Alibaba Group & E-Commerce

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Alibaba group Headquarters, Hangzhou, China

Contents

E-Commerce Business Models

Business-to-Business (B2B) Model

The B2B model involves electronic transactions for ordering, purchasing, as well as other administrative tasks between houses. It includes trading goods, such as business subscriptions, professional services, manufacturing, and wholesale dealings. Sometimes in the B2B model, business may exist between virtual companies, neither of which may have any physical existence. In such cases, business is conducted only through the Internet.


Business-to-Consumer (B2C) Model

The B2C model involves transactions between business organizations and consumers. It applies to any business organization that sells its products or services to consumers over the Internet. These sites display product information in an online catalog and store it in a database. The B2C model also includes services online banking, travel services, and health information.


Consumer-to-Consumer (C2C) Model

The C2C model involves transaction between consumers. Here, a consumer sells directly to another consumer. eBay and www.bazee.com are common examples of online auction Web sites that provide a consumer to advertise and sell their products online to another consumer. However, it is essential that both the seller and the buyer must register with the auction site. While the seller needs to pay a fixed fee to the online auction house to sell their products, the buyer can bid without paying any fee. The site brings the buyer and seller together to conduct deals

Consumer-to-Business (C2B) Model



The C2B model involves a transaction that is conducted between a consumer and a business organization. It is similar to the B2C model, however, the difference is that in this case the consumer is the seller and the business organization is the buyer. In this kind of a transaction, the consumers decide the price of a particular product rather than the supplier. This category includes individuals who sell products and services to organizations. For example, www.monster.com is a Web site on which a consumer can post his bio-data for the services he can offer. Any business organization that is interested in deploying the services of the consumer can contact him and then employ him, if suitable.


Jack Ma's View of C2B

In one of his speeches, Jack Ma said: In the past we are all C2C, there are the traditional B2C, to today, I would like to tell you that all manufacturing high alert, because consumers must change their product design, change the channel promotion, it is necessary to change the ability of innovative design, C2B will be upgrading the future of consumer-oriented, flexible production, customization, production will be replaced, the net profits of manufacturing goods will increase, funnel to be destroyed , net consumers of goods for all personalized products, network regulation will make these enterprises more transparent, more integrity, more of the respect by the consumer, I believe this is the future development of the times.



Alibaba Group

Company Overview

Jack Ma, Chairman and CEO, Alibaba Group


Alibaba Group is a family of Internet-based businesses which makes it easy for anyone to buy or sell online anywhere in the world. Since its inception, it has developed leading businesses in consumer e-commerce, online payment, business-to-business marketplaces and cloud computing, reaching Internet users in more than 240 countries and regions. The Group is currently focused on fostering the development of an open, collaborative and prosperous e-commerce ecosystem.

Alibaba Group was founded in 1999 by 18 people led by Jack Ma, a former English teacher from Hangzhou, China who has aspired to help make the Internet accessible, trustworthy and beneficial for everyone. The privately held Alibaba Group, including its affiliated entities, employs more than 24,000 people in some 70 cities in Greater China, India, Japan, Korea, the United Kingdom and the United States.





Alibaba Group’s businesses and affiliated entities

B2B - Alibaba.com

Alibaba.com International (www.alibaba.com) operates the leading global e-commerce platform for small businesses around the world. Upgraded from the previous Alibaba.com International Core Business Unit in July 2012, it aims at creating the go-to English-language platform for cross-border trade and purchases as well as helping small businesses worldwide expand to overseas markets. As of June 30, 2012, the platform had 29.4 million registered users from more than 240 countries and regions and showcased 2.5 million supplier storefronts.


B2B - Alibaba.cn (1688.com)

Alibaba.com China (www.alibaba.cn) operates China’s leading e-commerce platform for small businesses engaged in domestic trade. Upgraded from the previous Alibaba.com China Business Unit in July 2012, it aims at providing Chinese small businesses with a comprehensive domestic e-commerce solution that comprises more than product listing, sourcing and large-quantity wholesale services. As of June 30, 2012, the platform had 54.8 million registered users and showcased 8.4 million supplier storefronts.


B2C - Tmall.com

Launched in April 2008, Tmall.com (www.tmall.com) is an online shopping landmark in China with an extensive brand selection. An open business-to-consumer (B2C) platform, Tmall.com has established itself as the destination for quality, brand-name goods catering to increasingly sophisticated Chinese consumers and is the most visited B2C online retail website in China*. In June 2011, it was separated from Taobao’s consumer-to-consumer (C2C) marketplace and became an independent business.

Tmall.com currently features more than 70,000 major multinational and Chinese brands from more than 50,000 merchants. It offers several product verticals with customized customer services, including Consumer Electronics mall; Book mall; Home Furnishing mall; Designer Footwear mall; Beauty mall; and Imported Goods mall. Brands with flagship retail storefronts on Tmall.com include UNIQLO, L’Oréal, adidas, P&G, Unilever, Gap, Ray-Ban, Nike and Levi's. Tmall.com and Taobao Marketplace set a record for highest single-day transaction volume during a special promotion on November 11, 2012, facilitating the sales of goods totaling RMB19.1 billion (US$3.1 billion) on the day.


