Alibaba: The House That Jack Ma Built pdfdrive com

parted company.
Having failed to buy its rival, Meg Whitman announced
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an infusion of an
additional $100 million into its China operations. This was prompted out of fear
of Taobao, but Whitman spun it to investors as a positive: “The China Internet
market is developing more rapidly than anticipated. . . . We see even greater
opportunities in China today than we did six months ago.” The $100 million was
to be spent upgrading the credit system, hiring personnel, and splashing out a
new advertising campaign that soon blanketed billboards in China’s major cities.
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

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kill it, your techniques are completely exposed. . . . Hatred only makes you a
shortsighted person.”
In May 2005, Meg Whitman and a number of other key Silicon Valley
executives, including Jerry Yang, traveled to Beijing to attend the Fortune
Global Forum. There Whitman met up with Jack and Joe. But further talks,
which included a proposal for eBay to invest in Taobao, came to nothing.
At PayPal China, the mood was darkening, with Alan Tien writing to
colleagues: “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.”
While eBay was trying to put on a good face, Whitman was growing
increasingly frustrated at the AFT/PayPal infighting, warning that PayPal China
“is coming to a town near you, whether you like it or not. Although this may be
suboptimal for marketplace, it’s good for eBay Inc. to have two horses in this
race.”
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, such as, “My experience on eBay was
painful. Can’t fill order information. I’m a 100 percent good feedback user, I
was never delinquent, and never broke the rules. The payment systems used to
be pretty good.” Another customer vented, “I can’t stand it anymore. Does
EachNet call this customer service? They can only scare away more users. Did
my two payments totaling 5,000 [yuan] disappear? My confidence in EachNet is
once again severely blown.”
One customer even complained that his PayPal check was impounded by
the Bank of China in Nanjing under a law to “prevent overseas criminals from
money laundering through this method.” By the middle of 2005, Taobao had
facilitated online payments for 80 percent of the products on its sites, but eBay
barely 20 percent.
In a last-ditch attempt to turn things around, Whitman and a number of key
executives relocated temporarily from San Jose to Shanghai for a couple of
months. With the concentration of senior executives, Shanghai was quickly
dubbed “Shang Jose” within eBay. But its China business was looking
increasingly like a lost cause.

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eBay shifted its focus to new horizons, including the landmark $2.6 billion
acquisition in September 2005 of Skype.
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In China, things went from bad to
worse when Taobao reaffirmed its commitment to a no-fee model. Extending its
pledge of free services for a further three years, Taobao vowed to create one
million jobs in China. eBay’s PR executive, Henry Gomez, fired off a terse press
release titled a “Statement from eBay Regarding Taobao’s Pricing Challenge,”
which consisted of the following three sentences:
“Free” is not a business model. It speaks volumes about the strength of
eBay’s business in China that Taobao today announced that it is unable to
charge for its products for the next three years.
We’re very proud that eBay is creating a sustainable business in China,
while providing Chinese consumers and entrepreneurs with the safest, most
professional, and most exciting global trading environment available today.
Whitman and her COO, Maynard Webb, already knew that the global
product wasn’t working in China, so 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.
By the end of 2005, eBay’s market share had slipped to barely one-third of
the market and Taobao was closing in on 60 percent. Just two months after eBay
publicly defended its fee-based business model, eBay stopped charging fees
altogether. Having talked up China so much to investors, eBay’s struggles there
started to weigh on its share price, which dropped dramatically from a high of
over $46 in early 2006 to only $24 by August.
Jack didn’t pull any punches: “In China, they’re gone. . . . They have made
so many mistakes in China—we’re lucky.”
Having failed to team up with Taobao, Whitman launched discussions to
sell eBay’s China business to the Li Ka-shing–backed venture Tom Online,
finally abandoning its troubled business by leaving it in a minority-owned joint
venture, along with $40 to 50 million in cash. It left a note, in the form of a press
release, that, true to form, attempted to spin an obvious negative as a positive.
The joint venture, it read, left eBay “even better positioned to participate in this
growing market. This agreement is a sign of our continued commitment to
delivering the best online buying and selling experiences in China.” The venture
quickly faded into obscurity.
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eBay had lost China. But in Jack, China had gained a folk hero. When

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asked today about the experience, Whitman can only tip her hat to Jack’s
achievements.
“If you look at Japan and China, two important markets, it’s where we
didn’t strategically, actually do the right thing. But it was not obvious at the
time, honestly. So more power to Jack Ma, what a powerful franchise he has
built—and it is really in some ways the combination . . . of eBay, PayPal, and
Amazon. He’s done a remarkable, remarkable job.”
eBay had lost a few hundred million dollars on its China folly. But this
would soon look like small change to Alibaba, thanks to a one-billion-dollar deal
that Jack pulled off thanks to another Silicon Valley giant: Yahoo.

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Chapter Ten