June 15 (Bloomberg) -- It’s been a rough 18 months for Chinese Internet tycoon Jack Ma, founder and chairman of Alibaba Group Holding Ltd. Early in 2011 a fraud scandal hit his business-to-business e-commerce site, Alibaba.com.
At about the same time, the U.S. government publicly shamed Alibaba-owned Taobao, a hybrid of Amazon.com and EBay, for enabling the sale of counterfeit merchandise. Last fall, thousands of small merchants protested online and outside Alibaba’s headquarters in Ma’s hometown, the eastern Chinese city of Hangzhou, against an increase in Taobao’s listing fees.
“I was so lonely at that time,” said Ma, who presents himself as a champion of local entrepreneurs and added the higher prices were necessary to fight piracy. “Nobody wanted to believe Jack Ma.”
Ma’s bad run may be coming to an end, as Bloomberg Businessweek reports in its June 18 issue. On May 21 he reached a long-desired deal with Yahoo! Inc. to buy back half of the U.S. Web portal’s 40 percent stake in Alibaba Group. The Chinese company will pay Yahoo $7.1 billion for the shares, valuing Alibaba at about $35 billion.
Yahoo and another large shareholder, Softbank Inc., agreed to reduce their voting rights to 49.9 percent, even though the two combined still own more than half of Alibaba. Shareholders also approved a plan to pay as much as $2.5 billion to privatize Hong Kong-listed Alibaba.com Ltd., the group’s flagship brand.
Taken together, the deals are huge steps toward Ma’s goal of an initial public offering for Alibaba Group. The IPO, which Ma says is still a few years off, could be the largest stock market debut in Chinese Internet history. That would certainly show critics that he’s built a sustainable company.
“This is not a business that belongs to Jack Ma,” he said in an interview in Beijing this month.
Ma, a former English teacher, started Alibaba in 1999. For most of its history, he played the part of the hometown favorite standing up to foreigners such as Meg Whitman, who competed against Taobao when she was chief executive officer of EBay Inc.
As his difficulties last year show, Ma’s operation is no longer the scrappy underdog -- it’s an expanding empire. Alibaba.com has offices in the U.S., Britain, India, Japan, and South Korea. Taobao and Tmall.com, a sister site that opened in 2008, dominate e-commerce in China and together account for 71 percent of consumers’ online purchases, according to research firm Analysys International. Most of those customers use Alipay, Ma’s online payment service.
In the year ended Sept. 30, Alibaba Group earned a profit of $268 million on sales of $2.3 billion, according to Yahoo’s annual report.
“We are much more influential than we thought,” said Zeng Ming, Ma’s chief strategist.
Signs of Distraction
For Alibaba to keep its momentum, the company will need focus -- right at a time when Ma is showing signs of distraction.
“I am going to enjoy some other things apart from business,” he said.
Already one of China’s richest men, with a stake in Alibaba worth about $2.6 billion, Ma shows little interest in technology. He doesn’t spend much time online and depends on a colleague to help him download U.S. television shows to his iPad.
Instead, he dabbles in poker, traditional medicine, and other pastimes. He’s teamed up with movie star Jet Li to spread awareness of tai chi, and is so into the ancient Chinese martial art that he brings along a personal trainer when he travels. Environmentalism is another pet cause. In 2010, Ma joined the global board of the Nature Conservancy.
“Business is not his first love,” said Orville Schell, a former dean of the journalism school at the University of California at Berkeley, and a close friend.
Time in U.S.
Ma has been spending time in San Francisco’s Bay Area. He rents a home there, and he’s audited history courses at Berkeley, where his son is an undergraduate. The time in the U.S. has affected him.
“I want people to learn what democracy means,” he said.
At Alibaba the company’s 25,000 employees elect 10 representatives who determine how it spends part of its philanthropy budget. “This is the first test in China of a real democracy,” Ma said.
The Chinese government is showing an interest in what Alibaba does. In 2011, after the fraud and counterfeiting scandals, Ma met with government officials 40 to 50 times.
“I try my best to talk with them and make sure they understand what we are doing,” he said.
Ma also wants the world to know that he takes antipiracy efforts seriously. Alibaba hired James Mendenhall, a top lawyer in the George W. Bush administration, as its Washington lobbyist, and Taobao says it removed 63 million pirated products last year. In December, the U.S. Trade Representative acknowledged that Taobao is making “significant efforts” to expunge the fakes. Tmall specializes in authentic, branded goods.
The looming challenge for Ma and Alibaba is competition. China’s e-commerce market may grow 42 percent this year, to $173 billion, according to JPMorgan Chase & Co. That growth has global retailers slavering.
In February, Wal-Mart Stores Inc. acquired Shanghai-based e-commerce site Yihaodian. A group of investors including Russia’s Digital Sky Technologies put $1.5 billion into retailer 360buy Jingdong Mall last year. And on May 24, Tencent Holdings Ltd., Alibaba’s chief competitor, announced plans to invest $1 billion in its e-commerce unit.
The rivals will be battling uphill, according to Michael Clendenin, managing director of RedTech Advisors in Shanghai. Other retailers hold inventory and operate costly delivery networks. Taobao and Tmall let vendors take care of those low-margin tasks and instead earn money through storefront fees, advertisements, and infrastructure support.
“He’s the ultimate winner,” Clendenin said. “In e-commerce, Jack Ma is the house -- and the house always wins.”
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