C2C - Taobao.com

Launched in 2003, Taobao Marketplace (www.taobao.com) is the most popular consumer-to-consumer (C2C) online marketplace in China. Its mission is to foster a comprehensive e-commerce ecosystem that will provide partners and consumers with the best user experience possible. With more than 800 million product listings and more than 500 million registered users as of June 2012, Taobao Marketplace is one of the world’s top 20 most visited websites*.


Group Buy - Juhuasuan.com

Juhuasuan (www.juhuasuan.com) is a comprehensive group shopping platform in China. It was launched by Taobao in March 2010 and became an independent business in October 2011. Juhuasuan’s mission is to aggregate consumer power and offer the widest selection of high-quality merchandise and localized lifestyle services. Juhuasuan achieved peak transaction volume and facilitated the sales of goods and services totaling RMB282 million (US$44.76 million) on December 12, 2011 and saved tens of millions of consumers more than RMB11 billion (US$1.74 billion) in 2011.


Shopping Search Engine - Etao.com

eTao (www.etao.com) is a shopping search engine in China which provides comprehensive information about products, merchant and promotional offers. It was beta-launched by Taobao in October 2010 and became an independent business in June 2011. Its mission is to create a “one-stop shopping engine” which can address the problems faced by Chinese consumers before and after shopping online, assist them in making purchase decisions, and help them identify low-cost, high-quality merchandise on the Internet faster.

Features and services offered by eTao include product search, rebates, coupons, group buy search, Tao Bar community and product pinboard eTao Faxian. It currently showcases more than 1 billion product listings, more than 5,000 business-to-consumer and group shopping websites, as well as more than 200 million pieces of shopping-related information.

eTao reflects product results from various major B2C online shopping platforms and individual brand owners including Taobao Marketplace, Tmall.com, Amazon China, Dangdang, Gome, Yihaodian, Nike China and Vancl.


Alibaba Cloud Computing - Etao.com

Established in September 2009, Alibaba Cloud Computing is a developer of platforms for cloud computing, data management and mobile services. Its goal is to build the first platform of choice for sharing data and make cloud computing services more accessible to the public. The company is committed to supporting the growth of Alibaba Group and the whole e-commerce ecosystem by providing a comprehensive suite of Internet-based computing services, which include e-commerce data mining, high-speed massive e-commerce data processing, and data customization.


Third-party payment platform - Alipay.com

Launched in 2004, Alipay (www.alipay.com) is the most widely used third-party payment solution in China with more than 700 million registered accounts as of June 2012. It provides an easy, safe and secure way for millions of individuals and businesses to make and receive payments on the Internet. On November 11, 2012, Alipay set a record for the highest daily number of transactions, processing 105.8 million payments during the 24-hour period.

The preferred online payment tool of Internet merchants in China, Alipay provides an escrow payment service that reduces transaction risk for online consumers. Shoppers have the ability to verify whether they are happy with goods they have purchased before releasing funds to the seller.

Alipay partners with more than 170 financial institutions including leading national and regional banks across China as well as Visa and MasterCard to facilitate payments in China and abroad. In addition to Taobao Marketplace and Tmall.com, Alipay provides payment solutions for more than 460,000 merchants, covering a wide range of industries including online retail, virtual gaming, digital communications, commercial services, air ticketing and utilities. It also offers an online payment solution to help merchants worldwide sell directly to consumers in China and supports transactions in 12 major foreign currencies.


China Yahoo!

Alibaba Group acquired China Yahoo! (www.yahoo.com.cn) in October 2005 as part of its strategic partnership with Yahoo! Inc. China Yahoo! is a long-serving Chinese-language portal with a focus on essential Internet services including news, email and search.




Alibaba.com

Alibaba.com, founded in 1998 by a group of 18 people led by CEO Jack Ma, is a leading global e-commerce platform for small businesses around the world. The main aim of Alibaba.com is to provide aid to small to medium sized companies to help them in their worldwide expansion to oversea markets. By mid 2012, Alibaba.com has successfully reached a user database consisting of 29.4 million registered users from over 240 countries and regions.

In addition to its international site, Alibaba.com, a China alternative known as 1688.com is also offered to businesses in China for domestic trade. The China site, 1688.com, is similar in nature to the international site aside from not having many of the features that the international site provides to help its international members. By mid 2012, 1688.com has successfully reached a user database consisting of 54.8 million registered users.

Alibaba also provides a third platform known as AliExpress for international buyers that wish to purchase smaller quantity of a product at wholesale prices.

Alibaba.com has a Youtube Channel that features small businesses and their stories as well as success stories of using alibaba.com from small medium firms. The channel can be accessed here: http://www.youtube.com/user/teamalibaba

Features

Alibaba.com provides its members with a lot of features to help start-up and maintain their businesses. By utilizing the many features available on Alibaba.com, businesses are able to become increasingly competitive with other firms that may not know about Alibaba.com, thus putting them at a competitive advantage. The following sections will outline some of the main important features that members of Alibaba.com may use on a daily basis.

