Alibaba's Magic Carpet Is Losing Altitude

The Chinese dot-com needs to boost cash flow in a hurry

In the past two years, few Chinese Internet companies have generated more buzz than Founded by Jack Ma, a 36-year-old former university teacher from the city of Hangzhou who wowed investors with aphorisms delivered in colloquial English, Alibaba was unlike most mainland dot-coms. Nasdaq-listed Chinese portals, such as and, were imitations of foreign sites like Yahoo! But from the start, Ma vowed to create something different: an online marketplace where small and midsize Chinese manufacturers could hook up with similar-size buyers worldwide.

That business-to-business vision--plus Ma's gift for salesmanship--helped persuade such investors as Softbank, Goldman Sachs, and Fidelity Capital to put a combined $25 million into Alibaba. Ma became a New Economy hero, preaching the e-business model to appreciative audiences from Hangzhou to Harvard. At first it looked like his company was a winner, too. In its first two years, Alibaba says it signed up more than 500,000 users, who post buy and sell notices on the site. Chen Ankang was an early client. For two years he has used Alibaba to promote his company, Lidun Packaging Material Co. "It's a very good platform for companies to advertise their goods," he says.

Trouble is Chen and most other users don't pay for the service. They have come to expect it for free. As a result, says Ma, last year the company brought in only some $1 million in revenue. And it has yet to turn a profit. So Ma is scaling back his ambitions. Gone are dreams of collecting commissions on deals cut completely online. Ma now realizes it will take years before buyers and sellers feel comfortable doing big, complex transactions over the Web with partners they barely know. Gone, too, are plans to create portals in German, Italian, and Spanish. Instead, the company is focusing on its core Chinese market. These days, Ma sticks close to headquarters in unglamorous Hangzhou, near Shanghai. "My new plan is B2C," he says. "Back to China."

In an effort to turn around Alibaba, Ma recently hired Savio Kwan as chief operating officer. Kwan, 52, is about as Old Economy as it gets. The Hong Kong native worked as a general manager at General Electric Co.'s medical equipment division in China for 16 years before joining Alibaba in January. He sees his new job this way: "We need to ground [Alibaba] in reality and make it into a business."

REVENUE LINKS. Kwan is focused on making Alibaba a more traditional company by taming its exuberant and chaotic corporate culture. Staff now actually show up on time--wearing ties. The problem, though, remains generating revenues. To that end, Alibaba is selling trade-related statistics and reports that offer such information as the top 10 shoe importers in Los Angeles. So far, says Chief Financial Officer Joseph Tsai, revenues aren't sufficiently robust to "make a living."

Alibaba is also peddling customized versions of its exchange platform--what it calls "Alibabies." For instance, the company created and now manages a Web site called that is devoted to the necktie industry. Ma says there are now a handful of these Alibaby customers serving other industries and that there are several more in the pipeline. Alibaba also is trying to earn cash by building and hosting Web sites for some of its users, but that isn't much of a money-spinner. About 75 clients pay a total of some $300,000 a year for the service.

While Alibaba execs insist they're close to profitability, others aren't sure the company can survive much longer. With so many startups targeting the Chinese B2B market, pressure is building for dot-coms to merge--or fail. "Consolidation is imminent," says Brooks

Entwhistle, executive director of Asian high technology for Goldman, Sachs & Co. in Hong Kong. "That's the only way out for these guys."

Ma says he's not worried about Alibaba disappearing. Last year, "we made a lot of mistakes," concedes the ebullient entrepreneur, who gives Alibaba only a passing grade of 65 out of 100. "This is the year for performance." But the former professor will have to work hard to ensure his company doesn't flunk out.

By Bruce Einhorn in Hong Kong, with Alysha Webb in Shanghai

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