Alibaba

Vision & Scale

Jack and Cathy had wagered everything they owned on the company, including their home. Jack’s ambition then, as it remains today, was breathtaking. He talked of building an Internet company that would last eighty years—the typical span of a human life. A few years later, he extended Alibaba’s life expectancy to “a hundred and two” years, so that the company would span three centuries from 1999. From the very beginning, he vowed to take on and topple the giants of Silicon Valley. Within the confines of that modest apartment this should have seemed delusional. Yet there was something about his passion for the venture that made it sound entirely credible.

Jack is different from most of his Internet billionaire peers. He struggled in math as a student and wears his ignorance of technology as a badge of honor. His outsize ambitions and unconventional strategies won him the nickname “Crazy Jack.”

In the first eight minutes of 11/11/15, shoppers made more than $1 billion in purchases on Alibaba’s sites.

Twenty-four hours later, 30 million buyers had racked up over $14 billion1 in purchases, four times greater than 11/11’s U.S. equivalent, Cyber Monday…

A common saying today in China is wanneng de taobao,6 meaning “you can find everything on Taobao.” Amazon has been called “the Everything Store.” Taobao too sells (almost) everything, everywhere.

2008 changed everything. China’s traditional export markets were thrown into a tailspin. Taobao pried open the factory gates to consumers in China instead. The Chinese government’s response to the 2008 crisis was to double down on the Old China model—pumping money into the economy that fueled a massive real estate bubble, excess capacity, and yet more pollution.

Jack likes to say that his company’s success was an accident: “Alibaba might as well be known as ‘one thousand and one mistakes.’” In its early years, he gave three explanations as to why the company survived: “We didn’t have any money, we didn’t have any technology, and we didn’t have a plan.”

Marketplace Model

Unlike Amazon, Alibaba’s consumer websites Taobao and Tmall carry no inventory.8 They serve as platforms for other merchants to sell their wares. Taobao consists of nine million storefronts run by small traders or individuals. Attracted by the site’s huge user base, these “micro merchants” choose to set up their stalls on Taobao in part because it costs them nothing to do so. Alibaba charges them no fees. But Taobao makes money—a lot of it—from selling advertising space, helping promote those merchants who want to stand out from the crowd.

…with “pay-for-performance” advertising—and a ready market of hundreds of millions of consumers—Taobao commands an enormous appeal to small merchants.

The site works because it succeeds in putting the customer first, bringing the vibrancy of China’s street markets to the experience of shopping online. Buying online is as interactive as in real life. Customers can use Alibaba’s chat application10 to haggle over prices; a vendor might hold up a product to his webcam. Shoppers can also expect to score discounts and free shipping. Most packages arrive with some extra samples or cuddly toys thrown in…

Unlike Taobao, which is free for buyers and sellers, merchants pay commissions to Alibaba on the products they sell on Tmall, ranging from 3 to 6 percent depending on the category.12 Today Tmall.com is the seventh-most-visited website in China.

China Retail Shift

More than 10 percent of retail purchases in China are made online, higher than the 7 percent in the States.

Shopping in China was never a pleasurable experience. Until the arrival of multinational companies like Carrefour and Walmart, there were very few retailing chains or shopping malls. Most domestic retailers started as state-owned enterprises (SOEs). With access to a ready supply of financing, provided by local governments or state-owned banks, they tended to view shoppers as a mere inconvenience.

“Because of the way our economy is structured, the government has a lot of resources. The government decides the price of land. The government decides how resources are channeled, where money is spent. The government relies too heavily on taxes and fees associated with selling land. That almost destroyed the retail business in China, and pushed a lot of demand online. They deprived offline retailers of the opportunity to benefit from rising consumer demand—which they effectively channeled to e-commerce players.”

The result? China’s retail market is highly fragmented and inefficient. In the United States, the top three grocery chains account for 37 percent of all sales. In China, they account for just 7 percent. The largest department stores in the United States represent 44 percent of total sales in that segment. In China? Just 6 percent.

…today, some shop owners are too busy taking care of customers online to bother with those who actually wander into their store. Many vendors in China have simply dispensed with the shop entirely: Why rent an expensive space that is only open at most half of every day when your Taobao storefront is open 24/7? Nature abhors a vacuum and in China the Internet is filling the voids created by a legacy of state ownership and state planning.

“supermarkets in China were terrible; that’s why we have come out on top.” Already more than 40 percent of Chinese consumers buy their groceries online as compared to just 10 percent in the United States.

China’s fake goods can be so high quality that they defy detection even by legitimate manufacturers, made by “extra shift” production runs in the same plant as the real items, typically using leftover materials.

Logistics & Trust

Without the low-cost delivery that the courier services provide, Alibaba would not be the giant it is today. To survive in a cutthroat industry, some of the courier firms have adopted clever methods to keep costs at rock bottom. In Shanghai, for instance, couriers shuttle back and forth on the subway, passing packages over the barriers to one another to avoid buying multiple tickets. But none of these couriers are employed by Alibaba itself. Most of the packages in China are delivered by private couriers.

“Delivery companies are a propeller. We are the strongest force driving Alibaba’s fast development.” Alibaba has invested together with these companies and others in a firm called China Smart Logistics, or “Cainiao.”22 The combined hauling power of the fifteen logistics partners in Cainiao is staggering. Together they handle more than 30 million packages a day and employ more than 1.5 million people across six hundred cities.23 Cainiao is building a propriety information platform that knits together logistics providers, warehouses, and distribution centers across the country.

By investing in Cainiao, Alibaba aims to lock in vital relationships with its logistics partners while finding outside investors to fund the expansion of the networks themselves. Cainiao neither owns the physical infrastructure of the networks nor employs the personnel who make the deliveries. Those assets are contributed by the consortium’s members and partners, allowing Alibaba to pursue an “asset-light” strategy.

A lot is riding on this approach. Alibaba’s principal e-commerce competitor, JD.com,28 is pursuing an “asset-heavy” strategy, investing directly in its own logistics infrastructure.

…with Cainiao Alibaba has shored up the most important asset of all: trust. Customers and merchants know they can count on the products getting where they need to be, on time.

Payments & Finance

Alibaba’s most important asset is Alipay, its answer to PayPal. By far the most popular online payment tool in China, Alipay handles more than three-quarters of a trillion dollars a year in online transactions,31 three times the volume of PayPal and one-third of the $2.5 trillion global online payments market.

Alipay diffuses trust throughout Alibaba’s e-commerce empire. Consumers know that when they pay with Alipay their accounts will be debited only when they have received and are satisfied with the products they have ordered. Only then, after freezing the amount on the account, will Alipay release the funds to the merchant.

Alipay is the largest asset of a company, controlled personally by Jack, which has been valued by one analyst at $45 billion. Alibaba websites account for more than one-third of its revenues, but other sites also rely heavily on Alipay to process their online payments.

…offline banking has proved a ripe fruit for it to pick. Just as state-owned shops paid little interest in their customers, China’s state-owned banks paid little heed to the needs of individuals and small businesses. Until recently, they had no choice but to place their cash deposits with the banks that were focused on state-owned enterprises.

The disdain of these banks for their customers has fueled popular jokes such as the one about ICBC’s initials standing for, in Chinese, “ai cun bu cun,” translating loosely as “who cares if you save with us or not, whatever.”

Not only were the rates it offered much higher than the banks—as much as two percentage points higher—but Yu’e Bao allowed customers to make withdrawals at any time without penalty. As a result, individual customers transferred tens or hundreds of thousands of dollars into the fund. The banks became alarmed at the outflows. By February 2014, Yu’e Bao34 had attracted over $93 billion from 80 million investors, more than the combined total accounts of all other money managers in China. The inflow was so huge that in only ten months Yu’e Bao was ranked the fourth largest money manager in the world, closing in on global industry stalwarts such as Vanguard, Fidelity, and J.P. Morgan.

Jack took the unusual step, for a private sector entrepreneur, of penning an opinion piece in the Communist Party journal People’s Daily arguing, “The finance industry needs disrupters, it needs outsiders to come in and carry out a transformation.” Soon after, the SOE empire struck back, denouncing the fund managers behind Yu’e Bao as “vampires sucking blood out of the banks.” Starting in March 2014, the state-owned banks, holding collectively more than $100 trillion in deposits, imposed limits on the amounts their customers could transfer into third-party online payment accounts. Other government-imposed restrictions followed soon after. Pulling no punches, Jack posted a message on social media criticizing the banks by name and blaming them for failing to participate in China’s market-oriented financial liberalization: “The decision of who wins and who loses in the market shouldn’t be up to monopoly and authority, but up to customers.” Jack deleted it soon after, but the message was reposted widely.

Because it has access to the entire trading history of its customers, Alibaba is in a much better position to assess credit risk than the banks.

In 2015 Jack launched an Internet-only bank called MYbank, which gets rid of the need for branches entirely.

Jack Ma Persona

Even his Zhejiang-born billionaire friend Guo Guangchang1 has called Jack an “alien,” but only before dismissing himself as “just a normal guy … no one is as smart as Jack Ma.”

One of the most circulated images of Jack on the Internet is a photo of him sporting a Mohawk, nose ring, and makeup, including jet-black lipstick. On that occasion, a celebration of Alibaba’s tenth anniversary, Jack sang Elton John’s “Can You Feel the Love Tonight” to a stadium full of seventeen thousand cheering employees and ten thousand other spectators. Jack combines a love of showmanship with a relish for defying stereotypes. Where other business moguls like to talk up their connections or academic credentials, Jack enjoys talking down his own: “I don’t have a rich or powerful father, not even a powerful uncle.” Having never studied abroad, he likes to describe himself as “one hundred percent Made in China.” He stands out as a tech company founder with no background in technology. At Stanford University in 2013 he confessed, “Even today, I still don’t understand what coding is all about, I still don’t understand the technology behind the Internet.” Jack has made a career out of being underestimated: “I am a very simple guy, I am not smart. Everyone thinks that Jack Ma is a very smart guy. I might have a smart face but I’ve got very stupid brains.”

…this dumbing down is of course just a feint. Jack once explained2 that he loves the lead character of the movie Forrest Gump because “people think he is dumb, but he knows what he is doing.”

On the first day of trading of Alibaba’s shares, Jack was interviewed by CNBC live on the floor of the New York Stock Exchange. When he was asked which person had most inspired him, Jack replied without hesitation, “Forrest Gump.” His interviewer paused, then said, “You know he’s a fictional character?”

Jack shares a characteristic with Steve Jobs, whose charisma and means of getting his way were famously described by a member of the original Apple Macintosh design team as a “Reality Distortion Field.” Central to Jack’s own distortion field are his skills as a communicator. Jack’s speaking style is so effective because his message is so easy to agree with, remember, and digest.

Jack can dispense with notes because he already knows much of his material: a well-honed stable of stock stories, mostly tales from his childhood or Alibaba’s own infancy. A close inspection of all of his speeches reveals he has essentially been giving the same speech for the last seventeen years.

Culture & Leadership

…the most famous lesson of Jack the teacher is known by heart by every Alibaba employee: “Customers first, employees second, and shareholders third.” Jack describes this as Alibaba’s philosophy.

When asked by the journalist Charlie Rose if he saw himself as an “apostle for small business,” Jack agreed, “I’m a strong believer. It’s my religion.” Many small businesses in China don’t just use Alibaba’s websites as a marketing channel, they depend entirely on them to make a living. Jack has always insisted on offering most of Alibaba’s services for free.

