President, Alibaba B2B, Hangzhou, China
2007-05-01, China International Business (CIB)
FACE TO FACE INTERVIEW
By Mina Choi | From CIB July 2007 Print Edition
NAME: David Wei
EDUCATION: Shanghai International Studies University, London Business School
COMPANY: Alibaba B2B
IN HIS POCKET: Mont Blanc wallet, pen and business card holder; Dunhill cigarette lighter
The hottest gossip on the IPO front is the rumor of Alibaba's initial public offering, expected later this year. The Alibaba Group, founded by Jack Ma, has been at the forefront of China's internet boom and is the world's largest B2B e-commerce website, with more than 3 million registered users worldwide. Alibaba China — another subsidiary — is the largest Chinese-language B2B marketplace, with over 16 million registered users. The Alibaba Group now has 3,500 full time employees at 18 different branches.
In 2005, in what many felt was a sign that Yahoo! had thrown in the towel regarding its China prospects, the American company paid USD 1 billion in cash for a 40 percent share of the Alibaba Group, and handed over to Alibaba the control of Yahoo! China. A year later, Alibaba made the surprising announcement that David Wei, former president of B&Q China, had joined Alibaba as executive vice president of the Alibaba Group and president of Alibaba.com. Before his move to Alibaba, David Wei grew the British B&Q's do-it-yourself retail business from five to 51 stores in seven years, making it one of the largest foreign retailers in China. China International Business sat down with David Wei to talk about his recent transition.
Q: You went from seven years at B&Q, a “bricks and mortar” company, to Alibaba.com, one of the stars of e-commerce. Has this been a big adjustment for you?
Wei: All the basic business logic, philosophy and management are applicable to e-commerce. What is different is the e-solution, and that is something new. E-solutions can solve many problems that the traditional commerce world cannot solve.
Q: What are some of these problems?
Wei: In a traditional commerce world, scale is everything for the big companies. For example, because of its scale, B&Q could put a buying office in China, and export products from China in huge volume to make our price competitive in the UK or in Europe. But the smaller retailers in the UK cannot do that. However, with e-commerce, these small retailers are no longer handicapped because they can source from a flat marketplace like Alibaba. E-commerce has made the world flat. A small buyer or seller's reach to the other side is no longer limited by size.
Sometimes scale is a big problem for the larger companies. For example, B&Q started sourcing from Alibaba in 2003. That's when I first learned about Alibaba. I would find an excellent offer from a supplier listed in Alibaba with prices lower than what B&Q's buyers were getting. We confronted our buying department, and they said that this particular supplier only had 100 pieces and we needed 10,000 pieces. That meant that although this particular seller was not right for B&Q, those 100 pieces could have been easily taken by smaller competitors with just two or three stores. Without e-commerce, this kind of information would not have been accessible. Now, small businesses can now actively compete with bigger businesses.
Q: Why would the big businesses use Alibaba?
Wei: Even with their own sourcing offices here, these companies cannot check out all the suppliers, or in the case of China in particular, check out the suppliers inland. They use our online marketplace to screen and shortlist potential suppliers. They may still visit the factory or do some face-to-face negotiations. But now they can go through hundreds or thousands of suppliers online, shortlist them down to a dozen and finally pay a visit to three or four of them. So for the big buyers, our service is for screening, and they use their resources to take their actual negotiations offline. But online screening selection saves them a lot of time.
Q:So it's like having 24-hour trade show.
Wei: [It's] a 24-hour, 365-day trade show. But it's
better than a trade show because a trade show has limited space. In
the virtual marketplace, there's no limit to space.
Q: Do you think you can go back to traditional retailing after having seen the miracle of the virtual marketplace?
Wei: It would be difficult because there are many problems if you have the commerce without the e-solution. For example, at B&Q, as a retailer we always struggled with space and the restrictions posed by operating hours. In e-commerce the time limitation and the space limitation just don't exist.
Q: So what happens at the 16 Alibaba service centers?
Wei: Well, in fact we have 20 now and we plan to have 25 by the end of this year. They really work as education centers for consumers, an experiencing center and service center, and also as a sales office because the Chinese SMEs need education about e-commerce.
