Throwback Thursday: Forbes Discovered Alibaba When It Had Less Than $1 Million In Sales

May 8 2014, 6:02pm CDT | by

Back during the last dotcom bubble, my team created a magazine and Web site for Forbes called Forbes.com Best Of The Web. It focused mostly on demystifying the Internet and finding useful Web sites for our readers, but it also covered then sizzling hot world of B2B ecommerce. We wrote about many flame-outs, companies  like Ariba, Internet Capital Group and VerticalNet, but we also covered some big winners and to my knowledge we were the first to shed light on a fledgling web trading site called Alibaba. At the time the tiny company was mostly just a series of informational web pages with links connecting buyers and sellers who had to strike their deals either offline or via email.  Alibaba grossed less than$1 million when former Forbes writer Justin Doebele wrote the piece in July 2000. Its sales for the most recent nine months were reported to be $6.5 billion. Why did Alibaba flourish while once exciting B2B competitors like MeetChina.com disappear? For the answer read Paul McWilliam’s story on why Alibaba’s Long Tail Makes Amazon’s Look Like A Bobcat’s. 
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by Justin Doebele  (July 17, 2000)

We are in a dance hall of a lakeside resort a two-hour drive from Shanghai. It is 11: 00 p.m. The room, done in red velvet drapes and blinking disco lights, is packed with 120 men and women, mostly under 30, all employees of Alibaba.com. They’ve been waiting an hour to hear their leader, Jack Ma. Suddenly the room erupts in applause. A tiny figure with sunken cheekbones, tussled hair and a mischievous grin grabs the microphone. He’s five feet tall and weighs just over 100 pounds.

This imp of a man brought the commercial use of the Internet to China. Although Alibaba.com is legally based in Hong Kong, its roots and most of its operations are in China, and Ma is a Mainland citizen. In March 1995, the same year that Jeff Bezos started Amazon.com, Ma registered China’s first Internet company:  Hangzhou Hope Networks Consulting. It offered to host Web pages for Chinese companies. Today Alibaba links together importers and exporters from around the world and grosses under $1 million a year.

For Ma that’s just a start. Now he has global ambitions. He aims at nothing less than Webifying the  $6.8 trillion worth of world trade (retail value). Click on to the Alibaba.com site. It lets buyers and sellers find each other, matching, say, a supplier in Tibet with a buyer in Patagonia.

An American looking to buy 1,000 tennis rackets searches among dozens of potential suppliers and learns their terms of trade. Alibaba claims more than 200,000 registered members from 194 countries, though 70% are Chinese right now. You can buy fishmeal from Ghana or wiper blades from Italy; there are more than 700 different products broken down by category and country. The site is published in Chinese and English, and it recently launched a separate Korean version of Alibaba.

Listing is free, but you can’t actually make trades through the site. Alibaba helps you make a connection and deals are struck offline or via e-mail. Alibaba hopes to derive its revenue and ultimately its profits from add-on features. Shipping, trade financing, on-site inspections, quality control services and insurance are a few of the services that could earn money for the site. Ma also hopes to make money by offering a premium service to members and through advertising and promotions.

Except for some advertising, Alibaba.com doesn’t yet offer any of these services, but Ma says he expects to have them on the site soon.

Alibaba already has satisfied customers. One is Robert Guo, of tiny textile and light industrial trading company Wuhu Wanlong Trading in Wuhu, China. “I have gotten three contracts worth  $100,000 over the past three months from the site. These are just the big buyers. We also have gotten many smaller deals off the site,” says Guo.

Nelson Dy of Van Gils Garments in the Philippines makes T shirts and other garments in Del Monte Quezon City. He gets an average of ten queries a day or more on Alibaba. “Two potential buyers [from Alibaba.com] are coming soon to meet me in the Philippines,” says Dy.

“Alibaba has made a big step forward in how business is done in Asia,” says Hong Kong-based IDC Internet analyst Matthew McGarvey. “Sites like Alibaba are injecting transparency into the trading process.”

Elsewhere, however, it faces lots of competition. Ma isn’t the only one targeting this stupendous market. Some are trying to aggregate big buyers across industries, mostly in the U.S. and Europe, as Commerce One and Ariba are doing. Others are verticals for a single industry, such as E-Steel for the metals industry and Covisint for autos.

Alibaba has grander ambitions. Ma wants the site to be both global and horizontal across all products. But he may well have picked the best starting point:  Asia, by some estimates, is home to about 70% of all the world’s exporting companies. There are about 400,000 exporters in China alone and more on the way.

Not surprisingly, two of Ma’s three biggest rivals are Asian outfits, the Hong Kong-based Global Sources and the San Francisco-based MeetChina.com. Though MeetChina is based in the U.S., it is focused on building an electronic marketplace for Chinese exporters. China Resources, a public company backed by the Chinese government, holds a minority stake in the Web site.

MeetChina.com says it plans to compete more directly with Alibaba.com by expanding to other Asian markets within a year. “We want to make buying 1,000 bicycles from China as easy as buying a book from Amazon.com,” says American Thomas Rosenthal, cofounder of the site.

The third rival, Boston, Mass.-based Industry to Industry, Inc., is backed by a private investment arm of a foundation headed by Klaus Schwab, the founder of the World Economic Forum. It started in late 1998 and has focused on four industries:  chemical, energy, retail goods, and engineering and construction./>/>

Ma compares Alibaba.com’s free-for-all approach to a Middle Eastern bazaar, where anyone can lay out their wares and haggle with potential buyers. Alibaba.com’s rivals claim this difference is a disadvantage since, like a Mideast bazaar, Ma doesn’t do any screening of either his buyers or sellers. Though MeetChina.com also has a free-for-all approach, all three rival sites offer some kind of screening of its member companies.

Ma shrugs. “Let the others go after the whales,” says Ma. “We want to catch the shrimp.” Since most of Alibaba.com’s staff are Chinese and living in China, Ma’s personnel and operating costs are relatively low. His biggest office space, in Hangzhou, is 200,000 square feet in size and rents for just  $80,000 a year. A Chinese computer engineer with three years of experience can be hired for just $18,000 a year, versus $100,000 in Silicon Valley.

Though the business is chiefly in China, most of Ma’s backing is international. His first round of  $5 million in funding came from Goldman Sachs, Fidelity Investments, Sweden’s Investor AB, Singapore’s TDF fund and Hong Kong’s Transpac. His second round of financing, at $20 million, came in January 2000 from a group of investors lead by Japan’s Softbank. “This company has the potential to be big, as big as Yahoo,” says chief technology officer John Wu. He should know. Before joining Alibaba in May, Wu was the chief architect of Yahoo’s widely used search engine.

Certainly the potential market is enormous. FORBES figures that about $470 billion a year is spent just servicing world trade–phone bills, invoicing, sales calls, overseas travel. If Web sites like Alibaba can cut that bill by even 20% –and that may be conservative–there is a potential savings pool of nearly  $100 billion from which it can draw revenues as profits.

Say this for Ma:  He understands his business is one where the future is seemingly unlimited, but the present is a period of red ink and teeming competition. “One must run as fast as a rabbit,” he says, “but be as patient as a turtle.”

 
 

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