…an ability to motivate his team to overcome obstacles has been critical to Alibaba’s success. Joe Tsai didn’t hesitate in describing them to me as “disciples,”

“Today is brutal, tomorrow is more brutal, but the day after tomorrow is beautiful. However, the majority of people will die tomorrow night.”

“Let the Wall Street investors curse us if they wish!” Not exactly standard behavior for the senior executive of a publicly listed company.

A sense of subjugating one’s own needs for the interest of the customer is a cornerstone of Alibaba’s corporate culture.

Jack presides as chief witness over a ceremony to celebrate recent weddings of company employees. Alibaba covers the lodging and meal expenses of the immediate family members who are invited to join. The photos of a hundred plus couples celebrating their matrimonials together at one company has inevitably invited comparisons to cults…

Alibaba encourages a sense of informality at work. Every employee is asked to adopt a nickname. The practice is so widespread that it can invite confusion when they have to search to find out the actual names of their colleagues to communicate to people outside the company.

Employees are discouraged from ever complaining—a pet peeve of Jack’s—and encouraged instead to shoulder personal responsibility, carrying out or delegating tasks rather than waiting for orders from on high.

Welch’s 2005 book, Winning, recommends an almost messianic culture in the workplace: “Leaders make sure people not only see the vision, they live and breathe it.” Jack (Ma) has always held GE in high regard.

The “Six Veins” of Alibaba’s “Spirit Sword” are “customer first, teamwork, embrace change, integrity, passion, and commitment.” Generic-sounding as they are, the company treats them very seriously. Commitment to the Six Vein Spirit Sword accounts for half of employee appraisals.

Alibaba asks its employees to “embrace setbacks,” a radical departure from traditional Chinese culture, where failure is seen as something shameful.

Compared to other firms, “people at Alibaba are more passionate about their work, more honest, and more hardworking.” Jack’s emphasis on “commitment” is reflected in his frequent invocation of the phrase to “work happily but live seriously.”

Measuring how employees live up to the Six Vein Spirit Sword is the job of Alibaba’s human resources department, which plays a critical role, overseeing the hiring of twelve thousand people in one year alone. Relegated in some companies to a purely administrative function, HR at Alibaba has tremendous power over promotions and hiring. With its constant emphasis on culture and ideology, people at Alibaba refer to HR informally as the “Political Commissar” (zheng wei). The HR department also oversees extensive training, with manuals of more than one thousand pages for new employees and a sophisticated database, matching performance closely with promotions and pay raises.

Alibaba has been a team effort from the start. Jack doled out much more equity, and at an earlier stage, than many of his Internet founder peers. But he has kept a firm control on the company through his gift for communicating and his lofty ambitions.

Early Life & English

Jack came into the world at a time when private enterprise had almost been completely extinguished. Ninety percent of industrial production had been taken into the hands of the state.

…old customs like pingtan became a target of the Red Guards and its practitioners were denounced. Jack’s family was at risk of persecution, particularly as his grandfather had been a local official1 under the Nationalist (KMT) government. During the Cultural Revolution Jack was taunted by his classmates, although fortunately the family was not broken up like many were at the time.

Jack fell in love with the English language and literature, particularly readings of Mark Twain’s The Adventures of Tom Sawyer that he listened to on a shortwave radio.

Jack relished any opportunity to practice his English. He started waking up before dawn and riding his bicycle for forty minutes to the Hangzhou Hotel to greet foreign tourists. As he recalled, “Every morning from five o’clock I would read English in front of the hotel. A lot of foreign visitors came from the USA, from Europe. I’d give them a free tour of West Lake, and they taught me English. For nine years! And I practiced my English every morning, no matter if it snowed or rained.”

“English helps me a lot. It makes me understand the world better, helps me to meet the best CEOs and leaders in the world, and makes me understand the distance between China and the world.”

Ken Morley, once described his first impressions of Jack as a “barrow boy,” or a street hawker. “He really wanted to practice his English, and he was very friendly. Our kids were very impressed.”

“What followed that meeting was a pen pal relationship that I kept up for a few years until my father started to take an interest in helping this young man.” Jack would correspond regularly with Ken, referring to him as “Dad,” who asked him to “double space his letters so that any corrections could be sent back in the spaces.” David explained, “The original with corrections was returned for learning purposes with the reply letter. I believe this greatly helped and encouraged Jack to continue with his English studies.”

Jack took the gaokao but failed badly, scoring 1/120 in math. His hopes crushed, he took to menial labor delivering heavy bundles of magazines from printers to the Hangzhou train station on a pedicab, a job Jack managed to land thanks only to his father’s connections. Jack was rejected from numerous other jobs, including as a waiter in a hotel. He was told he was not tall enough.

Jack resolved to have a different fate, and took the gaokao again. This time his math score improved slightly, to 19/120, but his overall score dropped considerably. Jack once again set about applying for jobs to make ends meet. He sent out eleven job applications but all met with rejection. Jack likes to tell the story of how even KFC turned him away, the only one of twenty-four candidates they didn’t like.

…in 1984, when he was nineteen, he raised his math score sufficiently to win acceptance to a local university, the Hangzhou Teachers College. On his third attempt at the gaokao he scored 89 in math. His score was several points below the normal acceptance rate at other universities for a full four-year undergraduate degree.3 Normally he would have been relegated to a two- to three-year associate’s degree course,4 but Hangzhou Teachers College had a few spaces left for male students, and Jack squeaked in. The college was not a prestigious one.

In 1985, Jack also received an invitation from Ken Morley to stay with his family at their home in New Lambton, Australia, a suburb of Newcastle in New South Wales. It was the first time Jack had left China. He stayed for a month and returned a changed man. “Everything I’d learned in China was that China was the richest country in the world,” Jack later said. “When I arrived in Australia, I realized it was totally different. I started to think you have to use your own mind to judge, to think.”

Jack’s university life was not carefree. Money concerns were pressing. Once again Ken Morley stepped in to help. While the tuition at the college was free, the compulsory live-in fees were beyond the means of Jack’s family. “When we came back to Australia we thought about it,” Morley recalled, “and decided we could help. It was not much—five to ten dollars a week, I think—so I would send him a check every six months.”

The relationship was kept secret from Jack’s family. During a dinner one evening in Hangzhou with his father, Jack, and his parents, Stephen Morley recalled, “I blurted out ‘nü peng you’ [girlfriend] and gestured towards Jack. Jack looked mortified and probably wanted to kill me at this point. This led to a discussion in Mandarin between Jack and his parents. Jack still reminds me of the time I blabbed on him as a kid.”

The Morleys once again showed their generosity and gave the couple 22,000 Australian dollars (about $18,000) to help finance the purchase of their first home, two apartments on top of a tower block that they combined together to make a penthouse. Jack later said that words could not express what Ken and Judy Morley had done for him. Ken Morley died in September 2004 at the age of seventy-eight. His obituary in a local newspaper records that he had taken “his children to China and Cuba and encouraged them to get an education, travel and have a political point of view. This broad-minded, generous approach extended outside the family and Ken is well-known for befriending a poor young Chinese boy. This boy is now a man who heads a successful company in China.”

The irony is that Ken Morley, who was instrumental in unlocking opportunities for a man who would become one of China’s richest capitalists, was himself a committed socialist.

The Ma and Morley families remain close friends to this day and continue to vacation together.

Zhejiang Enterprise

Deng Xiaoping undertook his famous “southern tour,” immortalized5 in his pronouncement that “to get rich is glorious.”

Jack recalled the lesson he drew from Deng’s southern tour: “You can be rich; you can help other people be rich.”

Jack’s English classes were popular because he spent little time teaching grammar, vocabulary, or reading out texts. Instead Jack preferred to pick a topic and engage in conversation. His students came from a wide variety of backgrounds, from high schoolers striving to study overseas, to college students, to factory workers and young professionals. Jack would often spend time with them after class, “drinking tea, playing cards, and chatting.”

“Nobody else saw the opportunity in this business… . We didn’t make much money at first, but [Jack] persevered… . I respect him tremendously for he has a great ability to motivate people and he can invest things that seem hopeless with exciting possibility. He can make those around him get excited about life.”

The Chinese word for Hope was Haibo, which literally translates as “vast like the sea.” Popular slang for leaving a government job and entering the private sector at the time was to xia hai, or to “jump into the sea.” Jack wanted to get his feet wet as an entrepreneur, but he wasn’t quite ready to take the plunge and abandon his public sector job as a teacher. Entrepreneurship is such a well-established part of modern Chinese business and culture today that it is easy to forget how much things have changed in the last few decades. In the earliest days of China’s economic reforms, entrepreneurship was viewed as a highly risky, even illegal undertaking. Memories then were fresh of those imprisoned or even executed during the Cultural Revolution for carrying out commercial activities.

The first entrepreneurs, the getihu, were not leaving behind a stable government job, but rather were those with nothing to lose. They were mostly agricultural laborers, their low status inviting the pejorative association of “peddlers.” As they grew richer they were resented and mocked for their success and lack of class. One early getihu even papered the walls of his home with banknotes.

The need to trade and the distance from the country’s political rulers have helped make Zhejiang the cradle of private enterprise in China. Today many of the province’s entrepreneurs sit atop China’s rich list. Most, like Jack, started out living hardscrabble lives. Zong Qinghou, worth more than $11 billion, is the founder of Wahaha, China’s largest beverage manufacturer. From the age of four, Zong grew up in Hangzhou, later working on a salt farm on an island off the coast of Ningbo before graduating from secondary school. In the 1980s he sold ice pops on the street for less than a penny. Li Shufu, worth more than $2 billion, founded Geely, China’s first non-state-owned car manufacturer. He started out assembling refrigerators using spare parts, then in 1988 founded Geely. In 2010 Geely purchased Sweden’s Volvo Cars. Lu Guanqiu, worth more than $7 billion, is the founder of Wanxiang Group, the Hangzhou-based auto parts manufacturer. He started out as a farmer, then started buying scrap metal from villagers. Jack’s friend Guo Guangchang, a man worth an estimated $7 billion before his unexplained disappearance for several days in December 2015, is the founder of investment firm Fosun. Guo survived the Cultural Revolution only by eating moldy, dried vegetables, later winning entry to Shanghai’s prestigious Fudan University, where he sold bread door-to-door in the dorms to make ends meet.

Although the government wanted to help them showcase their success, many entrepreneurs refused to attend, fearing arrest. Only two years earlier a number of entrepreneurs in the city had been arrested for speculation. They still languished in prison. Of the entrepreneurs who showed up for the meeting with the government a number brought along their toothbrushes, in case they too were detained.

Starved for lending, the private sector in Wenzhou began to devise its own private credit market, often adopting illegal structures.

Raw entrepreneurial spirit, plus access to capital, fueled an explosion in the city’s private sector, which so dominated Wenzhou’s economy that the state became completely marginalized. Facing a huge demand for new roads and bridges, the entrepreneurs of Wenzhou didn’t wait for funds or instructions from Beijing. They simply built their own…

…acting on their own, entrepreneurs even funded the construction of the city’s airport. One year later the country’s first private carrier, Juneyao Airlines, was launched in the city. In 1998, Wenzhou created China’s first privately funded railroad.

