Alibaba IPO: Jack Ma's scrappy start-up takes on U.S.

SAN FRANCISCO — It was a scene straight out of Silicon Valley — only it took place across the Pacific.

In 1999, Jack Ma gathered his wife and 17 friends in his small apartment in China's eastern city of Hangzhou, about 100 miles from Shanghai.

They had pooled $60,000 to found Alibaba, a website for businesses to sell one another goods.

The dial-up connection was so slow that Ma took more than three hours to load half a Web page.

Undaunted, Ma roused friends with the first of many now iconic speeches, exhorting them to turn Alibaba into a global website that could take on Silicon Valley.

"All of our brains are just as good as theirs," he said.

That year, Beijing-based technology consultant Duncan Clark visited Hangzhou and found a dozen or so people crammed into the apartment, "as I could tell by the number of toothbrushes jammed into a mug in the bathroom and the unmistakable atmosphere of a start-up where people lived and worked on the project 24/7," he said.

Fifteen years later, Alibaba is on the verge of an IPO that clinches its breathtaking rise from scrappy start-up to global powerhouse.

Fueled by the growing Chinese middle class, Alibaba dominates e-commerce in China, positioning the company at the center of the world stage and hogging the spotlight from Silicon Valley.

"The biggest IPO in America is going to be a Chinese company that is rising on the promise of the Chinese economy," said Max Wolff, chief economist at Manhattan Venture Partners.

Ma, 49, the executive chairman of Alibaba, has even greater ambitions.

"In the past decade, we measured ourselves by how much we changed China," he wrote in a letter to investors last week. "In the future, we will be judged by how much progress we bring to the world."

THE EVERYTHING COMPANY

If Amazon.com is the everything store, Alibaba wants to be the everything company.

The Chinese technology giant is investing in a dizzying array of digital enterprises from online video to cloud services to mobile search.

But for the first time, Alibaba is looking over its shoulder.

It's playing catch-up on commerce on mobile devices in the world's largest smartphone market. The most critical task Alibaba faces: reaching the 500 million Chinese consumers who shop, chat, play games and basically run their entire digital lives on smartphones.

Alibaba is buying stakes in companies in China and the USA, mostly in mobile and e-commerce.

In the process, it's encroaching on its giant competitors, Baidu and Tencent in China — and potentially on the home turf of Amazon and eBay.

The challenge for Alibaba, says Clark, chairman of China tech advisory firm BDA: "Keeping the tremendous momentum they have achieved in their core consumer e-commerce offering while unlocking new growth drivers in areas such as media, financial products, entertainment, etc."

Alibaba revolutionized commerce in China by building trust in a highly suspicious society where most people trust only their immediate family.

Liu Bin's family used to think Ma — known as Ma Yun in Chinese — was a cheat, says Liu, 23, in south China's booming Guangzhou city.

But in recent years, the family business, Blue as Water Garments, has embraced Alibaba as snugly as the bras and underwear it sells to online customers across China.

Wholesale and retail buyers from other provinces used to visit its shop and factories in person.

"Later we were surprised we could earn more through Alibaba, because buyers could see all our products and save time and energy," Liu said. "Shipments grew faster and faster, and all thanks to Ma Yun. What a clever website he has created."

Building an "architecture of trust" through verified online payments, ratings and other mechanisms "allowed Alibaba to empower consumers and merchants, breaking the cycle of mistrust which had hampered the industry before and which hampers whole swaths of Chinese society still to this day," Clark said.

That empowerment has changed the lives of small business owners, said Porter Erisman, a former Alibaba employee who directed the documentary Crocodile in the Yangtze: A Westerner Inside China's Alibaba.com.

"Entrepreneurship is one of the only outlets for young people to chart their own destinies," Erisman said. "That's why you see so many people passionate about e-commerce in China."

They are also passionate about working for Alibaba, which tops surveys of employers for young Chinese.

CULTISH CORPORATE CULTURE

Inside Alibaba, the company has a cultish corporate culture that is both colorful and quirky.

Company employees "Alipeople" are encouraged to take nicknames from warriors in martial arts novels. (Ma goes by "Feng Qingyang," a swordmaster and kung fu guru who trains his apprentice to become a hero.)

Their job performance is partly judged by fidelity to the company's core values including integrity, teamwork and putting customers first.

American Idol-like competitions pit departments against one another. Ma himself is not shy about taking the stage.

At a stadium rally to celebrate the 10th anniversary of Alibaba in 2009, Ma appeared in a blond wig and black leather jacket with red flames and metal studs and belted out Can You Feel the Love Tonight?

Ma owes jubilant moments such as those to an early skirmish with eBay.

In 2003, Alibaba launched Taobao ("search for treasure"), in which consumers sell to each other, challenging eBay, which at the time had 80% of the market in China.

Ma, who as a young man read the books of Hong Kong martial arts novelist Louis Leung-Yung Cha, decided to use his opponent's strength against it, publicly declaring war on eBay and drawing much needed media attention to Taobao.

"EBay is a shark in the ocean; we are a crocodile in the Yangtze River," Ma said at the time. "If we fight in the ocean, we will lose, but if we fight in the river, we will win."

At great cost to his company, Ma kept the listings on Taobao free, and by 2007, eBay's market share in China had shrunk to less than 8%. The Silicon Valley giant retreated from the market, marking a turning point for Alibaba.

"The battle generated so much buzz in China that it accelerated the growth of e-commerce," Erisman said. "Once eBay withdrew from China, it was an open field, and Alibaba had a huge lead."

THE WORLD'S LARGEST SHOPPING MALL

Its two shopping platforms, Taobao and Tmall, connect retailers with consumers.

Alibaba collects most of its revenue from commissions and advertising.

Beijing housewife Zhang Jiazhi, 32, swears by the storefronts on Taobao. Using her smartphone, Zhang shops for products for her 2-year-old daughter. Taobao is an important part of her life, for shopping and sheer pleasure, she says.

"Products sold in real shops are more expensive than the ones sold in Taobao shops. I heard you can buy any products in ordinary supermarkets in America, but we don't have so many to choose from in Chinese supermarkets," Zhang says.

Zhang does want Alibaba to do more to crack down on counterfeit goods, something it has pledged it would.

"I, and most of my friends, only trust baby products from America or European countries," she says, after a string of fake infant formula incidents. "It's easy to buy these imported products in Taobao. But you must have sharp eyes, because there are many counterfeits, too."

During its road show this week to persuade U.S. investors to buy the stock, Alibaba executives said they expect the average spending per buyer to increase over time.

On a single day in November 2013 — the equivalent of Cyber Monday in the USA — Tmall and Taobao customers spent a record-shattering $5.7 billion.

Talk about disruption.

"This is the largest e-commerce company in what will be the largest e-commerce market in the world," Bernstein Research analyst Carlos Kirjner says. "Everything about it is: Wow."

MacLeod reported from Beijing. Contributing: Sunny Yang in Beijing.

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