Post Buying Request

Buyers on Alibaba.com have the option to fill out a form detailing the product name, category, specifications, estimated quantity, expired time, and business contact information so that vendors may review these requests to see if they are able to provide the buyer with the product that he/she desires. If a vendor wishes to provide the product to the buyer, they will then submit a quote to the buyer so that the buyer has the opportunity to review all quotes that he/she received and decide on the vendor that he/she would like to deal with.

Instant Messenger

Members of Alibaba.com have access to a software called TradeManager, which is an instant messenger that provides instant online chat for buyers and vendors to negotiate prices and discuss business related problems.

Trade Alerts

Trade alerts provide members of Alibaba.com with free updates on their chosen topics such as trending products, buying requests and supplier information. These alerts are sent directly to members' email inbox to ensure the information are readily available to the users whenever needed.

Price Watch

This feature provides international businesses constant updates for prices of products globally and within China so that they can compare and decide the best course of action to take for sourcing their suppliers.

Bargain Buy

Bargain Buy is a feature that provides information of products that have high profit margins. Alibaba.com uses this feature to display pricing information of a particular product and the expected profits that can be made if businesses sell the product at the manufacturer's suggested retail price. This feature is exceptionally beneficial to businesses that have just started, as it can help them determine which products are highly profitable, therefore minimizing the risk of small businesses importing goods that have a small ROI.

Inspection Service

For international businesses that are sourcing supplies from China, it is difficult for them to check the quality of the product before it arrives. Thus if the product appears to be defective upon arrival, it will cause many issues in the businesses' operating process. Alibaba.com aims to solve this issue by providing a feature known as inspection service where buyers are able to contact inspectors in China to inspect potential products for them for different amount of fees. By doing so, international buyers are able to ensure the quality in the product they are purchasing.

Supplier Assessment

International businesses are able to purchase a list of reports for various vendors to determine whether a vendor is reliable or not. Supplier assessment contains 3 parts: 1) A report detailing the management of a company, the equipment they use, where they export, etc. 2) Products made by the suppliers and information about a supplier's production capabilities and flow and 3) a Video displaying the company's operating environment and procedures.

Loans

Alibaba.com provides loans, but only to businesses in China to help with their expansion into the international market.




Taobao.com

Taobao.com is an online shopping platform launched by Alibaba Group in 2003. It is the most popular ecommerce platform in China and it offers various ecommerce models such as C2C, B2C, groupbuy, forms of auction pricing as well as distribution platforms. It remained completely free for its first 7 years running and later started to charge for advertisement fees; which is still its main source of revenue to date. Jack Ma's future hope with taobao.com is to create more than 10 million job opportunities for the Chinese population with the help of this website. The website has several sections and complementing functions which includes: Taobao with its C2C platform; Tmall with its B2C platform; Aliexpress for international sales; Aliwangwang as the messenger software for communication between buyer and seller; Etao used as the main search engine on the website; and lastly the Happy Taobao, the new subsection of taobao.com aimed to be a TV media channel to showcase various products and stores on the website.

In terms of its remarkable market reach, statistics have shown the website currently has: • more than 500 million registered users, 600 million fixed visitors daily; more than 100 million registered mobile users

• more than 800 million product listings daily

• 48000 products sold every minute

• Record sale of 3.36 billion RMB on Tmall and 5.2 billion RMB combined on taobao.com on November 11, 2012

• Taobao currently has 95% of the market share in C2C ecommerce and 51.5% for Tmall in its B2C market share

Distinguishing Features

The amount of features offered by the website is astonishing. There are countless features and elements to maximize online shopping experience and safety as well as protection for both the buyers and sellers. Every aspect of the website is designed for friendly user interface and the reliability of the services is outstanding considering it being able to hold all of its website services while through its record sales days. Only several significant features and elements of the website will be explored here.

Step by step instruction

There is a section of the website that guides the users through the process of opening a shop for sellers as well as the shopping process for buyers. For each stage of the process, step by step guidelines are provided to ensure user knowledge of the website.

Extensive rating system

To ensure better consumer choice - the ratings and comments on the website are the life and blood of the sellers. The ratings rates different aspects of the seller: product expectation with reality, customer service skills, shipping and handling efficiency. These criteria are then compared to other sellers on the website in the same business to give the buyer a better picture of how well the sellers is doing overall in the market.

Resources and support for sellers

Seller's centre on the website offers vast amount of resources for helping sellers through issues of advertisement, product picture processing/Photoshop, sales and operational analysis, etc. The "Alischool" section covers everything from marketing, to operating a small on-line business(industry/market analysis, taobao features), designs, data analysis, team management, and customer service. These on-line learning materials, posts are complemented by on-line seminars. The reservation for live seminars are about $1.5 each and are free once broadcasted. All of these resources are to help any seller to start their on-line business and to succeed at it. It offers the chance for any individual with no retail, eCommerce and business background to launch, grow and sustain their on-line stores. In the end, the website also offers a certificate that showcases the holder's ability to manage an on-line store.

Open platform for API

There are various complementary apps to taobao.com. These apps can be developed by any registered user of the website and allows the developer to receive a profit under certain circumstances.