Today in China, Wenzhou is synonymous with wealth.

“As entrepreneurs from Zhejiang, our greatest advantages are that we are hardworking, courageous, and good at seizing opportunities. We have these excellent qualities because we were given nothing. We are not like other provinces which have resources of coal and ore. We Zhejiang entrepreneurs have markets… . As long as we are in places where there are people, we are always able to find opportunities. It will be the same in the future.”

China Pages

To support his venture, Jack started peddling goods on the streets of Hangzhou, including some he sourced from Yiwu. His translation company also became a trading company.

Jack met with the unnamed boss of Tonglu’s erstwhile U.S. partner. Jack quickly figured out, as The Economist related, that the “company he was investigating did not exist, that his host was a crook, and that he himself was in serious danger.” Jack has never named the boss, later described in local media only as a “bulky Californian.” But after refusing to take a bribe, Jack recalled he was locked in a beach house in Malibu, where his captor flashed a gun. He was then taken to Las Vegas, where he was kept in a form of house arrest in a hotel room on the top floor of a casino.

Jack was impressed by some of the larger houses on the hill: “Jack would point at various houses and say ‘I’m going to buy that one, and that one and that one’ and we’d just laugh because they were very expensive houses. But he was impressed.” Bill Aho remembered, “At that time, he didn’t have a nickel.”

‘Jack, this is Internet. You can find whatever you can find through the Internet.’ I say really? So I searched the word beer. Very simple word. I don’t know why I searched for beer. But I found American beer, Germany [sic] beer and no Chinese beer… . I was curious, so I searched ‘China,’ and no ‘China,’ no data.” Intrigued, Jack asked Stuart for help. “I talked to my friend, ‘Why don’t I make something about China?’ So we made a small, very ugly-looking page … [for the] translation agency I listed on there.” The site for Hope Translation was just text, without any images, plus a telephone number and the price for translation work. Jack later recalled to the journalist Charlie Rose: “It was so shocking, we launched it nine forty in the morning, twelve thirty I got a phone call from my friend. ‘Jack, you’ve got five emails.’ I said, ‘What is email?’” Three emails came from the United States, one from Japan, and one from Germany.

Stuart asked for an upfront deposit of $200,0008 to grant Jack the exclusive right to make Web pages in China. When Jack explained that he had borrowed money to make the trip to the United States and was now penniless, Stuart signed the agreement without the deposit but on the condition that Jack pay up as soon as possible, even enlisting Bill Aho and his wife as guarantors. To get home to Hangzhou, according to a local media report, Jack had to borrow funds from a Hangzhou student in the States, then flew to Shanghai. For his client in Tonglu, Jack returned to China empty-handed, with no deal to finance the proposed highway. But inside his suitcase he carried back with him a computer running the Intel 486 processor: “It was the most advanced in China at that time.”

Jack resigned his position as a teacher at the Hangzhou Institute of Electronic Engineering. He had realized that his teaching days must end when he ran into the dean, who was riding his bicycle carrying vegetables he had just bought from the market. The dean encouraged him to keep working hard at teaching, but looking at the bicycle and the vegetables Jack realized that even if he were to become dean himself one day, this was a future he couldn’t get excited about.

Jack had a tremendous work ethic. To populate China Pages with entries, he toiled away collecting information on companies, which he would translate into English, then send along with photos to VBN in Seattle for uploading to the website.

To portray their business as a solid concern, Jack and He Yibing printed up several versions of their business cards, each listing different positions1 that they would use depending on whom they were meeting.

Jack had spent most of his money on registering the business, leaving little leftover for hardware or other equipment.

…asking people who had never heard of the Internet to fork over 20,000 renminbi ($2,400) up front to create, design, and host a website they could never see was a challenging one. Jack worried that people thought he was defrauding them. “I was treated like a con man for three years,” he said.

By the end of the year there were only 204 Internet users in the whole province. But Jack was among them and was finally able to load a website in front of his first client, the Lakeview Hotel, on the 486 computer he’d brought back from Seattle in his suitcase. “It took three and a half hours to download the front page… . I was so excited.”

China’s communist rulers had watched the collapse of the Soviet Union in 1990 with alarm, attributing it in part to the yawning technological gap that had opened up with the United States. At the beginning of 1994 China had only 27 million phone lines and 640,000 cell phones for a population of 1.2 billion. The early users of cell phones were either government officials or the getihu who could afford to shell out $2,000 to buy one, with others making do with pagers. The Chinese government resolved to change this, seeing an improvement in telecommunications as a tangible improvement they could deliver in the lives of the masses. Just as King Henry IV of France cemented his legitimacy by putting a chicken on every dinner table on a Sunday, with xinxihua the Chinese Communist Party began to roll out phone lines, then cell phones, then broadband connections to hundreds of millions of people.

After the suppression of pro-democracy protests in Tiananmen Square in June 1989, he and many other U.S.-educated Chinese instead shifted their hopes for radical political change in China to a faith in the power of technology to reshape the country.

…to convince prospective clients of the importance of the Internet Jack started citing a quote from Bill Gates: “The Internet will change every aspect of human beings’ lives.” A useful marketing message for China Pages, Jack had in fact made it up, as he later confessed, “In 1995, the world started to know Bill Gates. But if I said, ‘Jack Ma says that the Internet will change every aspect of human beings’ lives,’ who would believe it?”

…the publicity also triggered problems for Jack and the official who had commissioned him. One of Yang’s colleagues reported him to the provincial government, accusing him of “hobnobbing with a getihu.” The disgruntled colleague’s report thundered that “government information dissemination was a serious issue, how could it be handled and published via a getihu?”

Dife had registered the domain name www.chinesepages.com, very similar to his own venture’s www.chinapages.com, and a new company called “China Yellow Pages.” Yet because Dife was a subsidiary of a powerful SOE, Jack couldn’t fight back. Gritting his teeth he had to give interviews with local media lauding the new venture: “The establishment of Dife-Haibo will further strengthen China Pages.” He concluded by saying, “We have every reason to believe, with the right policies of the Party and the State, and with the tremendous support from every walk of life in the society, China Pages will surely achieve great success. China’s information high-speed train will be faster and faster!” Years later, after Alibaba had become successful, Jack was free to comment on the experience. China Pages was dwarfed by its new partner, and while Jack was the general manager, the position turned out to be of little value. “When the joint venture was formed, disaster followed. They had five votes on the board, and we had two. Whenever there was a board meeting, whatever ideas I put forward, if one of them voted against it, the rest of them followed suit. During five or six board meetings, none of our ideas were passed.” Jack had lost control of his pioneering venture: “At that time I called myself a blind man riding on the back of blind tigers. Without knowing anything about technology or computers, I started the first company. And after years of terrible experience, we failed.”

“From then on, I have held a firm belief: When I start businesses in future, I will never hold the controlling stake of a company, making those controlled by me suffer. I will give plenty of understanding and support to lower levels. I have never once had a controlling stake at Alibaba. I am proud of this. I am the CEO of the company, because I lead it with [my] wisdom, courage, and resourcefulness, not capital.”

Just as Jack had lost control of China Pages to his SOE-linked partner, in Beijing Jasmine Zhang had been forced out of Yinghaiwei by her largest shareholder, rumored to be connected with China’s Ministry of State Security.

Yun Tao from Beijing-based ISP Cenpok summed it up:1 “It is not yet possible to make money in China on the Internet… . I have been at it for the last few years and I tell you, I am bleeding now.”

Founding Alibaba

…the Taiwan-born Jerry Yang became a hero. The public was fascinated to learn how an immigrant to the United States had become a billionaire before the age of thirty. Suddenly there was a flurry of interest in Yahoo’s “portal” business model…

…all the offline bureaucracy involved in registering on the website made it unappealing to businesses, especially because the website could not facilitate any orders or payments. In other words it was just a bigger and government-backed version of China Pages.

Jack became increasingly frustrated as he watched the triumvirate of portal pioneers gain momentum: “Here I was, I had been practicing for five years in the Internet field,” Jack recalled. “Everything was changing very quickly. If I stayed in Beijing I couldn’t do something really big; I couldn’t realize my dreams as a public servant.”

Jack has been asked many times why he chose an Arabic name for his company rather than something derived from his passion for Chinese martial arts or folklore. Jack was attracted, he said, by the “open sesame” imagery, since he hoped to achieve an opening for the small- and medium-size enterprises he was targeting. He was also looking for a name that traveled well, and Alibaba is a name that is easy to pronounce in many languages. He liked the name since it came at the beginning of the alphabet: “Whatever you talk about, Alibaba is always on top.” In China, a song titled “Alibaba Is a Happy Young Man” was popular at the time, but Jack says the idea came to him4 for the website on a trip to San Francisco: “I was having lunch, and a waitress came. I asked her: ‘Do you know about Alibaba?’ She said, ‘Yes!’ ‘What is Alibaba?’ And she said, ‘Open Sesame.’ So I went down to the street and asked about ten to twenty people. They all [knew] about Alibaba, Forty Thieves, and Open Sesame. I think, this is a good name.”

The domain name alibaba.com was registered to a Canadian man who was asking for $4,000 to transfer it over, a transaction that involved some risk if he didn’t hold up his side of the bargain. So Jack launched5 the Alibaba site using alibabaonline.com and alibaba-online.com instead. Alibaba cofounder Lucy Peng recalled how the early team members had joked they were working for “AOL,” short for “Alibaba Online.”

Confident in his future success, he arranged for the meeting to be filmed. With the team seated around him in a semicircle, some wearing coats to fend off the damp cold inside the chilly apartment, Jack asked his converts to ponder the question: “In the next five to ten years, what will Alibaba become?” Answering his own question, he said that “our competitors are not in China, but in Silicon Valley… . We should position Alibaba as an international website.”

In contrast to the business-to-business sites in the United States that were focused on large companies, Jack decided to focus on the “shrimp.”

When Jack created Alibaba in early 1999 China had only two million Internet users. But this would double in six months, then double again, reaching nine million by the end of the year. By the summer of 2000 there were 17 million online.

For Alibaba to thrive he would have to foster a relentless work ethic, ensuring a clean break from the bureaucratic culture that he and some of his colleagues had just left behind in Beijing. Jack exhorted the group assembled in his apartment to “learn the hard working spirit of Silicon Valley … If we go to work at 8 A.M. and get off work at 5 P.M., this is not a high-tech company, and Alibaba will never be successful.”

Alibaba was cofounded by a total of eighteen people, six of whom were women. None came from privileged backgrounds, prestigious universities,13 or famous companies. This was a team of “regular people,” bound together by Jack’s energy and his unconventional management methods.

Thinking that it might help establish a rapport, Joe added, “I do speak Shanghainese. My parents grew up in Shanghai.” Looking back on that first meeting, Joe laughs. “I hadn’t realized that Hangzhou people hated Shanghainese. They think they are too sly, too commercial, too money-oriented. Later on Jack told me that there are three kinds of people he doesn’t trust: Shanghainese, Taiwanese, and Hong Kong people.” But somehow Jack and Joe, a Shanghainese-speaking Taiwanese who lived in Hong Kong, hit it off. “It was fate that the two of us ended up working together.”

…trading a well-paying job in Hong Kong for a start-up in Hangzhou was a big risk, especially since Clara20 was expecting their first child. So Clara suggested she travel with Joe back to Hangzhou. Jack remembers their visit. Clara told him she wanted to see Alibaba because her husband was crazy about it: “If I agree with him, then I am crazy. But if I don’t agree, he will hate me his whole life.”

