In the March issue of China Economic Review, we published a cover story on the Alibaba Group. On the day the issue was supposed to go to print, a fraud scandal broke involving corruption in the membership sales division, and CEO David Wei, along with COO Elvis Lee, resigned. Prior to the news, he had consented to give an in-depth interview to CER, the transcript of which is reprinted in its entirety here. It was the last interview he gave to international media in English.
The issues and challenges Wei was confronting as CEO were daunting, and the business model he was charged with advancing is complex – so complex as to be difficult to describe fully in the print cover story. The interview lends clarity to Alibaba.com’s strategy toward e-commerce, illustrates his thinking in his last month in office, and will help readers understand the challenges and opportunities that will face incoming CEO Jonathan Lu (who also runs Taobao.com), as he takes the reins. The transcript has been lightly edited for clarity in some areas.
Firstly, thanks for talking to us, we know you are busy. We have been reading some of the background stuff about you and how you came on board. You started out with B&Q, which is very much a bricks to mortar company, and you were a bit skeptical about e-commerce, and Jack Ma made you a believer.
What exactly is your dream, now having worked there for four years, in what is now, in many ways, still a dot-com? Where do you see e-commerce, and technology platforms that service on a global basis? What is the evolutionary goal you are looking at – bearing in mind where it was ten years ago, and where it still is for a lot of companies today: Going to trade shows and going to meet people out in the sticks? What is your business model? How do you see the way the whole environment is going to work?
First, a quick correction. Jack didn’t convince me: I was convinced by Jack’s customers. Jack introduced me to the hard facts for three consecutive years. I think he deliberately did that. He knew I started my career as an investment banker, trained to be textbook on everything. I think Jack finally gave up trying to convince me by himself. But his customers at Alibaba.com – all the small members I met – they all told me how great this company is, how it saved their lives, or saved their businesses, helped them to make more money, and helped them to make both their lives and work easy.
After meeting hundreds – thousands – of them, I was convinced. Also I was also convinced by asking B&Q as a buyer to use Alibaba.com for sourcing, with my buyers telling me, it is very efficient, it is helpful. So I was not convinced by Jack, but convinced by customers, at B&Q myself, and by many more customers who are using Alibaba.com. So, that is the quick correction.
On top of that, you mention traditional businesses, or traditional ways to do business – like trade fairs. I always use this as an example and say that we will not kill the trade show. E-commerce and the internet will not kill trade shows, but trade shows will kill trade shows themselves, if they do not revolutionize themselves.
If you look at the musical industry, it has been very different in the past. In the past if you went to see a live music show, or whatever, it was free, and the reason was that the pop stars were trying to convince you to buy more CDs after the show. But now, CDs are almost free because you can download at a very, very low cost. As a consequence, live music shows have become more expensive, because people are meeting each other, and the demand for that is still there.
Meeting will be more valuable, and that is my advice to the trade show industry. Hey, the buy and sell function of the trade show is no longer important, but people meeting each other, sharing ideas, making it a community is important. That is why online business, like Alibaba.com and the Alibaba Group, have offline, huge Ali-festivals, a kind of E-Bay Live. [We have] these kind of things, all the time, and spend a huge amount of money and effort to enable people to meet.
That is how we compare to the traditional offline way to do business. They have to change, and so we have to change. Their traditional way to enable buy and sell can be replaced online, but they can develop new values. I would say, it is not a trade fair anymore. Rather, it will be an exhibition, a buyer-seller community, a business people’s community fair, which will be more important than the trade function.
If you ask me, how do I see e-commerce? I think there will be four stages for e-commerce development. The first stage is non-core customer – or not mainstream consumer or business – buying non-core products. For Alibaba, we sell some really niche products [from] the non-core, small businesses, who are almost at the edge of failure, the people who suffer – non-core to non-core.
Then the second stage is the non-core customer group, or non-core consumer group, who start to use e-commerce to buy some core products. If you look at teenagers, they used to be the core consumers for Taobao, when they started to buy mobile phones and apparel. Apparel and mobile phones are obviously mainstream products. So, by the second stage we mean non-core to core.