Protection for sellers and buyers

The website has various protection programs and features available to maximize transaction safety. These features/programs are chosen by the sellers to opt in and make available to buyers; and provides the buyers with additional protection when the seller has that feature available. Various protection covers areas such as return policy, counterfeit policy, unsatisfactory product resolution process, etc. Apart from these features, other section of the websites informs the buyer and seller on recalls, dangerous items, various news and posts about any products with concerns or issues. Taobao.com also has a subsection dedicated to seller and buyer safety tips when making a transaction on-line. These safety tips includes awareness before a sale, during a sale, as well as experiences and problems faced by both sides of the parties after a transaction. There are always certain risks associated with on-line shopping; but taobao.com has really taken careful and detailed steps to minimize the risks for buyers to have the best on-line shopping experience.

Business Opportunities

The numbers of new business, new owners, new sellers on taobao.com are enormous. Almost anyone who has time and product resources available have taken this opportunity to open their own store on the website. Even individuals with a full time day job have made their store on the website a part-time responsibility and an extra source of income. There are millions of people in China right now hoping to make millions with the help of this website.

Internal Opportunities

Industry insiders generally agree, though, that logistics is the soft spot at Taobao, which as an e-commerce operator must base its business on the industry's core elements: information flow, fund flow and logistics. Taobao Mall is preparing for a major investment in building its logistics information system. From this B2C platform, vertical industries could expand in the future, so it's not trying for now to fully cover the supply chain but plans to control the information management game through back-office services and by setting standards. The company has yet to firmly establish its logistics information system and standards for service. Taobao's goal is to overtake and defeat established B2C firms such as 360BUY.com and DangDang.com, which currently have the capacity to integrate other services with consistent delivery systems.

Job Creation – Logistics Department

External Opportunities

Consumers can start their own “business” using TaoBao, while people with more funds can start their own “brands” using tmall. The establishment of tmall will create more jobs by creating a need for customer service personnel to deal with customers on a daily basis.

Models

Taobao also creates opportunities for models as vendors often require models to wear their clothing for display purposes, which is used to lure and attract potential customers. Taobao is also seeking for models who are willing to participate in the product delivery process by showing up at the customer’s door to hand them their products for an extra 10 RMB. Data from TaoBao reveals that in the first half year of 2012, the production value of TaoBao’s marketplace (mm.taobao.com/) reaches over 1.1 billion and the number of models working on this platform is close to 35000, 60% of which are from Beijing, Shanghai, Guangzhou, Hangzhou, Chengdu and Wuhan, biggest cities in China. Over 70% venders admit that models have promoted their business; while 80% consumers expect online products can be interpreted by pretty models. Monthly income for a TaoBao MM is commonly over 10000 yuan, for those particularly famous models, 50000 yuan for one day is possible, which for an ordinary “white-collar”, equals to their six-month’s salary, reported by TaoBao.

Agents

Taobao agents are businesses that will help international consumers place orders on the items they want on Taobao and ship it to their destination. The success of this type of business is due to the fact that the products on TaoBao are only available for the residents in China because a China bank account is necessary to complete the online transactions. International shipping is also very expensive through TaoBao, therefore, agents are able to not only help international customers purchase products, but also provide them with cheaper shipping fees.

Customer service representatives

As business grew larger on the website, the demand of customer services naturally lead store owners to hire customer service representatives for both on-line chat-rooms on Aliwangwang as well as phone services.

Professional Commenters

Yes, you heard right. There are individuals whose full time job is to give outstanding comments for sellers to attract and retain potential customers and visitors. Illegal organizations have also taken this chance to offer services to delete undesirable comments for a price range from 50-300 dollars.


Taobao.com Business Model in North America

Taobao.com Success Factors in China Market

Reliability - The website's reliability through heavy on-line traffic and transactions.

Convenience - Convenience of shopping on-line has always been a big appeal for consumers. The option of being able to purchase goods anywhere anytime through availability of Internet has greatly attracted people to eCommerce alternatives.

Price - Taobao.com offers unbelievable low prices that is one of the keys to its success. It brings together sellers with their unique sources of products that offers a very ideal price for buyers. The prices for goods are always well below what buyers find in the physical retailer stores.

Product Varieties - With 800 million products listed on the website at any given time, taobao.com has amazing product selections. It covers almost everything you can find in the physical retailer stores, and lists other unique products of which you can only find on-line. Taobao.com offers many people that would like to sell their own creations but are unable to penetrate the distribution market and do not have enough resources to set up a physical retail location.

Alipay - The payment system developed by Alibaba Group is one of its first kind in China. Before Alipay, consumers purchasing goods on-line have to go through a slow and tedious process with the banks that offers such a service. Alipay provided a simpler and more protected payment method that became the ultimate means of payment for on-line transactions.