“[t]o him, friends are as important as family. His definition of friends includes colleagues. When you try to compare [Jack] with, say, Steve Jobs, they are different people, different to the core.”

“I called him up and said, ‘Jack, I’m incorporating the company. Who are the shareholders?’ He faxed me a list of the names. My jaw dropped, because every single one of those kids in the apartment was on the list, as a shareholder. So from day one, he gave away quite a lot [of equity].”

MeetChina.com would raise more than $40 million in venture capital, significantly more than Alibaba. MeetChina would also excel at courting the support of governments on both sides of the Pacific. In Beijing, MeetChina.com’s founders claimed a special relationship26 with the powerful Ministry of Information Industry. At its April 1999 launch, the company promoted itself as “China’s first major government-sponsored business-to-business Internet portal.”

…having just escaped the clutches of government, Jack was convinced that his customer-first approach would prevail over other websites that focused foremost on wining and dining government officials.

Reluctant to cannibalize its profitable offline business, Global Sources was nervous about building a presence on the Web. Hinrichs was dismissive of B2B sites: “Suppliers and buyers were happy with the fax machine as that was cheap and simple to use.” But as Internet access spread, companies like Alibaba had an opportunity to pitch themselves as the new face of Asian business.

The news area of his china.com website carried the terrifying tagline “We do the surfing for you.” But Chinese users wanted access to the full Internet, something that local entrepreneurs such as the three portal pioneers were working hard to enable. Yip’s efforts failed to gain traction with Internet users in China. His “know who” approach, based on relationships, was beaten out by the “know how” smarts of China’s new generation of tech-savvy Internet entrepreneurs.

On July 13, 1999, China.com listed its shares on the Nasdaq. The stock ticker for the company was as catchy as its website: “CHINA.” Listing at $20, the stock closed that day at $67. What’s in a name? In the case of China.com, a company that people in China had hardly ever heard of, the answer was $84 million—the amount the company raised in the IPO, to which the company added a then-massive $400 million the following February in a secondary offering, valuing the company at $5 billion. The company raised so much money that it would be eleven years before it finally slipped into bankruptcy. The shock waves from China.com’s July 1999 IPO reverberated across the mainland’s nascent tech community. How had a guy with a website that almost no one had heard of raised so much money overnight? The IPO unleashed a frenzy of investments and deal making as entrepreneurs across the country concluded, “If China.com can do it, so can I!”

Founding Team

Ted had quoted Jack saying, “If you plan, you lose. If you don’t plan, you win.” After working in Beijing, the land of the five-year plan, I found Jack’s spontaneity refreshing.

Alibaba also had a strong component of female executives,3 adding to the achievement of women making up one third of its founding team—in contrast to many Silicon Valley–based companies.

Shirley had a strong preference in finding homegrown talent. “I really thought that to invest in China, you have to know the local market.”

Shirley felt more like a loan officer with the Asian Development Bank than an investment banker. She also had a hard time being taken seriously: “Even though we were at Goldman, people in China didn’t know who we were. They asked, ‘Are you Mrs. Goldman? Are you married to the owner of this business?’ They thought Goldman and Sachs were two people who owned the company, and I must be married to one of them.”

“I went up to the apartment, where they were all working twenty-four/seven… . The whole place stank. Jack’s ideas were not entirely original—they had been tried in other countries. But he was completely dedicated to making them work in China. I was moved by what I saw.”

Shirley negotiated to acquire a majority stake in Alibaba for $5 million.

It was Jack. He really wanted to do the deal but asked Shirley to leave him more equity. If Goldman took a controlling stake in his company, he explained, he couldn’t feel like a true entrepreneur. Jack told her how he’d put everything into the venture. “This is my life,” he said. Shirley replied, “What do you mean this is your life, you’ve only just started?” Jack explained, “But this is my third venture already.” Jack finally convinced her. The term sheet for the investment had been drawn up, but there were brackets around the numbers so it would be an easy change. Goldman would invest the $5 million for 500,000 shares, half the company, while retaining veto rights over key decisions. Just after she had agreed to the new terms, mid-conversation with Jack, she accidentally dropped her cell phone into the sea. Oops, she thought to herself. Well, I guess there goes $5 million.

…she encountered an unexpected snag. They pushed back. If Goldman invested the full $5 million, the fund would need to gain the approval of their investors. “Please get rid of some,” they told her. So, Shirley reduced Goldman’s stake to 33 percent. Now she quickly had to find investors for the other 17 percent.

Charles Zhang capturing the mood of the day: “This is a game of spending money and how fast you can spend money.” Even William Ding at NetEase relented, raising in two rounds $20 million from investors, including Goldman Sachs, but not without venting his frustration that now “people never ask you about your new products… . They only ask you, ‘When is your IPO?’”

Posting on the site, for buyers and sellers, was free—a central tenet of Jack’s approach throughout his career. His “if you build it, they will come” approach helped him pull clear of any rivals. If visitors to Alibaba.com were able to make new trade leads, he figured, they would demonstrate increasing loyalty, or “stickiness” to the website.

Alibaba benefited from Hangzhou’s relative isolation. There weren’t really any rivals to poach his employees. A few other technology firms were located in the town, such as UTStarcom or Eastcom, but in the dot-com craze these were fast becoming “old economy” ventures. Alibaba also benefited from Hangzhou’s distance from Shanghai—then some two hours away. For young talented engineers in Hangzhou who wanted to work for a fast-growing Internet venture, Alibaba was it. This helped keep costs low, too. For the price of one engineer in Beijing or Shanghai, Alibaba could hire two. The comparison with Silicon Valley was even more dramatic…

Jack liked the distance from Beijing: “Even though the infrastructure is not as good as in Shanghai, it’s better to be as far away from the central government as possible.”

When building up his team Jack preferred hiring people a notch or two below the top performers in their schools. The college elite, Jack explained, would easily get frustrated when they encountered the difficulties of the real world. For those who came aboard, working for Alibaba would be no picnic. The pay was low: The earliest hires earned barely $50 per month. They worked seven days a week, often sixteen hours a day. Jack even required them to find a place to live no more than ten minutes from the office so they wouldn’t waste precious time commuting.

Alibaba has been driven by a Silicon Valley–style work ethic, with every employee issued share options in the company, vesting over a four-year period. This is still a rarity in China…

…wedded to its “customer first” tenet, Alibaba resolved to respond to every email within two hours.

…others, such as MeetChina, were talking up their plans to expand into areas like market research, credit checks on suppliers, quality inspections, shipping, insurance, and payments. Jack argued this was premature: “Small- and medium-sized companies do not trust transactions online yet. And we believe the current banking system is good enough for small business. As long as our members feel it’s easy, they’d prefer to do their transactions offline.”

He particularly enjoyed talking about the reversal of fortune of being once rejected14 by Harvard but later being invited there to give a talk. “I did not get an education from Harvard … I went to Harvard to educate them.”

Jack has always been dismissive of business schools: “It is not necessary to study an MBA. Most MBA graduates are not useful… . Unless they come back from their MBA studies and forget what they’ve learned at school, then they will be useful. Because schools teach knowledge, while starting businesses requires wisdom. Wisdom is acquired through experience. Knowledge can be acquired through hard work.”

SoftBank Bet

Son grew up in circumstances even more difficult than Jack’s. Born on Japan’s southernmost main island of Kyushu, the Sons lived in a shack that didn’t even have an official address. His father was a pig farmer who brewed moonshine on the side. Son was bullied for being ethnically Korean and was forced to adopt the Japanese surname Yasumoto.

By the time he first met Jack, Son had become a billionaire many times over. He was known for making quick decisions. One of his best was the prescient investment he made in Yahoo in 1995.

Meeting Son, Jack knew he had found a kindred spirit. “We didn’t talk about revenues; we didn’t even talk about a business model… . We just talked about a shared vision. Both of us make quick decisions,” Jack recalled. “When I went to see Masayoshi Son, I didn’t even wear a suit that day… . After five or six minutes, he began to like me and I began to like him… . People around him have said that we are soul mates.”

“I listened to Mr. Ma’s speech for five minutes and decided on the spot that I was ready to invest in Alibaba,” Son recalled.

Son was asked what it was that prompted him to bet on Jack back in 2000: “It was the look in his eye, it was an ‘animal smell.’ … It was the same when we invested in Yahoo … when they were still only five to six people. I invested based on my sense of smell.”

“Masters of negotiation always listen, don’t talk. Those who talk a lot only have second-rate negotiation skills. A true master listens, and as soon as he moves his sword, you pretty much collapse.”

Upon their return to China, Jack wrote Son an email turning down the $40 million investment. Instead he offered to take in $20 million for 30 percent, adding, “If you agree, we will go ahead; if not, that’s it.” Jack later explained why he turned down the larger amount: “Why would I need to take so much money? I didn’t know how to use it, and there would definitely be problems.” Jack didn’t have to wait long for his reply from Son, which came in the form of two words: “Go ahead.”

“It’s not easy to shift from investor to operator and meanwhile still be a good investor. For me, I’m just an operator. I love to be an entrepreneur. I’m not a good investor.”

He’s crazy, but Ma’s also crazy. It’s very common for crazy people to like each other.”

Dotcom Bust

Jack proposed he run Alibaba’s R&D team from Fremont, California. John accepted. Jack, with a background as an English teacher, was keen to ensure that his own ignorance of technology was not replicated in Alibaba. “For a first-class company, we need first-class technology. When John comes, I can sleep soundly.”

“If you compare the other leading Internet companies in China,” he said, “almost all of them are copying business models already existing in the U.S.” Shirley Lin at Goldman Sachs had been attracted to Alibaba for its “localness.” John Wu saw the same merits: “There are a lot of Internet companies started by people who studied in the U.S. and came back to China… . Jack Ma is different. He has been in China all his life.”

There was no “Ministry of Internet,” but the Internet touched so many areas that it set off bitter turf battles between existing regulators. To demonstrate their relevance, China’s regulators regulate regularly…

I started to realize that, as the bankers began to invent stories of their closeness to the entrepreneur, the days of the Internet boom were numbered.

For Jack, the bursting of the bubble represented a great opportunity for Alibaba. “I made a call to our Hangzhou team and said, ‘Have you heard the exciting news about the Nasdaq?’ … I’d like to have had a bottle of champagne on hand,” adding, “This is healthy for the market, and it’s very healthy for companies like us.” He felt confident that now the IPO gate had closed, venture capitalists would stop funding Alibaba’s competitors. “In the next three months more than sixty percent of the Internet companies in China will close their doors,” he said, adding that Alibaba had spent only $5 million of the $25 million it had raised. “We haven’t touched our second-round funding. We have lots of gasoline in our tank.”

Jack was visiting Fremont at the time and had to step in personally to force better cooperation between the two teams so that the problem could be fixed. It was clear that splitting the technology team across the Pacific had failed. Alibaba started to move core functions back to Hangzhou. Alibaba was about to embark on a new, defensive strategy: “B2C,” or “Back to China.”

A former employee4 later summed up MeetChina’s experience as spending $30 million to “train Chinese enterprises to use the Internet.”