Sorry, can you clarify what you mean by core versus non-core?
Core-customers, or core-consumers, are the mainstream customers or consumers. Mainstream consumers are, for example, the middle class, workers, white-collar people with stable, good incomes. The non-core, I would say, are the youngsters, undergraduates, boys and girls. Non-core products, are like virtual products and accessories, used apparel, second-hand. These are the non-core – very small proportions of the overall retail business in China and anywhere in the world. So that is my definition of the non-core customer group and non-core product group.
Stage three is core-customer group buying non-core product groups. These will be, for example, a lot of people at my age using Taobao to find something, or trying Taobao when they cannot easily find something offline. Our chief strategy officer for the Alibaba Group [Zeng Ming] had his first Taobao experience trying to buy some massage oil. That is something really difficult to find offline. He wanted to find someone to do the massage at his home, but he wanted to buy the massage oil himself, rather than use that provided by the visitor. So, he used Taobao for the non-core products. So lots of people, in the core-customer group, start online. You may ask yourself what products you start to buy online? Likely, you buy a non-core, unique products.
Well, I was on Taobao today, looking for hair clippers, so I can give myself a haircut – can’t find it at Carrefour, anywhere.
Yep, Carrefour only carries the mainstream products. But, you cannot find it anywhere, so you try Taobao, E-bay, Amazon. That is naturally what happens. So today, we are at the edge of stage three to stage four.
Stage four is – you can tell what it is – core-to-core. That is when e-commerce becomes mainstream. Mainstream is core customer group buying core product group.
You use Taobao as an example a lot here, and I think your case is pretty solidly made. But with Alibaba.com it is a little bit more tricky, is it not?
No. It is exactly same.
First we have some tiny business, some tiny papa-mama shops, as they are now called. And then, people like Walmart and other Fortune 1,000 companies are coming to us to source. Almost one third of the Fortune 1,000 companies are our stable, annual big buyers – we offer big buyer ra
tes for them. Walmart will not source orders for Coca Colas, they will source their aprons, the labels they use in the store, or goods not for resale, these kind of things – tiny things for us. Nokia uses us to source some promotional gifts, they don’t source key parts from us. These source stages we have seen under B2B are identical to the C2C Taobao orders.
My last point about e-commerce: It is helping consumers and small business more than it is helping big corporate companies. These corporate companies will be the last people to use e-commerce, not the first people, because even without e-commerce, their life is good. Their global network and their distribution will enable their globalization.
But globalization has become a negative word for small businesses, and medium businesses, everywhere in the world. If you look at all the [supporters] of protections against globalization in every country, they are all small business owners. Wall Mart, IBM, GM, all these companies are the beneficiaries of globalization. But, we think with globalization, e-commerce can be a positive word for small and medium business. And, thanks to the nature of the internet – the internet is global, so anyone plug into the internet – your voice will be heard equal to a big company, your product, your service can be equally as visible as a big company.
But without the internet, small and medium businesses are invisible outside their town, outside their village. Their quality, their creativity, no matter how great they are, they can only sell their intellectual property, and sell their ideas, to big companies. Now, they don’t have to sell that. They can make their product or service and market it globally.
Of course, the internet for e-commerce starts with equality, and fairness of information, and Alibaba also needs to make the money flow – the cash flow – the payments, financial equal. Then there is the logistics. So, of all these three flows, the most important is to get information to flow fairly to small business versus big business – to make that fair first. That’s why we call our first ten years “Meet at Alibaba.” Meetings at Alibaba enable you, no matter where as a stranger you coming from, you can be as good as a big company with global presence, because all along there is no barrier to stop a small business.
