How China's Alibaba Is Surviving and Thriving

Jack Ma has built Alibaba over a decade from a simple B2B Web site for manufacturers to an online empire

Jack Ma says he saw it coming. Over a year ago, when Lehman Brothers and Washington Mutual were still going concerns, many business leaders and economists in Asia thought China would avoid damage from America's deepening financial mess. Ma, founder and chairman of e-commerce power, wasn't one of them.

Alibaba has more than 8 million small and midsize companies using its business-to-business online marketplace, and Ma's salespeople were already hearing about trouble from many of its export-reliant customers. "We are talking to factory people all the time, and with the data we collected, we knew something was wrong," he says. "We smelled something bad."

So Ma decided the times demanded a more cautious strategy. In February 2008, he ordered his managers to conserve funds. In July, Ma sent a letter to all Alibaba employees, warning them of hard times ahead. The message, Ma recalls, was simple: "Winter is coming, and we better prepare for it."

Net Booster

Descriptions of Ma typically don't include words like cautious and conservative. The 44-year-old former teacher has made a name for himself as an outspoken booster of the Internet in China, building Alibaba over a decade from a simple B2B site for small, unglamorous manufacturers into an online empire. In addition to its business marketplace, Alibaba's holdings include Taobao, an eBay-like (EBAY) site that is China's largest consumer-to-consumer service; Alipay, an online payment system with 150 million registered users; Alisoft, a provider of inexpensive software delivered online; and Yahoo! China, the Chinese-language site of the U.S. portal and search engine. In 2007, Alibaba raised $1.5 billion in an initial public offering in Hong Kong. Yahoo! (YHOO) owns 39% of Alibaba.

Raising all that cash—and then hoarding most of it—helped Alibaba survive the deep freeze of the global economy. Alibaba has $2.2 billion stashed away, Ma says, and the Hong Kong company earned $176 million, on sales of $439 million, last year. Earnings were up 25%, on a 39% increase in sales.

Not bad for a company that, because of its reliance on exporters, is especially vulnerable to a crisis in global trade. The recession in the U.S., Japan, and Western Europe has hammered China's exports, helping drive's stock price down 55% from a year ago. More recently, though, investors seem to be more confident in Alibaba, with the stock price doubling since October. Year to date, is up 35%, while the benchmark Hang Seng index is almost flat.

One key to Alibaba's success has been its trailblazing approach to marketing inside China on its flagship site, The site has two channels: one in English, the other in Chinese. The English-language site uses the keywords model perfected by Google (GOOG), but the Chinese channel relies largely on a subscription model, with members paying extra fees for special services. Companies that pay $2,900 a year to become "Gold Suppliers," can, for instance, post an unlimited number of products online, offer virtual tours to would-be buyers, and (to reassure potential trading partners) receive vetting by a credit reporting agency.

Stellar Sales Success

To get companies to sign up, Ma has deployed 4,300 Alibaba salespeople across the country.

"They are the only ones I know successfully pulling people in," says Paul Woodward, a principal at Business Strategies Group, a consulting service in Hong Kong. "Others have tried, but nobody else comes anywhere close to them."

Another important innovation from Alibaba has been its Alipay service. Because relatively few Chinese have credit cards, e-commerce companies have long struggled to find a way for customers to make payments for online transactions. With Alipay, Ma has come up with a simple solution: Buyers use Alipay to deposit money in a bank account; Alipay keeps the money in escrow; and then, after receiving notice that the buyer has received the purchase, releases the funds to the vendor.

"Alibaba is changing the way people think about availability of products, pricing of products, and how you get information," says Lydia J. Price, a marketing professor and associate dean at the China Europe International Business School in Shanghai "It's very much in line with what's happening in the youth society."

Ma argues that another key to Alibaba's success has been a set of priorities different from those of many other companies. Ma says he couldn't disagree more with those in the U.S. and elsewhere who say enriching shareholders is a corporation's top purpose. That's the sort of thinking that led to the world economy's current mess, he says. "A lot of people thought I was stupid and crazy when I said customers are No. 1, employees are No. 2, and shareholders are No. 3, but that's our philosophy," he says. "Shareholders, I respect them, but they're No. 3."

Going Global

Now, Ma is pushing Alibaba in new directions. The company has launched local versions of its B2B service in Japan, South Korea, and India. In November, it slashed the $7,000 price for Gold Supplier membership by more than half to hold on to customers. It has 43,000 today. On Mar. 31, Alisoft announced it would give its ShopkeeperTM—a package including accounting, inventory management and customer resource management software—to small and midsize users for free.

And Ma has plans to expand Alibaba's presence worldwide, spending $30 million on marketing to expand small offices in the U.S. and Britain. The company will add 5,000 employees, mostly in China, to raise its head count to 17,000. Not many companies are hiring these days, but Ma says Alibaba has to expand. "Our customers want to be global," he says.

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