Jack had long been dismissive of MeetChina, and as it fell to the wayside he turned his guns on Global Sources, now Alibaba’s main rival, and its founder, Merle Hinrichs. Jack dismissed Global Sources as an “old economy” company that had misunderstood the nature of online trade: “They are a company pushing a publication.” Merle Hinrichs in turn dismissed Alibaba as “a mile wide and half an inch deep.”

Although he never referred to Hinrichs by name, Jack later told a story about a rival (who owned “a beautiful yacht”) who after paying a $50,000 fee to be a keynote speaker was incensed to find that Jack had been invited to give a keynote speech without having to pay a fee. The conference organizers explained to his rival, so Jack’s story goes, that “it is because you want to be a keynote speaker, but the audience wants Jack Ma to speak,” to which his rival vowed, “I will sail the yacht to Hong Kong and will invite all the keynote speakers and speakers of the conference to have a party on my yacht, but I have one condition: that Jack Ma is not allowed.” Merle Hinrichs’s office declined to comment on the spat, but the rivalry is something that Jack, the philosopher CEO, invested with a deeper meaning: “If you can’t tolerate your opponents, you will be definitely beaten by your opponent… . If you treat your opponents as enemies, you have already lost at the beginning of the game. If you hang your opponent as a target, and practice throwing darts at him every day, you are only able to fight this one enemy, not others… . Competition is the greatest joy. When you compete with others, and find that it brings you more and more agony, there must be something wrong with your competition strategy.”

“Once many well-known managers in America came to Alibaba to be vice presidents. Each of them had their own opinions… . It was like a zoo at the time. Some were good at talking while others were quiet. Therefore, we think the most important purpose of a rectification movement is to decide a shared purpose of Alibaba, and determine our value.”

Unlike the three portals, Joe also saw the advantages for Alibaba of not having had an IPO. “I knew all of this was a bubble, and even if we had gone public in 2000 we would have to live with the consequences, the delivery. You would have had to grow into your valuation; it was a quick-buck kind of thing.”

“At that time, my slogan was ‘Be the last man standing.’ Be the last person to fall down. Even on my knees, I had to be the last man collapsing. I also believed firmly at that time [that] if I had difficulties, there must be someone who had worse difficulties; if I had a hard time, my opponents had an even harder time. Those who can stand and manage will win eventually.”

eBay Battle

Jack started to look at a new direction for the company: targeting China’s consumer e-commerce market. Two models from the United States stood out: Amazon and eBay. Mimicking Amazon, 8848 had already folded.

To launch his consumer e-commerce attack, Jack opted to go the eBay route, setting up a contest with EachNet. But in Shao Yibo, known as Bo to his friends, Jack could very easily have met his match. Bo came from a modest background. His parents were teachers.

After winning more than a dozen high school mathematics competitions across the country, Bo became one of the first students from mainland China6 to be admitted directly to Harvard College on a full scholarship. After graduating he worked for two years at Boston Consulting Group before returning to Harvard and enrolling at the business school. While Jack had already settled on business-to-business e-commerce, Bo looked at a range of U.S. Internet businesses that might work in China and found that “The only business model that got me excited was eBay.” Before leaving Boston, Bo auctioned off his unwanted possessions—on eBay—and in June 1999, then twenty-six years old, returned to Shanghai to build the eBay of China.

Bo doesn’t suffer fools gladly. In 2000, onstage at an Internet conference in Shanghai at which we were both speakers, Bo demolished a rival who had just given a presentation stuffed with inflated website traffic and exaggerated transaction data. Bo calmly but methodically exposed all of the flaws in the other presenter’s math and logic, demolishing him so effectively that the audience almost felt sorry for the hapless competitor, who did not ride out the dot-com bust.

Could the eBay model really work in China? In the United States, eBay became popular for offering goods through online auctions, with the transactions often taking place between consumers themselves. In China, although people loved to haggle, the trading of secondhand goods, even offline, wasn’t common. Shoppers were just beginning to exercise their newfound freedoms. Few people had many possessions to sell.

Few people could pay online or access reliable delivery services. More fundamentally there was a complete absence of trust in online shopping. Banking regulations restricted the development of credit cards, which were only allowed in 1999, their use restricted to customers who kept money on deposit in their banks. Debit cards were beginning to gain popularity but each bank issued its own card and there was no central processing network for merchants. Forget about online payment—even buying offline with cards was a mess: Checkout counters at the time were a tangle of cables, connecting or powering a half-dozen individual point-of-sale (POS) machines. Online payment was years away from becoming widely accepted.

“In the U.S., if you place a bid, it’s a contract, and by law you need to fulfill that bid if you win the auction. That’s very clear. People would be afraid of getting sued if they did not abide by that contract. In China people don’t care. ‘I place a bid, I don’t want it anymore, tough luck.’”

…eBay had pioneered a system that allowed consumers to rate vendors, but in China unscrupulous vendors quickly figured out they could game the system by using masses of fake accounts to drive up their positive ratings…

Bo and his investors realized that their best shot at making EachNet the eBay of China was to sell out to eBay itself.

…eBay’s strategy was a mess from the start. In Japan, eBay charged commissions but its competitor Yahoo Japan did not. Credit cards were still a rarity in Japan but eBay required customers to use them to register on its site. eBay chose a Japanese CEO and a local partner (NEC) with little experience of the Internet, charting a rapid course for irrelevance in the country. By the summer of 2001 it had garnered a measly 3 percent of the market.

Whitman was earlier than many in Silicon Valley to recognize the importance of China: “With the demographics and incredible changes in China, our hypothesis is this could be one of the largest e-commerce markets in the world,” she told the media, projecting $16 billion in e-commerce revenue by 2006.

Things looked good at the outset. With EachNet, eBay gained a 90 percent share of China’s consumer e-commerce market. But within two years eBay was reduced to irrelevance in China and forced to beat another embarrassing retreat from Asia.

“eBay thought it was a done deal, but it turned out it was not.” eBay had a leading position at the outset, but the market was growing so fast that all that really mattered was grabbing the dominant share of the millions of new online shoppers. Incremental users, not incumbency, was the name of the game.

“I needed to stop eBay to protect Alibaba.” Although EachNet was targeting consumers, not the businesses served by Alibaba, Jack was concerned that some of the larger merchants active on EachNet could encroach on Alibaba’s turf: “At that time, there were only two companies in China that understood online marketplaces, eBay and Alibaba. I was particularly concerned that eBay’s power sellers would grow their business to compete in the B2B space.”

The B2B business wasn’t yet profitable, and the VC market was closed for the time being. Could the company really afford to open a new front when they were still fighting the B2B battle? Was Jack just being paranoid? CTO John Wu adamantly opposed the idea, visiting Jack the night before the new project was kicked off. John warned Jack that the move would harm Alibaba: “How on earth could you fight against eBay?” Jack replied that the market was still open: “There are one hundred million Internet users today, but only five million people are doing online shopping.” Jack’s ambitious plans for Alibaba also gave him a different perspective: “eBay wants to buy the Chinese market, but we want to create China’s Internet trading market.”

Jack was adamant that the threat from eBay was real: “In China, there are so many small businesses that people don’t make a clear distinction between business and consumer. Small business and consumer behavior are very similar. One person makes the decisions for the whole organization.” Jack also understood the temptation for eBay, later reflecting, “We launched Taobao not to make money, but because in the U.S. eBay gets a lot of its revenue from small businesses. We knew that someday eBay would come in our direction.”

The project was kept highly confidential. Few within Alibaba were even aware that the idea of targeting consumers in China had been contemplated, let alone that a team had actually been formed to code a new website. Secrecy, and some useful Alibaba folklore, was achieved by sequestering a handful of employees, including Alibaba cofounder Toto Sun, in the original Lakeside apartment where Alibaba had been founded.

We talked to them one by one: ‘The company has decided to send you to do a project, but you are required to leave your home, and you must not tell your parents or your boyfriend or your girlfriend. Do you agree?’” Holed up in the small apartment, the team got to work.

Once the project became public knowledge, he wanted to ensure the fight was seen as a David versus Goliath struggle. One team member18 recalled the mood: “We were just a group of country bumpkins, and our competitor was eBay.”

Taobao’s association with Alibaba was kept so well hidden that a number of Alibaba employees even voiced concerns to management about a potential new rival on the scene.

Finally, on July 10, 2003, Alibaba announced that Taobao was part of the company. “There was a resounding cheer within the company,” Jack recalled.

…eBay signed exclusive advertising contracts to promote its site on all the major China Internet portals, preventing them from displaying ads promoting rival sites. This forced Alibaba to adopt a series of guerrilla marketing techniques, including reaching out to hundreds of small but fast-growing sites and online communities that eBay had deemed unimportant.

Jack took a move from Yahoo Japan’s playbook. In 1999, when it launched its e-commerce business, CEO Masahiro Inoue asked his 120 employees to list items for sale on his new site to make it look active and popular. Four years later in China, Jack did the same: “We had all together seven, eight people [in the Taobao team]… . Everyone had to find four items. I rummaged through my chests and cupboards. I barely had anything at home… . We pooled about thirty items, and I bought yours and you bought mine, that’s how it started… . I even listed my watch online.”

Shirley Lin had left the bank in May 2003. With no one to oversee the stake, Goldman had written down the value of its stake to zero. The following year, just before the new investment led by SoftBank, Goldman sold off its entire 33 percent stake. The bank had paid $3.3 million for it in 1999 and sold it for more than seven times that amount five years later. This seemed like a good result at the time…

The stake the investment bank had paid $3.3 million for in 1999 would rise in value to more than $12.5 billion at the IPO had they held on to it.

When asked by BusinessWeek in the spring of 2004 about rivals in China, eBay’s senior vice president Bill Cobb mentioned only one: 1Pai, a joint venture between Yahoo and Sina. Jack reveled in being ignored. “During the first year, eBay didn’t consider us their rival. They didn’t even think that we could be their rival. They thought, We haven’t even heard about Alibaba. Such a strange name. Chinese all know what tao bao means, foreigners don’t.”

…corporate bureaucracy, worsened by the extended and dysfunctional reporting lines all the way to San Jose, were to smother whatever embers of entrepreneurialism still burned within EachNet in Shanghai. eBay’s China adventure, lasting from 2003 to 2006, is today a case study in how not to go about managing a business in a distant market.

…hikes in commissions sparked protests from its virtual store merchants, tens of thousands clubbing together to denounce “FeeBay” or “GreedBay.”

…before the company had even secured its position there, a “we’re winning in China” attitude, at both eBay and its newly acquired business, PayPal, ensured a form of collective denial even when confronted with signs that things were not going to plan.

A “leave it to the experts” attitude demoralized the original EachNet team in Shanghai, as eBay executives were parachuted in from headquarters in San Jose or other parts of the eBay empire. No matter how skilled the new arrivals, most spoke no Chinese. They faced a steep learning curve to understand the local market. Key EachNet team members started to leave, their exit interviews revealing concerns that San Jose no longer involved them in key decisions.

…eBay moved quickly to align the EachNet site with its global site, revamping how products were categorized and altering the design and functionality of the website. This not only confused customers, but also alienated a number of important merchants who saw their previously valuable China account names had been deleted.

…the Chinese website lacked a customer service telephone number. eBay’s China site, modeled closely on eBay in the States, looked foreign to local users, who found it “empty” when compared to local sites. In website design, culture matters. In the West, websites like Google had become popular for their clean lines and uncluttered “negative space.” But to the mass market of Chinese Web users, accustomed to pop-ups and floating banner ads, they seemed static and dull.