Let me come back to you on that. I was listening to a conference call with Jim Strachan of Global Sources, and he was saying that the reason they have been doing well recently is because the small portion of their buyers account for 80% of their business volume. He said that, for their business at least, they do not perceive small business as being very beneficial at either end. He said that for a Chinese factory that wants to sell to the US, they don’t want to be pestered by orders from little Mom-and-pop shops that come and go, or to feel that the payment materializing might be too risky. And ditto for these mom-and-pop shops, they cannot necessarily trust these Chinese factories and they don’t have the wherewithal to do the research. Therefore, he fundamentally still believes that the meeting between these big customers and globalization and things is where it is at right now and that the system you are talking about – these small suppliers – is very much a thing of the future, and not necessarily the near future either.
I know you have your China Gold Supplier program, and specifically in terms of the international trade aspect, setting aside your domestic operations, what is happening with the small users and the value-added services you are wrapping around them? Are there measurable effects you have seen in terms of companies and factories on both sides of the relationship, getting more traction, more value out of this service?
I think, first, the real matching is always a problem. A factory in China employing 5,000 people, or 1,000 people, or even a shoe maker in China employing 1,000 people is a small-medium business in China, and that is too big for papa-mama retailer in the States: It is a wrong matching problem.
The papa-mama shop should probably find a shoe maker who is employing only 50 people, selling very much tailor-made, unique, personalized shoes – that is a good match. So, our job, number one, is not putting all the females and males, without age segmentation, without understanding their different tastes, into one ballroom and asking them to invite their partner to dance. That will be a mess – it will be terrible for such a ball organizer. A ball organizer needs to segment it, and that why search technology is very important – in order to find the right partner for you. No matter how small the factory, there are always buyers for it. It is all about matching, that is number one.
Number two is trust. That is the key value as a third party platform like us should play. To endorse the buyer and seller who haven’t met. For example, our factory audit, our testing audit service – all these things are serving the trust issue. Just take factory audits, for example, because it is a small factory, if they receive factory audit requests from Walmart, from Target, from Carrefour, from every retailer, then they will probably go bankrupt by receiving all these factory audit requests again and again and again. Now, they need only do one factory audit, using Alibaba.com, and they can use that factory audit to serve all their buyers. So, that is more efficient than one by one.
The buyer doesn’t need to trust the supplier, they trust Alibaba.com and our ethical service. The money is looked after by Alibaba.com until they have checked the products. If they have checked the products, the money gets released, it is very simple.
The meeting is expensive but necessary. Think about a US$10,000 order. The travel expense to a trade show and trade fair is probably more expensive than the margin they can make from a US$10,000 order. Because of the financial crisis or post-financial crisis effect, people are cutting down the size of orders: People are afraid of holding a big inventory. They order more frequently and the size gets smaller. That will make the meeting costs even more expensive compared to the smaller sized orders, and that is where we see the trend. People want to carry small quantities, but more tailor-made products to meet different customer segments. So, that is why we see small is beautiful – a small factory, outside small retailers or papa-mama shops – they should find their way to survive and to grow.
So these are the two value-added services that we offer: Ethical services and supply audit. But we do have a longer list – anything we see as a problem, or other people see as a problem, we see as a great opportunity. That is the value of Alibaba.com. If there were no problems, then we would have no value as the third party e-commerce platform. Without us, yes, the other problems that people describe do exist, but with us, we should shoot these problems and create value.
So just one little note and then I am going to ask you another question. So, this guy at Global Services said he is not competing with you. But with what you are doing in addition to what you are doing and other things, do you view them as a competitor? Who are your competitors?
If a papa-mama shop opens next to Wall Mart, Wall Mart will not consider the papa-mama shop as a competitor, although the papa-mama shop may consider Wall Mart as a competitor. We don’t think they are competitors, but they may do. The reason to think of it the other way round is that the papa-mama shop is not selling anything like what Wall Mart sells.
So, the Global Sources’ key strategy is multi-channel approach. Three channels, publishing, spatial and online – three approach, multi-approach, that is what they believe. I think multi-approach is suitable for a smaller group of suppliers and buyers who need a multi-approach. But that enhanc
es the barriers for people to use multi-approach because every approach costs money, for both sides, eventually.
But we believe that multi-approach is good value-added service for both sides, but not a must. [garbled] Our customer base is at least 10 times bigger than global sources customer base. I think their customer base is limited buy their multi-approach strategy, because mutual-approach only suits a much smaller group of buyers and sellers.
