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Economic Insights ... ...
    Open sesame to the Net highway

2005-02-16 07:19

Want to make it big in online business? Look no further than For, it not only survived the dotcom collapse, but also stuck to its original goals to thrive.

Alibaba International was launched in 1999, and in this short span (through its website has already drawn 1.2 million registered users across some 200 countries; and 1.8 million businesses to its dedicated China site. And Forbes magazine's four-years-in-a-row "Best of the Web: B2B" honour is the feather in its crown. was set up to help mainland import/export companies to source their products and develop a network of small domestic firms. Its online marketplace targets small- and medium-sized enterprises (SMEs), especially international buyers seeking suppliers in China, thus giving domestic firms a chance to expand and reach the global market.

But why Alibaba? "The name, taken from the Arabian Nights, was chosen because it's universally well known and is easy to spell," says Jack Ma,'s founder, chairman and chief executive officer. The tale of a humble oil seller who stumbles upon a doorway that opens to reveal untold riches is a metaphor for the possibilities the portal can offer to companies.

But despite's dream run, Ma says the company "is not successful yet". "We have survived because we have remained focused... We have not changed our original strategy of paying full attention to our customers. Even in the face of our investors' and media and Internet analysts' concerns, we have focused on what we wanted to do." This commitment has paid off for the portal that has a burgeoning customer base and is adding more than 18,000 new members a day.

Another reason for "our success", says Ma, was doing the opposite of the generally accepted norms on building an online business. A key strategy was not charging any subscription fee for the first three years. That helped the company build a critical mass of users. "When everybody was thinking about creating value, we were thinking of keeping our services free. Now that everyone is thinking about offering free services, we are thinking of creating value," he says.

The prudent use of resources also helped the company survive the lean years. "In the first three years, we used money very carefully. We are also fortunate that companies (like) SOFTBANK and Goldman Sachs invested in us," Ma says. The result: Alibaba broke even in only three years.

For Ma and his 18 associates, the early days were simply a matter of survival and having unshakeable faith in their vision. "From the beginning, no one believed we would be successful. Growth was very slow in the first three years and we had to do all the small things; we committed mistakes in everything - marketing, staff selection, even the location of our headquarters. But we never gave up."

Though it has retail giants Walmart and GE and many of the mainland's biggest companies among its customers, Ma believes the firm's services are of more help to SMEs, that form a large share of its customer base. "Large companies have extensive resources to draw upon, so they don't need us that much. They have other avenues to source their products", says Ma, who cut his teeth on e-commerce during his days in the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). "We are geared towards SMEs because that's where the bulk of the business is."

"We don't have an online competitor (either) in China or in the world," Ma says. "Globally, our competitors are the traditional trade magazines such as Global Sources. They are very good. But in China there is nobody. We have 99 per cent of the users." The value of transactions through all its sites in 2004 was more than US$4 billion. But he doesn't give a break-up of the revenue for each site. And as a private company, it is not required to. An official fact sheet, however, says US GAAP revenue for 2004 was US$46 million.

The company employs 1,900 people - content creators, engineers, marketing personnel, designers, those in the services, sales and product designing sections as well as those checking the portal listings' facts. The e-commerce guru intends to keep relying on subscription-based revenue for the time being, and shift "three to five years" later to transaction-based revenue, when the company could charge a percentage of the transaction value as a fee.

"Our present concept is 'Meet at Alibaba'. But it'll change in the next five years," Ma says. Apart from getting a slice of each online transaction by 2009, Ma expects to be providing services that help companies do business online. "Then our concept would be 'Work at Alibaba'."

The firm's phenomenal growth saw it expanding into three dedicated B2B portals, before turning its attention to the C2C market in 2003 with the launch of taobao, an online auction website. Taobao competes directly with US online auction giant eBay's dedicated China site, EachNet, for China's more than 90 million Internet users. Today, with the growth of its B2B business, industry observers say it was natural for Alibaba to expand. The new C2C portal, targeting mainland consumers, also offers a B2C platform to provide SME members access to a wider customer base.

So far, eBay is still ahead in China, but perhaps not for long. EachNet, with 10 million registered users, traded US$360 million worth of goods in 2003, compared to taobao's 4.3 million customers and US$300-million transaction for a US$46-million revenue. But the Shanghai-based EachNet controlled 60-70 per cent of China's online auction market when it was taken over completely by the US company in September 2004.

That the US giant considers taobao a threat was proved recently when it announced another US$100-million investment into its China portal. But whether that would be enough to counter taobao's threat remains to be seen. "Their stock dropped 12 per cent in the fourth quarter," says Ma. "One of the main reasons for this is taobao. In every index in the fourth quarter (of 2004) we were better than them."

In order to grab users, taobao is following in's footsteps of not charging customers for a listing on the site for three years. The site also offers products on a scale that is "many times stronger than eBay's", says Ma. The firm has been quick to adapt itself to local conditions. For example, since the mainland market is way behind in credit card payments, taobao has introduced a form of escrow service called AliPay to handle payments. By acting as the intermediary, it provides comfort to its subscribers, strengthening its credibility at the same time.

Ma says taobao has been outperforming eBay because "we know how to tailor content to suit the local market... We have 16 million page-views a day compared to 10 million for eBay (EachNet). We have been doing e-commerce in China for five years, so we understand what the local consumer wants. Only eBay presents a challenge to us, but we are far ahead of everyone else." With an overwhelming dominance in the world's most promising consumer market, it appears that nothing will stand in the way of the company's march forward.

Asked what does the future hold, an upbeat Ma offers a prediction that for would-be competitors sounds like a warning: "At the moment, one in 1,000 transactions takes place online, but I believe that, in 10 years, 70 per cent of business will be done on the Internet."

(HK Edition 02/16/2005 page4)


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