From its outset Taobao has been a website built by Chinese for Chinese. And it worked. It’s not just the graphics that helped Taobao connect with consumers. Taobao structured its website like a local bazaar, even featuring innovative ideas such as allowing male or female shoppers to click on a button to display products most suited to their interests.

…experience in the United States and other Western markets proved to be of little use. “E-commerce in China is very strange,” the rival e-commerce founder continued. “It started with C2C (consumer-to-consumer) and with nonstandardized products. This was unlike Amazon, unlike the conventional wisdom where you need to start with standardized products, like books.

By starting with C2C, it made the price factor very appealing. Individuals23 can be happy to make even five mao (less than 1 U.S. cent) on a sale.”

Taobao outsmarted eBay by having a better understanding of the country’s merchants, for whom membership has been free of charge from the outset. Just as free listings was a core principle for the B2B Alibaba.com, it became a key competitive weapon for Taobao.com, too. Buyers pay nothing to register or transact; sellers pay nothing to register, list their products, or sell online. EachNet had started out with free listings, but faced with spiraling costs in August 2001, it started to charge listing fees to sellers, adding commissions on all transactions the following year. These resulted in a sharp reduction in the number of auctions on the site, but given the state of the VC markets, EachNet management felt they had no choice. The decision to start charging fees, core to eBay’s model, ironically fueled its interest in buying EachNet. But once eBay was in charge in China, it pushed the fee culture much more aggressively than Bo and his team.

…attracting merchants, who in China are especially allergic to paying fees, was more important than attracting shoppers. Taobao’s popularity was fueled by a “virtuous circle”: More merchants and product listings meant more shoppers were attracted to the site, which meant more merchants and products, etc.

…offering free services ensured that Taobao was not distracted by a persistent problem that plagued EachNet from the beginning: worrying about how to prevent vendors and consumers from figuring out ways to use the website simply as a place to connect with one another, then conducting their transactions offline or through other means. As Taobao charged no fees, they had no incentive to police this behavior. On the contrary, Taobao actively encouraged communications between the transacting parties by setting up bulletin boards and, beginning in June 2004, launching an embedded, proprietary chat window…

Buyers on the site use the service to haggle with sellers, which resonates well with the vibrant marketplace culture in China. Communication is a key underpinning of commerce, but eBay users struggled to communicate with vendors.

…the effects of the government’s long-standing efforts to build and extend the “Great Firewall of China” often means websites hosted overseas are much slower to load than those hosted in China itself. All Web traffic accessing sites hosted outside the mainland has to go through a series of chokepoints where the request is screened. This is to ensure that a foreign website does not display material the Chinese government deems “sensitive,” including the “three T’s” (Tibet, Taiwan, and Tiananmen Square).

…the Great Firewall can often ensnare or seemingly block even anodyne activities or requests. For example, once eBay had moved its servers outside China, a user who happened to have a “64” or an “89” as part of his or her username might see their account blocked or be unable to access the Internet—the reason being that both numbers automatically trigger the censors in China as part of the effort to block any mentions of the events in Tiananmen Square on June 4, 1989 (6/4/89).

…after a series of site outages that had damaged its reputation at home, eBay had become obsessed with the stability of its platform. eBay pushed ahead with the China migration anyway. The attraction of a unified worldwide site with a consistent set of features was just too hard to resist. Some senior executives within eBay already knew that migration would be a mistake—the company had already seen the damaging impact in Taiwan—but bizarrely eBay managers in Taipei were blocked by migration-obsessed managers in San Jose from sharing their experience with the team in Shanghai. As predicted, as soon as the China site was migrated and integrated into the global site, the impact on EachNet’s traffic was disastrous: It dropped off precipitously. Customers in China started to experience long delays and time-outs on the site. Why would they bother to wait for eBay in China—a site that charged fees—when Taobao was available instantly and for free? Migration was also costly for eBay because the company typically carried out maintenance of its servers every Thursday at midnight on the West Coast, ahead of the peak traffic of Friday. But this meant the disruption happened at the peak of China traffic, fifteen hours ahead of San…

…all modification requests from engineers in China were stacked up in what the company called a “train seat” system. Departments would submit their requests for changes, and like an assembly-line process these were then lined up and consolidated into a “train of needs.” Changing one word on…

…eBay had an effective monopoly in the States, and this bred complacency. Second, despite its Silicon Valley aura, eBay was never very strong at technology. One eBay executive famously once said, in public, “Even a monkey could run this business.” After the…

…just five months after the launch of Taobao, Alibaba rolled out Alipay, its own payment solution. Although it was rudimentary, reminiscent of the early days of Alibaba’s customer log three years earlier, it proved an instant hit with customers.

Alan Tien, a Stanford-educated engineer working on PayPal’s China efforts since 2004, the AFT/PayPal infighting and the disastrous migration of servers to the United States were the beginning of the end for eBay in China. In a series of internal memos to the head office, he tried to raise attention to the seriousness of the threat from Alibaba and Alipay. In January 2005 he wrote, “Current situation isn’t good. Momentum has shifted away from us. Must execute on get well plan to stay in the fight,” adding, “We cannot afford to deceive ourselves anymore.” eBay just wouldn’t take Alibaba seriously, questioning the reliability of mounting data that showed Taobao was selling more goods than eBay in China. Taobao now had more listings, but eBay convinced itself that because those listings were free they must be inferior. Jack vigorously rejected that thesis: “The survival and growth of Taobao are not because of free service. 1Pai [the joint venture of Yahoo and Sina] is also free but it is nowhere close to Taobao. Taobao is more eBay than eBay China [because] Taobao pays more attention to user experiences.” Sensing it was game over, Alan Tien concluded, “Taobao’s product development cycle is much faster. Jack Ma’s right. We cannot fight on his terms.”

This was music to Jack’s ears. He joked to Forbes magazine that eBay had “deep pockets, but we will cut a hole in their pocket.” Talking to Chinese media, he ridiculed the new investment: “When I heard that eBay would spend one hundred million dollars to break into this market, I didn’t think they had any technical skills. If you use money to solve problems, why on earth would the world need businessmen anymore. Businessmen understand how to use the smallest resources to expand.” Even with SoftBank’s backing, Jack didn’t have the resources that eBay could bring to China if it wanted. Dismissing eBay’s approach, he added, “Some say that the power of capital is enormous. Capital does have its power. But the real power is the power of people controlling the capital. People’s power is enormous. Businessmen’s power is inexhaustible.” Having earlier ignored them, eBay was now paying a lot of attention to Alibaba. Jack later commented that he saw this as a decisive moment: “The moment she [Meg Whitman] wanted to use money as her strategy we knew she would lose. First they didn’t consider us as a rival. Then they treated us too seriously as a rival. Neither of them was the right [strategy]. When we say, ‘If you have no enemy in your heart, you will be invincible in the world,’ we mean you have different strategies and tactics. In terms of strategies, you must pay attention—whenever there is a rival emerging you have to study whether it could become your rival, and if so what to do. Whatever is stronger than you, you have to learn not to hate it… . When you treat it too seriously as a rival, and intend to kill it, your techniques are completely exposed… . Hatred only makes you a shortsighted person.”

“I think it’s absolutely frightening that eBay doesn’t take these threats more seriously… . Taobao/Alipay has grabbed the mantle as the auctions/payments leader in China. We are caught on our heels every time. Yet instead of developing a leapfrog, or even a flanking, strategy we try to match feature-for-feature, six to nine months later.”

Instead of picking AFT or PayPal, eBay had decided to go with both—meaning customers in China would have to navigate not one but two websites when buying online. Not surprisingly, running two payment systems in parallel in China proved to be a disaster. Customer complaints flooded in…

…they initiated a new project to launch the best e-commerce site in China from scratch. They called the initiative de nuevo (which means “from scratch” or “anew” in Spanish). After all the talk about being more sensitive to local culture in China, adopting a Spanish name for the project hardly inspired confidence.

Jack didn’t pull any punches: “In China, they’re gone… . They have made so many mistakes in China—we’re lucky.”

Yahoo & China

Son and the two founders hit it off. Son agreed to invest $2 million for a 5 percent stake in Yahoo. In March, Son doubled down. In a gutsy move, Son agreed to pay more than $100 million to top up his stake, ending up with over 41 percent of Yahoo, more than Jerry and David, who together held just under 35 percent. Jerry recalled, “Most of us thought he was crazy… . Putting $100 million into a start-up in March 1996 was very aggressive, but I don’t think it was luck.”

China presented a quandary: how to deal with a government intent on control at all costs. In 1996, speaking in Singapore, Jerry had shared his views: “Why the Internet has grown so fast is because it is not regulated.” There were limits to how much Jerry’s Chinese ethnicity would translate into an inside track for Yahoo in China: “The First Amendment safeguards freedom of speech. I’m more American in terms of my upbringing now.”

Yahoo was in touch with the authorities in China but “to be honest, the policy is not very clear as to what is politically sensitive,” adding that they had been informed that “as long as we’re just listing content and not hosting it then we can just go right ahead.”

How could Yahoo comfortably serve users both in Taiwan and the mainland? Jerry Yang admitted it was a challenge: “We may or may not be able to get around it, because they [the Chinese government] can shut us off… . The point there is to take a very neutral stand. I don’t know if we can get away with it. We are already running into problems.”

The announcement from Wu Jichuan, the powerful minister of information industry, appeared to ban all foreign investment in the Internet: “Whether or not it is an ICP [Internet content provider] or ISP [Internet service provider], it is about value-added services. In China, the service area is not open.” Yet, in an illustration of the gray area in which the Internet was operating, Minister Wu’s own deputy5 was onstage with Jerry Yang at the launch of Yahoo China, her presence as good a sign as any that Wu had given his tacit blessing to the venture. But an MII official described Yahoo’s business as still being offshore, with Founder merely acting as a trustee: “No company was set up inside China’s border.” This admission revealed that, as with many deals in China, the negotiations only began once an agreement had been signed.

Yahoo’s partnership with Founder in China ended up having little consequence. Founder was not the gatekeeper to China that Jerry Yang had hoped. The company’s links to the Chinese government, which Yahoo had looked to as a shield from regulatory uncertainty, also prevented an entrepreneurial culture from ever taking root. Yahoo China’s content was boring, and Chinese Internet users noticed, being drawn instead to the more compelling offerings…

Pony named his company Tencent because the cost of sending a mobile text message at the time was ten Chinese cents (about 1.2 U.S. cents).

After June 4, 1989, he was keen to head overseas: “China was a depressing place… . I thought there was no hope.”

“Once you find out what you should do, then you need to stay focused. That’s what we did during the difficult times back in year 2000, 2001, 2002. Many people think search was a done deal. It’s boring. Everyone has figured that out in terms of technology and product, but we thought we could do a better job. We resisted all kinds of temptations from being a portal, being an SMS player, online games, developing all kinds of things that could make money in the short term. We really, really focused on Chinese search. That’s how we got here.” In 2002, Baidu’s Chinese index of searchable sites was 50 percent greater than its nearest rival’s. By 2003 it had become the number one search engine in China.