Well, let’s move from that into your customer base. I am reading some analyst reports here who are talking about the increase in price in the China Gold Supplier program. They are saying, they believe, or at least their theory is that you are doing this in order to slow the growth of members, increasing average revenue per user, and focusing more on the quality customers, and trying to change the metrics that way. They say that the majority of your users are not paying users, and the big struggle for you is going to be to convert those, when you have this large user base that does not actually give you any money into a revenue center.
Can you talk a little bit about that your strategy is regarding your existing user base and these various fee paying programs that you have?
First, a quick correction again – we do not offer free user services for any global supply functions in the international market place. The free user function only exists in the China market place [Wei is referring to the domestic 1688.com B2B division]. So, in comparison to gold supply there are no free users at all. [clarification: membership in Alibaba.com is free for buyers, but not for suppliers. Most “members” are therefore free, but to advertise products on Alibaba.com for sale, one must be a paying member]
The reason for that is that the basic costs for authentication is high for every Chinese Gold Supplier, and we are afraid to allow exporters to use our platform for free without checking and without basic audit – without basic service. That’s why for domestic trade we do allow free users, but for international trade we don’t allow exporters from China to use our platform for free. It is not a revenue issue, it is not a model issue, it is a quality issue, it is the quality they want. That, basically, is why we raised the fee.
Number two, we need to look at why we cut the fee three years ago, from RMB50,000 to less than 20,000 in November 2008. At that time we believed that e-commerce could help more China exports to survive in the coming financial crisis – which we did. So the financial crisis happened more or less in November; at that same time we cut the price. So from our data, from our platform, we normally have a crystal ball that can see the world six months in advance, so we knew that probably in July 2008. So we made a decision in July 2008, and we developed the product and changed the price in November and announced it, and we tripled the paying customer base in three years. But the main philosophy behind that is not that we tripled the number, but we tripled the survival of our exporters. So we feel proud that we helped these people in getting through the crisis.
Today, we have decided to raise the price because we believe they need even more quality service and value-added services. It is not just about survival anymore, is about further growing their business. We also believe that after the crisis, China’s export condition is getting better and better and exporters can afford a little bit more for our service. If they can afford more we can to do better. Otherwise, we will continue to offer some basic service, and going forward, that is not good enough for exporters. We are not afraid of over- or full-penetration in China. We believe that at least one million exporters in China can be our customers and right now, we are only doing about just over 10% of that.
I will just give you a little story. If you look at my kid, Daniel, who is about 12 years old. I know that he will grow to be about 180cm at least, but today he is something like 120cm. So, one day he asked me, Daddy, I have not grown recently. I said, you will not grow the 60cm from now to 80 years old evenly every year. Rather, every year you will grow 6 or 8cm. Sometimes you have to pick up some height and sometimes you have to pick up some weight.
This story is very similar to our customer service and customer number strategy. If every other year we should grow some height – customer number – then to be honest it is a very service intensive business model for us. We are asking our-self, can we really serve 200,000, go supply now? My answer is, definitely not. It would be a disaster if we had 200,000 customers now, because we would not be able to serve them, and we will not be able to grow the buyer number so quickly. It is like the boys and the girls in the ballroom: If the ratio is wrong it will be a mess. There will be fights in the ballroom if there are too many boys versus girls. So, we have to grow the buyer numbers in advance to accommodate more sellers, and we have to improve our service team to serve the gold suppliers and Trust Pass [the domestic verification program].
So in 2010, we passed a milestone, celebrating one million paid customers, that’s a huge number, and that has been more than doubled in two years. We are asking ourselves, if we want to be responsible for our present paying customers, then we have to improve a lot of things before we take the next million customers. That’s why we deliberately slowed down customer acquisition numbers. Not because of penetration, not because we are not good at acquiring customers anymore, but because we need to settle the demand of those one million customers first. By serving them better, the value-added service revenue will naturally come from that one million customers, offsetting the revenue reduction from new member acquisition.