Counterfeit/Counterfeit lawsuit- Taking advantage of the many loopholes in China's legal system, many people have used the website to provide the mass market with cheap imitation products of real high-end brands. Sellers and manufacturers gives the consumers the option of buying a very high quality and well made products that is identical to a branded product, and yet costs the consumers only a fraction of its price. For even cheaper knock-offs, consumers have the option of choosing a lesser quality counterfeit for a reduction in price. The selection and options are phenomenal in this market and the businesses have truly excelled. Most importantly, the loopholes in the legal system made it impossible for the big brands to successfully sue and file for injunction against the counterfeit manufacturers and sellers.

Free On-line Store - Taobao.com is completely free for sellers to set up a store on their website. There are absolutely no start up cost, no additional membership fees, no hidden and future charges.

Manufacturing Resources - There are lot of cheap and available manufacturers in China that have made possible for sellers to take advantage and offer prices that are undeniable. Imports are extremely expensive in China, and foreign brands are ridiculously high priced and this causes great opportunity for local manufacturers and sellers to offer a cheaper alternative for the Chinese population.

North America On-line Market

Statistics show around 78% of the population in North America are on-line users and roughly 49% of the college students in USA prefer buying on-line rather than purchasing in-store. In Canada, about 26% of the college students prefer on-line shopping compared to in-stores. The younger generation have definitely showed a great interest in eCommerce and there will continue to be a growth in this trend as time passes. Thus, the market does exist in North America for a website such as taobao.com to grow and expand. But will such a business model prove successful in a completely different environment?

In North America, the biggest C2C and B2C platforms are eBay and Amazon. Some of the key success factors listed in the previous section along with other factors will not work with these platforms and in this culture. Ebay and Amazon has established themselves very well in the North American market. They too, are known for their convenience of finding varieties of products and their attractive prices. However, their influence and impact on the local population are incomparable to the reach of taobao.com in China. Several potential reasons for such differences are explored below.

Cultural Difference - Asian countries have adored foreign brands and concepts. They will almost endorse any brands perceived to have come from Europe or North America region. However, the pricing of these products are extremely expensive due to import duties and such. Thus, there is a real market demand in China for the counterfeit market. China also has a market for cheap China-made products since it is still a developing country and the majority of the population lack the resources to purchase expensive products. In the North America market, the more luxurious brands can still be affordable to anyone with a modest income. An example would be: the lowest pricing of an LV bag here in Canada is $800, affordable to an office worker earning a monthly salary of $3000 with careful budgeting during the month; however, the same bag in China would cost about 5000RMB, which is double the 2000-3000RMB regular monthly salary of an office worker in China. Also, in the North America market, the culture tends to be leaning away from buying counterfeits. People are willing to pay a premium for the quality and the design behind the branded products. The Americans are also moving away from the China-made products as they are now perceived to be associated with poor quality. One other very important factor to consider is the concept of social responsibility. The Americans are now growing more concerned with the ethics and social responsibilities involved with the organization/manufacturer behind the products. Thus, they might be willing to overlook the benefits in reduced price and pursue products that have a better reputation in such areas. Consumers in China are also more reluctant to physically shop for their products as the population density in China is extremely high, thus making it hard for most people to have a pleasant shopping experience as many places are overly crowded. However, the popular density in North America is relatively low and combined with the fact that it is extremely convenient to purchase a large quantity of things in North America as most people have their own transportation to carry their belongings, makes it a less of an hassle for North American consumers.

Mailing costs are also substantially higher in the North American market, and it only made sense for consumers to purchase goods on-line in large quantities to justify the expensive shipping costs as well as to receive the offer of free shipping after a certain threshold offered by many sellers.

Uncertainties and Risks - The big eCommerce platforms have limited protection features compared to Taobao or Tmall. This has raised the level or risks the buyer needs to take and so there are still doubts in the general population about the safety and issues of shopping on-line.

Resources for Sellers - Taobao offers extensive learning materials to help a new and start-up stores to become successful on the website. The Chinese website pro-actively pushes individuals with an idea or dream to start their business on-line and provides as much help as they can to help the business owners achieve their goals. Whereas the shopping platforms here offers no such support and is only intent on generating a profit from the transactions and listings; their strategy is may the best player win. The fees of using websites such as eBay to open an on-line store further deters it from reaching massive scale with the public.

In the end it's quite hard to say whether or not a website offering completely free services, except for advertising fees, and having wonderful website features such as taobao.com will excel in the North American market. It is a very competitive market where every businesses are striving for the ultimate goal of high profitability.

The story between Taobao & Ebay China

ebay.cn
Taobao.com

By 2008, Jack Ma, CEO of Alibaba.com Inc., was in a position to consider how to fortify Taobao’s dominant position in China’s online consumer-to-consumer (C2C) market. Ma and his company had come a long way since May 2003, when they first launched the Taobao website. Back then, eBay China dominated the fledgling market, holding over 70 percent share. It had entered China with its acquisition of the start-up EachNet, and was actively building upon that company’s first-mover advantage. But by 2006, Taobao would overtake eBay China. As Taobao grew explosively, eBay China’s market share would fall dramatically and it would bow out, transferring its operations to a joint venture partner.2 THE BIRTH OF CHINA’S ONLINE C2CMARKET Although eBay would nominally continue to operate in China, it was no longer a concern in Ma’s plans for Taobao―which by 2008 held over 80 percent of the market. How had this upstart company overwhelmed the world’s most formidable player in the online C2C space?