Yahoo Deal

Yahoo had struck out twice in China: first Founder, then 3721. After years of frustration, Jerry Yang made a bold decision. He handed Jack $1 billion, and the keys to Yahoo China’s business, in exchange for a 40 percent stake in Alibaba.

…after a thorough screening of which company might be the answer, Alibaba had not been Yahoo’s first choice. Sina was the most logical target.

Sina’s executives and investors were ready to pop the champagne corks when Sina CEO Wang Yan went to meet China’s propaganda chief, Li Changchun.21 Li rejected the deal. Sina would not be allowed to align itself with a foreign strategic investor.

Hurst called me up and said, ‘I just met Jerry and I think I can finally get rid of my stock. We have a deal.’ He was really happy. But, of course, as you know ‘the forces above’ were uncomfortable.”

“At the time this seemed like a big leap of faith: More than half the value of the venture—more than two billion dollars—was attributed to Taobao and Alipay, both of which were losing money.” The decision to hand over Yahoo’s China business was a gutsy move, as Decker recalled, “We realized we needed to be willing to give up all operating control. Practically speaking, this meant forgoing our previous desire to own more than fifty percent of the local operations. It also meant we would leave all employee issues to our partner and allow our code to be used by people with no previous connection to the company. Scary.”

“The balance sheet at Yahoo was around $3 billion, so it wasn’t as though there were huge amounts of cash at Yahoo.” Putting a billion dollars into Alibaba, he added “probably raised a lot of eyebrows.” Although Yahoo conducted extensive analysis on the underlying business, Jack’s charisma and vision for Alibaba also played an important role, as Jerry recalled, “It was probably in retrospect a big bet, but if you met Jack, and having got to know him and seeing what his vision was, you certainly thought it was worth it.

With the deal, the New York Times crowned Jack as “China’s New Internet King.” Jack couldn’t resist taking yet another shot at eBay: “Thank you, eBay… . You made all of this possible.”

The final ownership of Alibaba would be Yahoo, 40 percent; SoftBank, 30 percent; and existing management, 30 percent.

A decade later he again looked back on the deal: “I asked for one billion dollars, and they gave us one billion dollars. I thought the war between Taobao and eBay would last for a long time, so we needed enough cash to fight.” In the end, $1 billion was enough to scare off eBay.27 “We asked a lot. But we did not know when we got the money eBay would run away. So the money [wasn’t used].” Jack said he would do the Yahoo deal again but “in a better, smarter way,” adding, “Nobody knows the future. You can only create the future.”

Alibaba.com IPO

In May 2007, Alibaba changed the name of the business from Yahoo China to China Yahoo, an apt reflection of who was in charge. Alibaba did invest heavily in the Yahoo China brand at first, pouring in 30 million yuan (over $4 million) to make TV ads to promote Yahoo Search.

After the deal, Jack became exasperated at how slow Yahoo was in delivering on the search and other technology it had committed to provide. The pressure was so great that in 2006 Jack made the decision to remodel Yahoo’s home page in the uncluttered, clean style popularized by Google, which Baidu had already mimicked. But Jerry Yang was very unhappy with the move and asked Jack to change the China Yahoo site back to its original portal look and feel, which he did. Not surprisingly, Yahoo’s users were confused by the changes…

…for companies dealing with Internet content, China was a highly risky market, as Google would later experience itself before it closed up most of its operations in 2010.

In March 2010, Google stopped censoring search results in China, rerouting traffic to its site in Hong Kong—the other side of the “Great Firewall of China”—and signaling its exit from the market.

One analyst slammed the psychology of Hong Kong investors who “trade stocks like they’re playing at the baccarat table.” That was an accurate description of many of the individuals who lined up to buy the shares, such as sixty-five-year-old Lai Ah-yung, who told the Associated Press: “People said buy, so I buy.”

The schedule was so packed that David Wei had no time to eat. Jack unexpectedly ducked out of their last investor meeting, calling David soon after to invite him to an airport restaurant where he’d ordered all the noodle dishes on the menu.

The offering of Alibaba.com, listing under the lucky number stock ticker “1688,” sold 19 percent of the company for $1.7 billion. It was the largest Internet IPO since Google in 2004, and valued7 the company at almost $9 billion.

The buzz around Alibaba was focused on Jack and the other high-growth businesses like Taobao and Alipay. But these assets weren’t part of the IPO; in fact most of the shares released in the IPO were from Alibaba.com’s parent, Alibaba Group, which needed to raise cash to support them.

…the 2007 IPO gave him two insights into Jack’s approach. The first was something that Jack had often told him: “Raise money when we don’t need it. When you need it don’t go out to raise money, it’s too late.” The second was that the IPO allowed Alibaba to take care of its employees: “Jack understands people more than any business. He knows business well, but if you ask me the three skills Jack has amongst people, business, or IT? IT is the worst. Business second. First is people.” Alibaba’s B2B business was eight years old. Jack knew that he needed to give his employees an opportunity to cash in their shares. David remembers Jack telling his employees, “You need to buy a house. You need to buy a car. You can’t wait to sell the stock to get married, to have a baby. Selling the stock doesn’t mean you don’t like the business. I encourage you to sell some, to build your life, to give a reward to your family. Because you have been working too hard, you’ve been away from your family. They need some reward.”

Crisis & Pivot

Only weeks after Beijing had staged the Olympic Games, it was facing a crisis as global trade volumes plummeted by 40 percent. Alibaba’s B2B business was vulnerable. It had an impressive sounding 25 million registered users, but only a handful paid to use the website. Just 22,000 subscribers of its Gold Supplier service accounted for 70 percent of total revenues.9 As CEO of Alibaba.com, David Wei was expecting the falling share price would trigger a lot of pressure from Jack. But, he remembers, “Jack never picked up the phone or came to see me about the share price. Never once. He never talked about profit growth.” But there was one occasion when he did experience Jack’s wrath. “The only time he ever called me after midnight was when our team changed the website a little bit. He was shouting, the only time he ever shouted at me. I had never heard him so angry. ‘Are you crazy?’” Jack wasn’t yelling at him about the stock price. He was angry about downgrading in prominence a long-standing discussion forum set up for traders to chat with one another. Jack demanded David move it back the next day. David pushed back, saying that Alibaba needed to focus on transactions, not discussions, adding that the space on the home page was very valuable for advertisers. But Jack was emphatic: “We are a B2B marketplace. Nobody comes to trade every day. We are more important a community than our marketplace. The same for Taobao; nobody comes to shop every day. If you downgrade this forum you are focusing too much on profits. Switch it back to a non-revenue-generating entry point to the business community.”

Jack realized that the downturn gave him a way to increase the loyalty of his paying customers. He initiated a dramatic reduction in the cost of their subscriptions, telling David, “Let’s be responsible to our customers. They are paying fifty thousand yuan; we can give them thirty thousand yuan back.” “The stock market went crazy,” David recalled, as investors called him up to complain, “What? You’re losing sixty percent of your revenue.” But there was a method to Jack’s madness. Jack was serious about putting the customer first…

“Revenues didn’t drop at all. Customer volume growth offset the price drop completely. And after the financial crisis was over we didn’t raise the prices. We created an opportunity to sell them more value-added services, more of an Internet-style model. Jack actually told…

…the collapse in their traditional export markets forced China’s factory owners to prioritize consumers at home instead. Increasingly goods “Made in China” for export would be “Sold in China” too. Taobao…

By the end of 2009, Taobao’s market share had climbed to nearly 80 percent. Finally, Taobao started to generate meaningful revenues, selling merchants advertising space10 to help them promote their…

Alibaba also launched its new cloud computing…

Alipay Transfer

Microsoft made an unsolicited offer to buy Yahoo for $44.6 billion.13 If the deal went through, Jack realized, Microsoft would become his biggest shareholder. Although he had a good relationship with Bill Gates, Jack realized that in Microsoft he would have a very different partner to contend with, one known to get much more involved in the companies it invested in than Yahoo did. There was another risk: The Chinese government had contacted Alibaba for comment about the possible change in ownership.

When the global financial crisis hit a few months later, Jerry’s decision to reject the Microsoft bid looked like the height of folly. Investors called for his head. In November 17, 2008, Jerry announced he was stepping down as CEO…

The fraud, in which an estimated one hundred Alibaba sales personnel were implicated, involved 2,300 merchant storefronts19 who were certified as trusted suppliers by the corrupt employees. The merchants then took in $2 million in payments for orders of computers and other goods on alibaba.com—bestselling items that were offered at very low prices—that they never shipped to the customers overseas. Alibaba outed itself, sending its shares down by 8 percent, but Jack was most angry about the damage it had done to consumers trust. The salespeople were fired, and the accounts of more than 1,200 paying members were terminated. Although an investigation cleared the senior management of any wrongdoing, because the fraud happened on their watch Jack asked for the resignation of CEO David Wei and the company’s COO.20 Jack told the media that Alibaba is “probably the only company in China” where senior management takes responsibility, which prompted Forbes to describe Jack as “something of a rare species” in a nation “steeped in corruption.” When some accused him that the dismissal of the senior executives was a publicity stunt, Jack responded angrily, “I’m not the guy who created the cancer, I’m the guy curing it!” David Wei didn’t oppose the move, crediting it as helping spur a similar crackdown within Taobao shortly after. “People said, ‘Wow it’s that serious?’” he told me. “And this triggered other cleanups within the group. It started within B2B, then to consumers. I feel very proud of my resignation. Without cleaning up the business, the IPO in 2014 would not have been so successful.”

As it was so integral to Alibaba, it was hard to put a value on the business, but one analyst estimated that Alipay was worth $1 billion. But on May 10, 2011, it emerged that the Alipay asset had actually been transferred out of Alibaba Group the previous year. The business was now owned by a company, personally controlled by Jack, called Zhejiang Alibaba E-Commerce Company Limited. Jack owned 80 percent of the company, and Alibaba cofounder Simon Xie (Xie Shihuang) held the rest. Investors first got wind of the transfer in a paragraph buried on page eight of the notes to Yahoo’s quarterly earnings report.

A business potentially worth $1 billion just went missing? Investors were alarmed.

In Yahoo’s 2005 investment agreement, any transfer of assets or subsidiaries out of Alibaba Group that were worth more than $10 million required the approval of the company’s board of directors or shareholders.

Alibaba also released a statement confirming the transfer and explaining that it was made to comply with regulations from the People’s Bank of China…

…the PBOC had issued its “administrative measures for the payment services provided by nonfinancial institutions,” which required, Alibaba explained, that “absolute controlling stakes of non-financial institutions must be domestically held.”

Alibaba insisted that Yahoo and SoftBank had been told in a July 2009 board meeting that “majority shareholding in Alipay had been transferred21 into Chinese ownership.” The Chinese business publication Caixin confirmed, after an investigation, that Alipay was sold in two transactions, in June 2009 and August 2010, to Zhejiang Alibaba E-Commerce Company Limited, the firm controlled by Jack. The total price paid was 330 million yuan ($51 million).

Critics of the VIE structure, and of investing in Chinese companies in general, were having a field day. But did Alibaba in fact, as it was arguing, have no choice but to make the transfer?

Masayoshi Son, however, was incensed. What was Jack thinking? To figure out what was going on, Jerry offered to fly to Beijing. Meeting there with a senior official at the PBOC, he was told that it was best he just “accept the situation.” When he pressed for an explanation, he was simply informed that the matter was “out of their hands.”