That is why we are still very confident to say to the capital markets, hey, no worries, we will grow our revenue by value of service. In the last two years we have told the capital markets that we are not going to [intensify] the value of service: We are growing the number of customers. That’s where we are learning from our history. If the overall economic environment is poor, it is the best timing to acquire e-commerce paid customers, because it is cheap and efficient. When the economy is getting better, it is much easier to grow the average spending because every customer is a little bit more confident and wants to spend more and get a little bit more orders, which they can. So, that is also in line with the economic cycle in the world. That’s why we adjust the strategy according to the service level we can offer, the buyer number we can bring, and the global economic cycle. These are the three elements for us to increase price, reduce price, grow customer number or grow revenue and value of service.
You can’t grow customer number all the time and you can’t grow value of service all the time. That’s the weight and height issue. It is a healthy tip to be a healthy teenager or a healthy youngster.
Let me follow into that about the capital markets. There have been some reports about you being a little bit displeased about the performance of Alibaba.com stock price, holding off on executive wage raises and so on and so forth. In some ways that seems strange. Alibaba is a profitable company and a list of these numbers look really positive; there are the acquisitions, it seems to be a company with a vision, and yet the markets are beating you guys up. One of the things of course is that you look at other tech companies that have listed and some of the performance expectations that are built into these valuations seem a little bit ridiculous [redacted, a side comment about Youku listing]. Your price-to-earnings ratio is north of 50. Is that obligating yourself, having a long term picture and then having to justify yourself to a stock market that wants more height and
weight every quarter, in retrospect was [listing] the way to go? Did you have any choice on that? Just talk about the market if you can.
It is true, I did say that I am not happy with the share price performance. I am also a shareholder, I am highly incentivized by share price. So are my management team and all the staff. But I am not going to please the capital markets by changing our height and weight strategy. I am not happy, but I am not necessarily going to please them. I am happy with the strategy re our customers, and that is my key number-one priority. This is a customer number one, employee number two, shareholder number three company.
What I am going to do is, not to try to please the shareholder, but make our strategy more transparent. I am not going to invite every investor in the world to be our shareholder, that’s too many. I think there will be smart, visionary shareholders, who understand Alibaba.com’s value, and one day they will benefit from their long term visionary investments. But, I am not concerned about hedge funds and short term investments, and I am not concerned about hedge funds or short term investors dumping our shares – that is fine. We don’t want to please every shareholder, it is not necessary to please all of them, who I need to please is my customer.
Well, let me just jump in here, because you have held off on raises, and there is obviously some problem that needs to be addressed. I mean above and beyond the stock price. What are the issues and challenges or internal contradictions or whatever, that you are trying to get your team to resolve?
Well, I am not going to resolve the biz model. I am going to try and make the model more transparent and be consistent with delivering what we promised. You mentioned Youku, or some latest IPOs in this stage: It is still very naïve for investors to find a copycat of a US model in Asia. They pay a high price for it. Unfortunately for them, Alibaba.com is very unique, we do not copy from anybody. There is no big copycat anywhere else that has been very successful.
Even after three years of IPO, some investors are still struggling to understand the value and the business model behind this company because it is very difficult to compare. Look at Tencent. It took many years for people to understand them, and then people tried to label them and say, hey, Tencent is the Facebook of China. I would say, no, it’s the other way round: Facebook is probably the Tencent of the States.
If you look at the mini blog from Sina.com [Weibo] people get excited – oh that is Twitter! If you really use the mini blog of Sina – that is not Twitter at all! But people on the other side of the ocean try to label something, and unfortunately there are no existing labels that match Alibaba.com, because there are not many small and medium business enablers like us in the States, or anywhere in the world. That is the unfortunate thing.
What I can do is to keep educating, and the best education is to keep our promise: The consistent delivery of strategy, quarter by quarter. I am not going to change the strategy to please the shareholder or investors, but what I can do is to buy back the shares at their value, pay dividends if I cannot use all the cash. That’s the thing I can do, but I am not going to change the business model or strategy to please shareholders.
