not make the same mistake. “It’s more important to build products and services that your customers want than to cater to the latest investment fad popular among investors,” Erisman writes. “If you do what is right for your customers and employees, investors will be rewarded in the end.”
And that brings me back to Jeff Bezos. He certainly has not run Amazon with a focus on short-term profits. In fact, one analyst pointed out recently that Wal-Mart makes more profit in a single quarter than Amazon has made in its entire history. Bezos consistently sacrifices profits in order to deliver services that consumers want.
And he’s been very successful at it. Internet Retailer calculates that a quarter of online retail sales in the United States take place on Amazon.com. Amazon is not only the No. 1 e-retailer in the U.S., but also in Europe. It has a solid foothold in China, where it is No. 4 in the Internet Retailer China 500, and is investing in such growing markets as India, Brazil and Mexico.
To me, Jeff Bezos and Jack Ma seem alike in their passion, intelligence and focus on serving customers first. But that doesn’t change the fact that they lead the two richest e-commerce companies in the world. Aren’t they fated to become arch-rivals?
Reporters repeatedly asked Jack Ma around the time of the IPO last fall if Alibaba planned to challenge Amazon in the U.S. Ma explained then that Alibaba took off so fast in China because the retail industry there was so weak. In a country like the U.S., he said, with many strong retail companies, he did not think Alibaba could replicate that feat.
I asked Erisman by email this weekend if he though Alibaba was planning a major move in the U.S., and he did not think so—although he noted that he was in Seattle recently and found that many in Amazon’s hometown fear that the Chinese e-commerce giant does have such a plan in the works.
Erisman doubts it for a couple of reasons. For one, he says, there is still so much room for growth in China, where sales on Alibaba’s two big consumer-facing marketplaces, Taobao and Tmall already exceed those of Amazon and eBay combined, “and that is with only 25% of China’s population shopping online. With a growing middle class and increasing Internet penetration in China, they would be making a huge mistake to take their eyes off the ball and wage an all-out assault on Amazon in the U.S.”
Second, he says, “Alibaba’s business model fits emerging markets better than developed economies.” Alibaba, he believes, has learned the lesson from the inability of U.S. giants to dominate e-commerce in China, that “it would be impossible to ‘cut and paste’ Taobao to the U.S.”
Erisman does consider it possible that Alibaba might enter the U.S. in a big way by buying eBay, whose value has fallen steadily over the past decade as Amazon overtook it as the dominant e-retail company. I consider that unlikely. Jack Ma speaks of building Alibaba into a company that will last 102 years—which would mean Alibaba would span three centuries—and eBay seems to me to represent the past of e-commerce more than its future.
I was more intrigued by the news in March that Amazon was going to open a storefront on Alibaba’s Tmall marketplace to sell imported goods. That seems noteworthy because Amazon China has also been building up its selection of imported—which more affluent Chinese favor because they are leery of the quality of Chinese goods. Why would Amazon in effect compete with itself by opening up a storefront on Tmall?
When the story broke, my Chinese colleague Frank Tong tells me, social media in China buzzed with rumors that Jeff Bezos had traveled to China himself to broker the Tmall deal. Amazon did not immediately respond to a request for confirmation of those rumors. Whether true or not, I’ve no doubt that Bezos must have approved such a step towards collaborating with its biggest competitor in China, which is now the world’s largest e-retail market.
That’s led me to ponder whether Amazon and Alibaba would choose to collaborate rather than compete. After all, Alibaba has the connection with the Chinese factories that manufacture so much of the world’s goods, not only through its consumer-facing marketplaces but also through its less well-known but important business-to-business marketplaces—1688.com, the central online wholesaling portal in China, and Alibaba.com, which allows companies outside of China to source from manufacturers in China and elsewhere around the world. Meanwhile, Amazon is increasingly the favorite choice for online shoppers in North America and Europe. An alliance of Amazon and Alibaba could transform e-commerce worldwide.
I raised this idea with Erisman, who was skeptical. He sees Amazon and Alibaba already competing in a number of areas. They include emerging markets like India and China, in cloud computing and for e-commerce talent. And then there is always the possibility that Alibaba will decide to take on Amazon on its home turf, setting up, as Erisman puts it, “a battle of the e-commerce titans.”
I, for one, remain struck by the similarity in the business philosophies of Bezos and Ma, and can see them recognizing the opportunity to profit more together than they could be battling head to head. Time will tell. Meanwhile, many in the U.S. still have a lot of catching up to do on Alibaba, and reading Erisman’s book is a good way to start. “Alibaba’s World” is available on Amazon, of course, and elsewhere. I highly recommend it.
And if you’re planning to attend IRCE in early June, you can meet Erisman in person and hear him talk about his book on June 3 at noon in the Global Theater the show floor.