Taobao Rivals eBay China

During the period from late 2002 to early 2003, when eBay was acquiring EachNet, one man was particularly concerned with the development, and quietly evaluated the progress of eBay. He was Jack Ma, founder and CEO of a leading Chinese Internet company, Alibaba.com Inc. Ma was a legendary business figure in China, who progressed from being a college English teacher to one of China’s earliest Internet pioneers. Very different from other Internet entrepreneurs in China, who normally had a strong technical background and graduated from an elite university, Ma attended a local college in Hangzhou and taught English at another local college after graduation. He had almost no knowledge of computers, but happened to come across the Internet during a trip to the U.S. during the 1990s. On his return to Hangzhou, Ma founded one of the earliest business websites in China, and then in 1999 founded the business-to-business (B2B) website Alibaba.com. By 2002, Alibaba.com had grown to be the leading B2B website in China.

When eBay acquired EachNet, Ma felt that eBay could become a serious threat to Alibaba. According to Ma: “In China, there are so many small businesses that people don't make a clear distinction between business and consumer. Small business and consumer behavior are very similar. One person makes the decisions for the whole organization. We launched Taobao not to make money, but because in the U.S. eBay gets a lot of its revenue from small businesses. We knew that someday eBay would come in our direction.” As eBay’s Cobb observed at the time: “This is also a model where people can start their own business. So it really comes together quite nicely in China. We've received great support from the government because they've realized how we can empower entrepreneurs and provide access to the rural areas.”

Taobao.com was headed by Tongyu Sun, one of Alibaba.com’s founders. In Chinese, the phrase “Taobao” actually means “searching for treasures.” While this meaning shares the spirit of “Alibaba,” the link between Taobao and Alibaba remained secret at first. For over two months after the launch, few people knew Taobao.com was part of Alibaba, not even most employees of Alibaba. But in July 2003, Ma thought the website was ready to go head-to-head against eBay China, and officially acknowledged the affiliation between Taobao and Alibaba.35 At the news conference, Ma also announced that Alibaba would invest 12 million US dollars into Taobao.

Ma viewed Taobao an underdog in this competition. Management chose the image of a worker ant to be Taobao’s mascot, with the idea that Taobao employees needed to unite and fight to the end. In a late 2004 celebration for Alibaba’s fifth birthday anniversary, employees of Taobao waved flags featuring worker ants, showing their determination to defeat their powerful rival. At the time, Taobao might in fact have looked like an ant to eBay. In 2004, when asked about potential challengers in China, Cobb only mentioned a joint venture between Yahoo! and Sina (China’s leading Internet portal service company). Cobb viewed Internet C2C as eBay’s primary expertise, and did not think that it could be matched by its competitors in China.

Ma’s plan for Taobao was to compete in a different way than eBay. In Ma’s opinion, despite eBay’s huge success in other countries, the war eBay faced in China would present new challenges. Ma commented in 2005: “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose―but if we fight in the river, we win.” Ma gained some of his confidence from one of his most important business partners―Masayoshi Son, Founder and CEO of Softbank Capital. After all, it was Yahoo! Japan, backed by Softbank, that defeated eBay in Japan. The founding of Taobao was believed to be a co-effort between Son and Ma, with Softbank providing the much-needed capital. Ma was optimistic about this partnership: “We were both thinking the same thing: Son kicked eBay out of Japan. I have the same chance in China.”


Competing for Customers

Taobao approached advertising very differently than did eBay China. eBay’s approach was to invest heavily in its marketing campaigns in China, and to sign exclusive contracts with almost all the major Chinese websites. These contracted websites then were forbidden to sell advertisements to eBay’s competitors. This exclusion was important to Taobao, since it badly needed publicity. To deal with this problem, Ma and his team switched to the “ants’ way.” They took advantage of the enormous number of computer bulletin board services (BBS) in China, and posted thousands of messages there to introduce Taobao to Internet users. According to Ma, this grassroots approach to online marketing worked well, and Taobao continued this approach even after most of eBay’s exclusive advertising contracts expired. “They (eBay) have deep pockets, but we will cut a hole in their pocket,” Ma was quoted saying.

Taobao launched with an entirely no-fee model. It further extended the no-fee plan for three additional years starting in October 2005. According to a survey taken in 2005, a significant number of eBay China’s users were migrating to Taobao because of the free services. eBay China responded by defending its fee structure, noting that “free is not a business model,” and that quality service made such fees necessary.

Taobao designed its categories in accordance with the typical structure of a Chinese department store, with separate sections for men’s and women’s departments. By contrast, eBay China used the category structure set by eBay’s global platform. Taobao focused on fostering a sense of community on its website, by setting up online forums for its users and by encouraging interactions between sellers and buyers. Because of the no-fee policy, Taobao was less concerned with offline transactions among those who used the online service only to initiate dealings. (Such transactions would mean a loss of revenue for a fee-based service like eBay China.) To facilitate communication, Taobao integrated an instant messaging service into each seller’s webpage, and allowed sellers to provide full contact information, including phone numbers, on their own web pages. Some industry insiders argued that heavy communication among Taobao users substantially increased their sense of community. As a consequence, Taobao was generally perceived as informal and friendly compared to eBay China.