Let me get into one of the core things I wanted to ask you about and that is your globalization strategy.
There have been these two interesting acquisitions you guys have made and some interesting partnerships. Your working with Pay Pal as far as I understand and you are working with Vendio and Auctiva. Let me ask you first about … you have probably looked at examples of other Chinese firms that have made acquisitions abroad, presumably you studied what Lenovo did, and now you are going out and you are not buying something simple like rocks or oil, you are going to have foreign staff and you will have to manage these people and integrate them with your team. If you could describe a little bit about what your preparation was and how you prepared for these acquisitions and how you deal with post merger acquisition and mainly what if anything are you doing differently from those who went before you?
First, I think that Chinese companies should be very careful and cautions about getting into the consumer business directly outside China. It is more than just ordering the rocks. It is anything B2B there is a challenge. I would say that while Huawei are successful, they are not dealing with consumer business directly outside China. They are offering their services to telecoms carriers and telecoms providers outside China, and that is fine, that is still B2B. Oil and gas and rock that is B2B. Buying B2B from Chinese business is getting gradually easier, because there are less cultural conflicts: Sensible deals between two businesses are easy. Lenovo and the Volvo case, that challenges, because it is difficult for Chinese business to understand consumers with completely different cultures and different demand globally, and that will still be a challenge in the future.
Alibaba does not want to do consumer business outside China. But, we believe that connecting small business is much easier than serving consumers outside China. Small business are not identical to Chinese small business, but their problems are very similar to each other.
Secondly, we don’t want to do any cross border activities, without one end in China. There are two ends in any business, and one end must be in China. Either China is the selling side, or China is the buying side. That is where our strength is coming from. If we want to do B2B or C2C within the US, there is no comparative advantage we can bring – we have no value addition in that market. If we can consolidate what we have, and grow another end, then if you look at Vendio and Auctiva, that follows that strategy. They are an e-commerce, small-business enabler, and we are buying them – still B2B – we are not serving US consumers directly, we are connecting the Vendio and Auctiva sellers to our sellers, and the Vendio and Auctiva become our buyers – that is still B2B.
So that is much easier, rather than asking us to compete against Amazon or eBay to serve US consumers. Our first step is always to make the business connection with one end still solidly located in China. So the Vendio and Auctiva case, the seller side is still in China. We may move into other business initiatives, helping businesses outside China sell into China. Again, you see, export to China, not from China. Exports to China from Taobao.com and Alibaba.com have huge consumer bases, and we will be the buyers of global supplies for buyers outside China. Again, we control one end and then we have the chance to add some value, because otherwise, we will lose.
Right, but what about management integration? It is a big challenge, no? Apart from the business model that you are talking about, anecdotal evidence says your typical Chinese company that acquires a foreign company will have difficulty retaining foreign managers who, on paper, are making more money than their Chinese superiors are. That there will be cultural communication breakdowns and hierarchy issues that cause management teams not to work together, regardless of the business model. Do you have a post-merger acquisition team in place? Or, perhaps a structure that ensures people will get along? What do you do?
First, Alibaba.com has been very international from day one. We have already had our US office for more than 10 years and we have not closed it once, even when we had tremendous difficulty during the recession. If you look at our management board and core management team, I would say that it is quite international. All my management team can speak English, one third of
them have studied, or have been trained abroad, and we do have expats at a very senior level. Even before the acquisition, our company employment policy is not decided by what sort of passport you hold, so it is already very internationally competitive.
So [we are] different from other manufacturing businesses and traditional FMCG businesses, who have a huge gap between the salary band and the compensation. Our compensation at different levels are already internationally competitive. So that’s why we won’t have this sort of problem, because we do have a management team and executives that are already very experienced internationally.