Q: So you're offering technological training for the previously unreachable suppliers.
Wei: That's the difference between the US and China, and why Alibaba can win in China. In the US, you have about 8 million SMEs - seven million of them have their own websites. In China, we have over 30 million SMEs, but only 700,000 have their own websites. That's why in the US, the 7 million websites boost business [for search engine Google, which earns revenue from advertisements]. The businesses build a website, and if there's no traffic they go to Google to bring traffic in. In China, Google cannot win because there are only 700,000 websites that they can search through. With us, these businesses don't need to build a website. We build a website for them in our marketplace and maintain it for them so it is much cheaper and easier for them to start e-commerce. This is the main difference between Chinese SMEs and US SMEs.
Q: Why do you think that in the internet web portal or e-commerce areas the local Chinese companies have done much better than the global firms?
Wei: My conclusion is that the Internet is something that doesn't need globalization except for e-commerce. So the search engine is very local, because Chinese characters are so different from English. The same goes for portal sites, because it is for local news and local language. Very few people care about the international news unless something big happens. Even online gaming is very local. Online shopping, such as Taobao, is also local - most of the transactions are done within the same city. Very few people really want to buy something from eBay US in China. So the only market need for a global Internet entity is in the B2B e-commerce sites.
The other reason is that the business is not technologically driven, unlike Google. We are still customer-driven so we only develop technology to respond to customer needs. This may be one of the factors for why many of the bigger Internet giants have failed in China. They have focused too much on technology and ignored whether Chinese customers can use their site.
Q: Alibaba has branched out its services with Alipay and Alisoft. Are there more plans to create other services to expedite e-commerce?
Wei: Alipay has close to 40 million users with a daily transaction volume of over RMB 100 million (USD 13.11 million). We launched Alipay because there was nobody on the market doing this. The secret weapon of Alipay is escrow account service, rather than payment gateway. This makes it very different from Paypal. This escrow service was the winning model.
We also launched our own online software company, Alisoft, because no one in China was doing this. When we launched our SME financing solution, we also partnered with banks. We will also launch online logistics, but with a partner. We will be launching online hiring, online training, but with partners. These online solutions will be targeted towards SMEs which cannot afford their own complicated in-house structure with things like lawyers, an HR department, etc. They can get this solution from Alibaba, which will help them reduce costs and improve efficiency.
Q: What sort of growth do you envision for Alibaba B2B? Can you share some of your long-term plans and strategy?
Wei: We want to create an online ecology, an online ecosystem for SMEs. Also, we want to make this ecosystem international so we can apply a part of the ecosystem for Chinese SMEs to international SMEs. We have announced our plans to go to Hong Kong. We will launch our office in Japan later this year. We will also open a US and a European branch.
Q: Is the source of revenue stream changing for Alibaba?
Wei: The reason to add value-added services is to take a long-term approach to the revenue stream. [In the] short-term, the value-added services improve the “stickiness” for our customers. Since we offer so many comprehensive services, if these SMEs suddenly decide to stop using Alibaba then the switching costs will be very high for them. We want to grow the market big enough before we monetize it.
Q: Can you tell us anything about the IPO offering this year? Many say that they expect it to be one of the biggest offerings in China.
Wei: I cannot comment. But I can give you the official line: we have been ready for an IPO for years, but we will consider our customer's interests first. We have been preparing for a long time, but there's no fixed time-table.
Q: How does Alibaba plan to remain the market leader?
Wei: We don't invent new models for ourselves. We look at working models and think about how we can tailor them to the China market. For example, in the case of Taobao.com, we never intended it to be an auction site. In fact, auctions only make up 10 percent of Taobao's activity. It's really functioning as a B2C site. In China, people don't want to buy secondhand goods, so we offer a different model from eBay. Again with Alipay, the escrow service in China is not a payment issue, but a trust issue.
Q: Do you project a market saturation point for your business?
Wei: Not all of the 16 million registered users are
paying members, and the paying members are a relatively small proportion
of the users. Once many of these registered users become paying members,
then we can start to monetize our value-added services. Right now, our
basic service fee in China is still less than USD 400.