Competing in Payment Services

Management at Taobao thought it was important to offer payment mechanisms as part of their service because of China’s poorly developed e-business infrastructure. So the workforce at Taobao worked feverishly to launch its integrated payment system, AliPay, within three months of the website’s official launch in 2003. Ma and his team had longstanding relationships with key government officials and leaders in the Chinese banking industry, and were able to secure the cooperation of key banks in China to process payment transactions. AliPay also provided escrow services for buyers. It held the buyer’s payment until the merchandise was actually accepted by the buyer, and provided insurance for buyers in case of fraud to protect them from financial losses. Taobao also made efforts to facilitate the delivery of transacted merchandise. In 2005 and 2006, Taobao struck deals with several leading logistic companies in China to provide customized services at discounted prices to users of AliPay. The company’s technology teams, meanwhile, integrated delivery service requests into AliPay’s user interfaces.

eBay China also had been developing a payment system, “An Fu Tong” (Secure Pay), building on the payment and escrow systems developed earlier at EachNet. This service was launched in October 2004. The escrow service would hold the buyer’s payment until delivery was confirmed, while the payment system was similar to PayPal’s. Meanwhile, eBay corporate acquired PayPal in 2003 and soon bundled this service with its U.S. website. eBay corporate had high hopes for PayPal in China, appointing eBay executive Jeff Liao, originally from Taiwan, to head PayPal China. Liao had planned an immediate launch upon his arrival in January 2005, but encountered serious institutional obstacles that delayed launch until July of that year.

PayPal’s problem in China stemmed from the Chinese government’s tight control of financial service providers. Chinese retail financial services were closed to wholly-owned foreign companies at that time. To manage this problem, Liao carefully orchestrated PayPal’s entry by partnering with a local company. But PayPal still was scrutinized by the government. In particular, PayPal was prohibited from offering international transactions and flexible credit― services that leveraged its global platform and would give it an advantage over Taobao.

After launch, eBay China found that its customers often confused An Fu Tong and PayPal. This confusion led to serious problems, since customers would mistakenly think that the transaction system had erred when, in fact, they were mistakenly moving between separate systems. In response, the company emphasized that the two services were distinct, and that each focused on different stages of the transaction. But the problem of customer confusion had taken a toll. While AliPay was rapidly being adopted by Taobao’s users, online payments were growing slowly within eBay China. During 2005, 79 percent of listings on Taobao.com accepted online payments, while that number for eBay China was 21 percent. In the wake of this success, Taobao’s management made AliPay available to merchants other than those on Taobao.com. The company also extended its insurance service to all transactions that occurred through AliPay, even those not on Taobao.


Competing for Partnerships

2005 saw both Taobao and eBay China forming key partnerships. In April, Taobao and Sohu (one of China’s leading portal websites) entered into a partnership, giving Taobao a foothold in online advertising. eBay China’s exclusive contracts with nearly all the major websites in China made this partnership particularly notable.53 In May, MSN China announced its decision to select Taobao instead of eBay China as its exclusive partner for MSN China’s shopping channel. This decision was regarded as a substantial recognition of Taobao’s rising position in China’s Internet C2C market, especially given the fact that MSN’s partner for its shopping channel in the U.S. was eBay.

eBay China, meanwhile, announced in June 2005 a partnership with Global Resources, a leading international trade information provider in Greater China area. The partnership was intended to take advantage of eBay’s global platform to attract international business people to the website. Under the plan, Global Resources’ clients would have opportunities to sell directly to Chinese customers, and manufacturers in China would also have opportunities to sell through eBay’s global platform.


The Problem of Counterfeit Merchandise

As online C2C business took off in China, the market was flooded with counterfeit merchandise ―especially in categories such as clothing and accessories. Very few online sellers were authorized vendors of branded goods, and as their sales volume rapidly increased it was impossible for the auction sites to monitor all merchandise. Few buyers complained, however, because the prices of these goods typically reflected their “knock off” status. More broadly, such counterfeit trading was widely seen in China as a fact of life, especially in categories such as clothing and accessories where some experts estimated 70 percent of all C2C sales were of counterfeits. Online C2C sites were becoming aggregators for the highly fragmented counterfeit goods industries of China. To the online C2C firms, the downside of counterfeit sales depended on the potential for legal action by brand-name manufacturers. In China at the time, no online service providers had been held liable for damages due to counterfeiting among users. For example, in September 2005, a seller on eBay China was sued in a local court of Qingdao for selling counterfeits and was found guilty. But eBay China was not held liable in the ruling, although it was sued together with the seller. Similarly, in 2006, Taobao was sued by PUMA in a local court in Guangzhou for infringing upon PUMA’s trademark rights. PUMA argued that Taobao.com provided service to 43,932 online shops that were found distributing counterfeit PUMA garment products. Taobao and its online shops were requested by PUMA to immediately stop the infringement and compensate RMB1million Yuan (approx. US$0.125 million). The court decided to support Taobao’s defense that it was beyond the online auction firm’s ability to supervise and control all its online shops’ activities.