“PBOC were pissed. But Jack was very skilled at playing off different factions. No one could do anything about it because PBOC’s rules were so vague to start with.”

A number of domestic commentators were even harsher than foreign critics. In their eyes, the dispute threatened the interests of other entrepreneurs in China by undermining confidence in the VIE structure, and foreign investment in the country in general. After first criticizing the government for the vague and lengthy approval process for licensing payment providers, respected local magazine Caixin slammed Jack personally for “violating contract principles that support the market economy.” Jack had tarnished his international business reputation and diminished Alibaba’s long-term growth prospects, Caixin argued, by transferring an asset “to a concern under his name, for a price too low to be fair.”

…four years after the controversy, told me that even if that was the motivation, Jack was justified in doing it: “I perfectly understand it. Is it right? If I were Jack, I would have done the same thing. If he hadn’t resolved the incentive problem, Alibaba wouldn’t be today’s Alibaba.”

Finally, on July 29, an agreement was reached. The transfer of the assets would stand. But Yahoo, benefiting through its continued stake, would receive compensation of $2 to $6 billion from the proceeds of any future IPO of Alipay. Alibaba, Yahoo, and SoftBank were ready to put the dispute behind them. But investors in Yahoo were underwhelmed, particularly by the cap of $6 billion,26 and its shares fell 2.6 percent on the news. But in a call explaining the agreement to investors Joe Tsai pushed back vigorously, saying that the transfer was made to stay in line with government regulations: “If you own a hundred percent of the business that cannot operate, you own a hundred percent of zero.”

IPO Governance

Speaking in English, Jack started by acknowledging the elephant in the room—the company’s relationship with Yahoo. He said he was very tired from the events of the past few months, then, raising his right hand and looking at the audience, he said, “I still don’t know what the VIE is, right?” Of course it was obvious Jack knew all about the investment structure—it had been center stage of the Alipay controversy—but feigning ignorance was his way of winning over the crowd, even if the lawyers in the audience couldn’t contain their incredulity.

“tangible” risks, such as the company’s dependence on Alipay, a business it no longer owned. Jack addressed the issue of the Alipay transfer head-on, saying he had been given no choice. The decision, he said, was one of the hardest of his life, but one in retrospect he would make again.

The risk factors also included a discussion of the controversial but enduring VIE investment structure. But the offering had added, on top of the VIE, another layer of complexity for investors: the “Alibaba Partnership.” The partnership4 comprised thirty individuals, mostly5 members of Alibaba’s management team. Six,6 plus Joe Tsai, were original cofounders of Alibaba. The explicit goal of the partnership is to help Alibaba’s senior managers “collaborate and override bureaucracy and hierarchy,” to ensure “excellence, innovation, and sustainability.” In December 2015, Alibaba appointed four new partnering members, taking the total to thirty-four.7 Of course the implicit reason for the partnership is control. Even after becoming a public company, Alibaba wanted to ensure that the founders remained masters of their own destiny.

…the Hong Kong Stock Exchange and its regulator8 to turn down Alibaba’s application for an IPO in the territory. Hong Kong was concerned that allowing the structure would signal a weakening of its commitment to the “one shareholder, one vote” system. Alibaba countered that the partnership could not be compared to the narrow concentration of control of the “dual-class” or “high vote” share structures used by tech company peers in the United States like Google and Facebook. Instead it was proposing a new, more sophisticated form of corporate governance that gave each member of a larger group of managers a vote. But the distinction failed to convince the Hong Kong authorities, and Alibaba opted for an IPO on the New York Stock Exchange instead. Saying “no” to Alibaba was costly for Hong Kong, depriving the city’s bankers and lawyers of a huge windfall. Joe Tsai didn’t pull his punches: “The question Hong Kong must address is whether it is ready to look forward as the rest of the world passes it by.” So, Alibaba found itself in New York. Selling 12 percent of the company, it raised $25 billion, the largest IPO in history.

Newly appointed CEO Daniel Zhang reminded the company’s employees, “Our values do not waver with the fluctuations in stock price,” and that they were not just fighting a battle, but were “in it for 102 years to win the war.”

Regulators & State

Remarkably, both the SAIC’s report and Alibaba’s response to it were on full view to the public. In China, discussions between the government and companies are typically conducted in private, as the opacity of PBOC’s intentions and interactions during the Alipay crisis had already illustrated. But here was one of China’s largest companies directly criticizing the government. More spectacularly, a posting by a Taobao customer service representative on the company’s official social media14 account even named the individual SAIC official15 involved: “Director Liu Hongliang! You’re breaking the rules, stop being a crooked referee!” The post continued, “We are willing to accept your God-like existence, but cannot agree with the double standards used in various sampling procedures and your irrational logic.”

Finally, the mudslinging had become too much. SAIC deleted the report from its website. Jack flew to Beijing to meet with the regulator’s head, Zhang Mao.18 There the two men, in public at least, buried the hatchet. Jack promised to “actively cooperate with the government and devote more technology and capital” to rooting out the sale of fake goods. Zhang Mao praised Alibaba for its efforts to safeguard consumer interests and said SAIC would look to develop new tools to oversee the e-commerce sector.

…one former senior Alibaba executive told me the company would have been better off not responding to the SAIC announcement in the first place: “Alibaba is still relatively young, but to some they’ve become such a big monster. Even the government doesn’t know how to manage them. In the future, there will be a lot of conflicts. That’s natural. Because this government has never had to deal with a company this influential.” For Alibaba, and any private company, the Chinese government itself is a multiheaded hydra of agencies, often competing with one another for influence, licensing fees, or other forms of rent to justify their existence, often lacking sufficient central government support to finance their operations. These agencies exist at both the national level and at multiple levels below. Some are replicated all the way down through the provinces to municipalities and finally to the level of rural counties.

Jack revealed19 that Alibaba had hosted in 2014 alone over forty-four thousand visits from various government delegations in China.

Jack once explained to a friend that he was never really sure of his schedule from one day to the next. If the party secretary of Zhejiang, for example, requested he travel with him as part of a business delegation to Taiwan, then he would have little choice but to make the trip.

A typical feature in the lobby of any large company in China, whether state or privately owned, is a wall of photos memorializing meetings between the boss and various government dignitaries. Alibaba is no exception. At the entrance to its VIP visitor suite there is a photo20 from July 2007 of Jack welcoming Xi Jinping to Alibaba. Xi today of course is president of China but back then he was Communist Party secretary of Shanghai.21 Entrepreneurs in China can never eliminate the risk for their business of arbitrary regulations or actions. Instead they can try to shield their companies by helping the government do its job.

Trust Issues

“Every consumer that buys one counterfeit on our site, we lose five customers. We are also victims of [counterfeits]. We hate this thing… . We have been fighting for years, but we are fighting human nature, human instinct.”

By one estimate, four click farms27 interviewed each claim to control at least five million Taobao buyer accounts. These firms no doubt exaggerate their influence—to boost their appeal to potential customers—but collectively the click farm companies claim that in 2015 they accounted for double digit percentages of the total merchandise volume of Singles’ Day purchases in 2015.

Rivals & Ecosystem

JD is a threat to Alibaba in part because it represents a competition of ideas. Unlike Alibaba, JD is more closely modeled on Amazon, purchasing and selling its own inventory. In addition, while Alibaba has kept one step removed, JD owns and operates its own logistics network. While Alibaba argues that JD will never rival it in scale due to the costs of owning inventory and shifting physical goods, JD counters that its model ensures a higher quality of product and speed of delivery to its customers. JD clearly riles Jack. In early 2015 he turned his guns on the founder of JD, Richard Liu. Although he spoke the words to a friend in what he thought was confidence, Jack’s criticism of the company was posted on social media: “JD.com will eventually be a tragedy and this is a tragedy I have warned everyone about from day one… . So I’ve told everyone in the company, don’t go near JD.com.”

The power of Tencent’s ability to innovate was demonstrated most dramatically in 2014 with WeChat’s Lunar New Year “red packet” (hong bao) campaign. In just two days, WeChat users sent out more than 20 million virtual envelopes38 of cash. Jack even compared the psychological impact of WeChat’s campaign on Alibaba to Pearl Harbor. Alibaba fought back in 2015 but despite doling out $100 million in cash-and-coupon promotions, it was able to rack up only a quarter of the red packets sent by WeChat users. WeChat exposed a critical gap in Alibaba’s armory that it tried to close with its own mobile social app, Laiwang. Throwing everything it could at promoting Laiwang, Alibaba even required every employee to sign up one hundred users in order to qualify for their annual bonus. But Laiwang launched two years after WeChat. By then it had already lost the battle. Today even Alibaba’s senior executives use WeChat, resorting to Laiwang only for official communications with colleagues.

Alibaba backed a company called Kuaidi Dache43 while Tencent backed its rival, Didi Dache44 in a conflict that raged out of control with $300 million poured in to fund tips and marketing subsidies. The battle became so intense that Kuaidi even offered taxi drivers a free case of beer for referring fellow drivers. As the red ink flowed on both sides, a truce was called in early 2015 when the two transportation companies merged in a $6 billion transaction to form Didi Kuaidi, although they retained the two separate operating units.

Global Expansion

At first Alibaba expected the United States to be AliExpress’s key market. But Alibaba discovered that America was a market with sophisticated players, both online and offline. After the early disappointments, then-Alibaba.com CEO David Wei instructed his team to look at countries with the lowest efficiency in their retail sector.

Russia and Brazil became early success stories. Demand from Alibaba’s customers in Brazil at one point exceeded over three hundred thousand packages a day, before a slowing economy and the weakening real hit the company’s business there. Demand in Russia, especially for clothing and consumer electronics, was so strong that AliExpress reportedly even broke the Russian postal service, leading to the dismissal of its boss. Today Russia accounts for a fifth of AliExpress’s sales.

The one Alibaba effort that did explicitly target the U.S. market, 11Main.com, was a conspicuous failure.

Public Critique

Jack isn’t shy about criticizing the old industrial model: “Chinese people used to feel a sense of pride for being the world’s factory. Now everyone realizes what it costs to be that factory. Our water has become undrinkable, our food inedible, our milk poisonous, and worst of all, the air in our cities is so polluted that we often cannot see the sun.” In his article, Jack also took aim at the government’s inaction toward the environmental crisis: “Before, no matter how hard we appealed to the privileged and the powerful for attention on water, air, and food security issues, nobody wanted to listen. The privileged still got their privileged water and privileged food.67 But everyone breathes the same air. It doesn’t matter how wealthy or powerful you are, if you can’t enjoy the sunshine, you can’t be truly happy.” Like many of the other superrich in China, Jack bought himself a pristine patch of paradise abroad. In 2015, with the help of the Nature Conservancy, an environmental foundation founded by a former Goldman Sachs banker, Jack purchased the $23 million Brandon Park estate in New York State’s Adirondack Mountains; the estate is part of a holding that once belonged to the Rockefeller family.

One high-profile real estate entrepreneur, Vantone Holdings’s Feng Lun, even blogged—then later deleted—the following message: “A private tycoon once said, ‘In the eyes of a government official, we are nothing but cockroaches. If he wants to kill you, he kills you. If he wants to let you live, he lets you live.’” The temporary and still unexplained disappearance in December 2015 of Fosun chairman Guo Guangchang—once feted as a “Warren Buffet of China”—further illustrates those risks.