Having said that, the key thing is not to try to integrate the company being acquired. I have been advising over one hundred merger and acquisition deals as a merchant banker. I find that synergy should be driven from the company being acquired. So, we have a great incentive scheme available to Vendio and Auctiva, the company being acquired, and we will keep all the management with a generous, aggressive plan – a long term, five-year incentive plan for them – then we will say, you tell us what you need from Alibaba.com and the Alibaba Group to help you meet your incentive plans. We are saying, hey, this is a buffet restaurant, you come here to take anything you need: Capital, branding, products, synergy. It is the same strategy we apply to companies being acquired in China after we acquire. We don’t send management; we don’t send an integration team. Integration is happening at all levels, and it is coming from the company acquired, not by telling the acquired business not to do this or that. It is them who must say, great, I am joining this family, coming into this big buffet restaurant, and it is I who is going to decide what to eat from this big menu. So a very different philosophy for integration, but it is the same for both domestic and international acquisition.
Today, I would say so far so good. I have only had a dinner and a drink with these people. I have not had a long board or management meeting with them at all.
What about developing economies? A lot of people are saying this is the big growth area for trade … You mentioned a lot of your management team having studied in the US, and I know that Jack Ma was there, and of course, in other Western countries. What are you doing to prepare for an increasing role from other developing economies, as opposed to the West and Europe?
Our strategy is to keep it focused and keep it simple. Number one, we have a first-tier countries that we cannot lose. It is not about which countries we ought to win, it is about these ones we cannot lose. These four are China, Japan, the US and India. The reason is that all these four countries are either important for the seller side, or for the buyer side, or both.
China has been perceived as a country for a great seller’s market but we believe it will be a great buyer’s market as well. The US and Japan are important for the buyer’s side, but India will be another important country for the seller’s market as well as for the buyer’s market. So these four countries are the first tear countries we cannot loose – our priority.
We don’t think that the internet requires us to set up offices in all the countries we operate in. Our strategy is to look at language – instead of country strategy, we have a language strategy. So we prioritize, we say, we have three languages, Chinese, English and Japanese. So, we need to be driven by technology thinking about languages. And then, once we have different languages, say Spanish, Portuguese, Russian, we wish our partners locally can help us to deliver local services by leveraging their local language platforms.
So, we will develop language platforms, but we are not going to grow our service team our sales team and everything locally. We should be an open platform, and an open system, to enable the individual country and partner to make money and help the local customer. They can do this kind of job much better than us.
I want to turn around to the domestic structure. You are talking about the importance of China becoming a buyer’s market. Now I have you have this 1688.com, these Trust Pass programs and other things – this ties in to you being part of this larger Alibaba group. Where do you start bumping into things like Taobao because being part of this bigger group can almost limit the degree to which you can develop domestically, if at all?
When Taobao is purely C2C, we can do nothing to help our business to sell Taobao, which coming back to something I mentioned earlier, there are four stages of e-commerce, that is, four stages for Taobao. When Taobao is non-core to non-core, which is C2C, and we are B2B, B and C have no relationship. However, when B2C becomes a growing mainstream offer in relation to Taobao, we can help some of our business customers to see directly to consumers.
So, on the 7th of January – last week, we launched an Alibaba mall on Taobao, which is for our Trust Pass and Gold Members who are willing to serve consumers directly. It is still a trial at the moment, but the first week after we launched was a great success, much better than we, or consumers had expected. However, as we mentioned, not all businesses and factories are interested in selling to consumers, even within China, piece by piece. We have a distribution network connecting our factories and suppliers to consumers, and that has been there for a year, and we already are selling 100,000 to 200,000 pieces of clothes every day through this platform. That is just one category and we are moving into more and more categories.
So, Alibaba.com and what we see as our sister company Taobao are offering two opportunities to help our business customers. Number one is the direct B2C platform, and we are launching the Alibaba Mall to enable them to use Taobao’s consumer traffic to sell directly. Or, to some factories and businesses which are not interested or able to serve consumers directly, we offer a platform and distribution network connecting Taobao sellers, who are good at serving consumers, but lack a stable, quality source of products. So that is why we see that synergy will be bigger, and bigger yet when Taobao’s B2C volume picks up. Because when Taobao is C2C, we can do nothing. But it is so obvious that the B2C ratio of Taobao sales is getting bigger and bigger.