By contrast, eBay China was especially vulnerable to negative fallout from Chinese counterfeiting. Given eBay’s global platform, any counterfeit seller in China could list goods on a system that would be displayed on eBay websites around the world. Consequently, the sale of counterfeits globally on eBay exploded after the company’s expansion into China in 2004. This fact raised a serious dilemma for eBay corporate. The worldwide organization could be subject to legal actions in the U.S. and Europe because of the availability of these counterfeits in such regions. Yet if eBay became strict regarding counterfeits, it would lose a significant portion of the Chinese market. Taobao, as a purely Chinese operation, faced no such bind.

Events several years later would serve to illustrate the different situations faced by eBay and Taobao. In 2007, LVMH, filed a complaint against Taobao regarding fake LV handbags sold on Taobao.com. But this complaint did not lead to any consequential legal actions in China―only an agreement between the two that Taobao would respond to LVMH’s future complaints in an “effective manner.” By comparison, when LVMH sued eBay in a Paris court in 2008, it won the case. Analysts then began to question whether the ‘business model’ of a global online C2C platform would be viable―a question that eBay and eBay China had already been asking several years earlier.


The Endgame

As eBay China’s performance continued to slip in 2005, many began to re-evaluate its strategy and organization. Some questioned the wisdom of eBay’s global decision-making process. The former head of strategic planning at eBay China, Charles Shen, complained: “As the service is now running from the global platform in San Jose, California, if we have to add a new feature, it takes quarters, instead of months. Taobao is more flexible and faster in responding to users.” Shao later would echo this view, saying that the complexity of eBay’s global platform severely dragged down the speed of decision making in its China operation. He claimed that a 9-week decision in the former EachNet had become a 9-month decision in eBay China.

Centralization also harmed eBay China’s technical performance. One industry insider explained that eBay global normally maintained its servers on Thursdays at midnight, in order to better prepare the website for the week’s peak traffic on Friday. But Thursday midnight in Silicon Valley would be Friday afternoon in China. Consequently, regular server maintenance at eBay’s headquarters coincided with eBay China’s heaviest traffic of the week, resulting in performance problems and customer complaints. eBay China had tried to coordinate with eBay headquarters to set up a different maintenance schedule, but was not successful. eBay corporate also saw the need for a change in its China operation, and so shook up the company’s leadership. Ten months into Zheng’s leadership of eBay China under the COO title, eBay announced in September 2005 that Martin (Shih-Hsiung) Wu, Microsoft China’s CEO, would replace Zheng and take the title of CEO. Wu was born and raised in Taiwan, but later got his master’s degree in computer science in the U.S. He moved from the U.S. to Japan when he was with Kodak, and then joined a Taiwan technology firm and started working in mainland China. By the time he joined eBay China, Wu had served as a high-ranking executive in several international IT companies’ China operations, including Lotus, Intel, and Microsoft.

Wu promptly initiated several strategic changes at eBay China. In December 2005, the company stopped charging maintenance fees for online stores. One month later it also eliminated the transaction fee. Two months after that, in March 2006, eBay China established a partnership with one of China’s largest electronics chains, YongLe Electronics. According to the agreement, EachNet.com would become the exclusive online stores for YongLe. Wu stated that the company would continue to explore the B2C market through such partnerships.

But as eBay China’s performance continued to decline, Wu did not stay long at the CEO position. In September 2006, Wu was replaced by PayPal China’s CEO Jeff Liao, who continued to head PayPal China as well as eBay China. Many industry insiders regarded this consolidation to be a sign that eBay had given up on eBay China. And so it was that in December 2006, eBay paid $40 million to Tom Online to hand over its control of eBay China―again to be called EachNet―to the joint venture partner. eBay corporate then quietly decreased integration between EachNet and its global platform. In 2007, EachNet was entirely cut off from eBay’s global platform and relegated to domestic trading within China only. Also in 2007, PayPal was taken off the EachNet website, leaving An Fu Tong as the website’s only online payment service.

eBay had repeatedly expressed its commitment to the market in China and emphasized the essential role of this market in eBay’s future plan for growth. And so eBay corporate soon opened another China site in 2007, www.ebay.cn. This site was fully integrated into eBay’s global platform and was directly controlled by eBay corporate. Management at eBay corporate explained that www.ebay.cn was designated to international trade, while EachNet.com would focus on domestic C2C.

Conclusion

The real influence and dream behind Alibaba Group all came from one man, Jack Ma. He is the person who made Alibaba and Taobao's business model successful and influential. It is his belief and religion of helping small medium sized firms as well as tiny individuals that set him apart from other businessman and allowed him to squash out his competitors. It is ultimately this dream that made his company the biggest eCommerce giant in the world and in China. All of Alibaba Group's services resonated with his religion that successfully distinguished his business from other organizations around the world and perhaps will continue to shape and influence the world in a better way.

References

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21) http://www.youtube.com/user/teamalibaba

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