Alibaba: The House That Jack Ma Built pdfdrive com

Whoever Wins China, Wins the World
Meeker now saw China as the Next Big Thing. Picking the right Chinese

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company to bet on wasn’t easy, Meeker said, so she recommended instead that
investors leverage Silicon Valley companies with exposure to China: “Both
Yahoo and eBay have interesting plays in the Chinese market. So our simplistic
point of view is that one way to play the Chinese market is by owning Yahoo or
eBay.” The report quoted Whitman, raising the stakes, as predicting, “Whoever
wins China, will win the world.”
Meeker’s vocal support for Whitman, including cheering on her China
strategy, helped boost eBay’s share price by 80 percent in 2004. But the
climbing valuation obscured growing challenges for the company. A series of
hikes in commissions sparked protests from its virtual store merchants, tens of
thousands clubbing together to denounce “FeeBay” or “GreedBay.” Complaints
reached a crescendo in February 2005 when eBay increased commissions by
almost 3 percent (to 8 percent) on its worldwide mall. Whitman remained
sanguine. “The thing to know about the eBay community . . . is that it’s been
vocal from Day One.” She did concede, however, that the dissatisfied merchants
had “perhaps been a tad more vocal than in the past.”
China became a useful way of distracting eBay’s investors from problems
at home. Worse, 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. China was considered so important that managers,
keen to present a positive story to Whitman and other senior executives, made
sure that everything looked great on PowerPoint and sounded smooth on
conference calls. But thanks to its own missteps as well as Alibaba’s competitive
moves, this was increasingly at odds with the facts on the ground.
eBay’s biggest mistake was in getting the culture wrong. 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 had sent over a
number of China-born executives, but most had studied or worked in the United
States for many years, sparking misunderstandings or friction with the local
team. EachNet found itself at a serious disadvantage to the 100 percent local
Taobao.
This gap was reflected in the design of the two rivals’ websites. 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

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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. This invalidated their trading history and forced them to
scramble to reapply for new names on an unfamiliar global platform. Worse still,
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. As you can see for yourself by opening
taobao.com, successful Chinese websites are typically packed with information
and multimedia graphics, requiring many scroll-downs to see the whole page.
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. The design of the site makes it the virtual
descendant of the Yiwu wholesale market, where Jack and many other Zhejiang
entrepreneurs draw their inspiration. The founder of another, niche e-commerce
venture explained, “If you go to Yiwu, you can order as little as three pairs of
shoes. One factory specializes in soles, another in the uppers, another factory—
or perhaps a small village—specializes in the laces. Taobao tapped the
motivation of those small merchants to make money.”
For companies like eBay and Amazon, their 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. The more standardized the supply chain, the
higher the barriers for etailers. All the smaller, mom-and-pop stores selling
nonstandardized products are more accommodating, more flexible in supplying
goods. That’s unique to China. The lack of national supply chains removed the
barriers to entry that exist in the West, making it possible for individuals to make
money.
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By starting with C2C, it made the price factor very appealing.
Individuals
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can be happy to make even five 
mao
(less than 1 U.S. cent) on a
sale.”

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Again aided by its roots in Zhejiang, 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. eBay’s vice president for global marketing, Bill Cobb, summed
it up:
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“We’re mainly interested in making sure that we structure this to have
long-term sustainability. We have the essential eBay format—the insertion fees,
final-value fees, and features fees—though at a lower level.”
Meanwhile, Taobao’s decision to forgo charging fees was not without risk,
since it forced it to look to other ways of generating revenues, especially if the
site became popular and drove up operating costs. But making the site free for
both shoppers and merchants turned out to be the key factor in ensuring
Taobao’s triumph over eBay. A research paper
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that analyzed more than a
decade’s worth of transaction data on Taobao concludes
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 that in the early phase
of the company’s history, 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.
In addition to being popular with consumers, 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