My final question, and then I will let you go. You are a technology company and we have not talked much about that. Looking at your figures here, I can see your R&D expenses going up. Where are the areas that are innovation for you, in terms of computing, in terms of the internet? There is a lot of buzz about cloud computing. If you can be a little bit more specific than saying “we are investing in cloud computing,” that would be wonderful. If you can talk about the key areas in which current technology is inadequate for your needs, and if you need to improve it or create new technology.
Again a quick correction. We do not mind if we are not perceived as a technology company by our customers. We would like to be perceived as a service company by our customers … Investors thinking we are a technology company, well, that is great, because technology, eventually, is serving customer value, rather than have a huge investment in very fancy technology that proves to be a white elephant later. Having said that, we do invest a lot, we have thousands of engineers, and billions worth of investments in technology.
But where are we investing? We continuously invest in search technology, not to make us a general search engine company, but rather, our search engine technology is to better enable e-commerce. We have hundreds of millions of product listings and hundreds of millions of users, and the matching is important, so it al
l begins from the matching technology. Search engine technology is equally important for the development of advertising technology. We are not just helping some big accounts, we are helping millions of paid customers to whom sellers want to advertise. So search engine technology and advertising platforms are equally important. So, that is our, say, our first end technology investments.
In the back end is cloud computing, to enable our service to be efficient, reliable and low cost. We do invest a lot of money in the cloud computing. Something connecting the front end and the back end is sales, not big technology, but its application in the sales model: Software as a service, or pay-as-you go model. If you summarize, these are the three areas. I cannot say which one is more important than the other, because all three are equally important. But since we launched and invested in cloud computing [Wei is referring to starting up the new subsidiary AliCloud], only about 16 months ago, then proportionally, today we are catching up with our investments in cloud computing. We invested in search engine about six years ago, and in sales technology about four years ago, and we only started investing in cloud technology 16 months ago. So, that is why we are doing a little bit of catching up on our investments in the back end – on the infrastructure side.
Sorry, I am going to cheat, and ask you just one more general question and you can play with this as you want. Obviously, [Alibaba.com’s strategy] is counting on international trade and trade liberalization and the reform and opening movement and everyone getting along. In terms of the macroeconomic environment right now, there is a lot of concern that countries are going to start putting up trade barriers and generally making everything much more complicated for companies like you. What is your take on the general wider benefit that this sort of international trade, and the role that companies like yours play in facilitating global economic development and making everybody happier and wealthier?
I think the barriers and the pressures you mentioned are mainly targeted on the huge China trade surplus issue. But to reduce that trade surplus issue, our view is not to reduce China’s exports. Doing so is no good for anyone in the world. They would endure high inflation if China exports less, creating unemployment and instability in China. Our remedy is very simple: China should import more. With that, we are restructuring the global trade picture, instead of China building up a huge trade surplus and buying up US bonds to finance US mortgage loans.
The best way is not using the trade surplus to buy US bonds, but rather to release the trade surplus and import more. China importing more will create more jobs, and more prosperity outside China will lead to more people buying goods, not just from China, but locally as well. We are trying very hard to increase exports to China, and we are lobbying the government to release more import restrictions and encourage business and consumers in China to import directly. Instead of smuggling all the iPads into China, or smuggling all the wine into China – if you look at Chinese consumers crazily shopping on the major high streets of every country – that is mad! Why are lots of people going to Hong Kong just to shop? Why? They cannot buy imported products in China.
I don’t think we need to prove the spending power of Chinese consumers any more. They are so visible in London, New York; even the shopping assistants need to learn Chinese now to serve Chinese consumers in New York and London. Yet, they should be able to shop on their doorstep, or at least more locally, and businesses should be able to import raw materials or parts more easily. That can help to release the pressure and lead to global free trade, if China takes the first move by importing more. But please, do not pressure China to export less, that is lose-lose. That will make everyone’s life more difficult. But, if China can import more, the Chinese consumer will be happier and other countries suppliers will be happy, with more jobs created by China spending more.
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