“Okay, everyone,” Jack Ma said, clapping his hands and rolling up his sleeves. “Let’s all get up and stand against the wall.” Everyone stood up from their chairs, wondering what sleight of hand their boss would show.
“Now, I want you all to stand on your heads,” Jack Ma said. “What? You want us to stand upside down?” one member of the executive team asked in disbelief. “Yes, stand upside down on your heads,” Jack Ma said. “Oh, no,” another member murmured. “I have never done that in my life, and I am too old for that.” “No excuse,” Jack Ma said. “I am the oldest among this group. We’ll all stand upside down on our heads.” So, everyone in the room, one by one, managed to stand upside down on his or her head… After they finished the exercise, Jack Ma said, “When you stand upside down, you’ll see the world from a new perspective.” Then he turned to the person who said he had never stood on his head. “You see, you can do things that you have never done before.”
Excerpt from The Chinese Dream, by award-winning author, Helen H. Wang
Unbeknownst to the world, this inspirational exchange between a maverick boss and his executive marked a pivotal moment in the development of today’s international e-commerce mammoth. At that moment, in May of 2003, Jack Ma, CEO and founder of Alibaba, was about to announce to the team his harebrained plan to launch Taobao, a C2C platform aimed at keeping the billion-dollar e-commerce giant eBay at bay. Up until that point, Alibaba was a B2B platform founded just a couple of years before China’s climatic accession to the World Trade Organization. Naturally, Ma’s primary focus was on expanding and developing his virtual Canton Fair to connect local suppliers with the thousands of foreign companies flocking to the Middle Kingdom. But, when eBay entered the then nascent online market with its $180 million acquisition of the Chinese online auction site EachNet, garnering a market share of nearly 85 percent, Ma feared that “someday, eBay would come in [their] direction.” Consequently, the move to launch Taobao, which was initially just a defensive measure, started a remarkable battle of David and Goliath proportions. While Ma and his team were contriving in the dark and racking up a hefty $56 million investment from Masayoshi Son’s Softbank, Meg Whitman, then CEO of eBay was brimming with enthusiasm and optimism. The acquisition catapulted the company into a thriving economy and an anticipated market of hundreds of millions of small and medium sized enterprises selling online. In an interview with Wang, Whitman predicted, “ten to fifteen years from now, China can be eBay’s largest market on a global basis as we build up the local trade and export trade.” Despite the company’s many advantages, and an additional $100 million investment at the height of the battle, by 2006 eBay was forced out of the online auction market.
So how did eBay, a multinational corporation with a well-established global brand, get bested by a local startup?
Simple, eBay made one colossal and fatal mistake; they did not localize. Ebay tried to expand and transplant their existing “global platform” rather than reinventing and adapting it to the local market. Instead of utilizing local management knowledge, eBay sent a team of expatriates; mostly Harvard Business School graduates, to run the operation. They did not speak Chinese and they did not have sufficient experience or understanding of the Chinese market. This created a top down domino effect of bad decisions that inevitably played a noteworthy role in their demise.
When entering the Chinese market, Whitman saw economic growth, the emergence of a middle-class and a burgeoning demand-driven economy as a by-product of westernization. However, eBay failed to understand that China and the West do not have a shared sense of history, culture, language, and attitudes about life’s meanings. Therefore, it cannot be approached from the lens of existing consumer theory. Success in China is dependent on going beyond skin-deep adjustments generally made when entering new markets. For example, when Pepsi entered China, it made a grave mistake in translating its slogan. Due to the nuances of the Chinese language and its extensive repertoire of over 30,000 characters, the translation mishap read “Pepsi brings your ancestors back from the grave,” rather than “Pepsi Brings You Back to Life.” Thankfully, Pepsi bounced back from this public relations nightmare and quickly learned from their mistakes. However, with Alibaba tailgating eBay’s every move, eBay did not have that same luxury.
Language and Education
When eBay entered China, it stepped in with bang. The EachNet acquisition not only gave them a dominating share of the market but a whopping 3.5 million users as well. However, eBay was not a recognizable brand in China, let alone pronounceable. Jack Ma saw the opportunity, “eBay may be famous in the United States, but in China, if you ask one hundred people whether they’ve heard about eBay, I believe that less than 10 percent have heard of it. But if you ask one hundred people whether they’ve heard about Alibaba, 90 percent know about us… I believe we have a chance.”
With that, he launched Taobao, meaning “digging for treasure,” a clever wordplay that caught the public’s attention. To gain momentum, Taobao offered free listings to all its users for the first three years and eliminated most auction style listings.
On the other hand, eBay continued to charge a fee to its users as Ebay executives continued to maintain their focus on their “global platform.” They revamped the Chinese-made EachNet user interface to a simpler, cleaner and crisper model. But Taobao knew what Chinese consumers preferred and maintained the ‘organized chaos’ of several categories. Typing Chinese characters on a keyboard is more time-consuming and cumbersome than alphabet-based languages. Clicking over typing was the way to go. As Ebay was eliminating all the features that Chinese user preferred, Taobao was adding more user-friendly, and culturally appropriate touches.
Advertising
As Taobao started gaining more of a presence, eBay launched an aggressive advertising campaign, signing exclusive advertising rights online with Sina, Sohu and Netease to block out competition. Ads were also spread throughout the city on buses, taxis, subways and everything in between. An additional $100 million was invested in the local operation and the company rebranded itself as eBay EachNet. At this point it was clear, Ma had a much deeper understanding of the Chinese market and the battle was intense. Ma knew that most people watched TV on a regular basis and very few logged on to the Internet. He engaged in fierce advertisements for Taobao on all major TV channels until the witty play on words blared in every home and business with a TV.
Guanxi
As expats we all understand the importance of guanxi; a deep-rooted part of Chinese culture. Guanxi is a system of mutually beneficial social networks and interpersonal relationships. Ma understood the necessity for a tool that could facilitate the communication between buyers and sellers. Early on, Taobao introduced Ali Wang Wang to its marketplace. It allowed for real-time communication between users to enable negotiations and building trust. Ebay executives feared that such a tool would encourage users to complete the sale offline to avoid incurring fees.
Migration
Up until October 2004, eBay was still dominating the market. What really ran them out of the game was what EachNet co-founder Bo Shao called “migration.” To implement her global vision, Whitman and her team of executives ignored warnings and made the decision to move its Chinese technological platform to the US. Shao recalled, “On the day of the move, traffic (of eBay China) dropped by half.” Traffic now needed to flow across the Pacific Ocean, dramatically slowing down the loading speed of the Chinese website. And transmission faced another hurdle: the Great Firewall. The foreign computer servers would face censorship lasting from several hours to several days. Frustrated users began to look for alternatives and Taobao received them with open arms. Migrating eBay EachNet users to an American platform was a critical miscalculation. It decreased its flexibility to implement China-specific features needed to compete with its rival. In an interview with Sherman So, the lead China technology reporter for the South China Morning Post, Shao recalled that they were unable to implement changes for a whole year on the site while preparing to move their servers. Once the migration took place, “it took nine months to implement any major changes and nine weeks to even change a word on the website as everything had to go through the headquarters technology development team.” “This is unthinkable,” said Shao. “Fast reaction to user demands is crucial in this market.” Having the first idea becomes irrelevant in China’s fast-paced market environment. One must assess economic trends in dog years when comparing China to developed markets.
PayPal vs Alipay
As eBay’s users were defecting to Taobao in droves. Alibaba’s C2C marketplace continued to implement new Chinese-centric features. At that time, China had a business environment with limited rules and laws and no credit check system in place. Safety and trust were pressing concerns in the minds of consumers and small-businesses. To create a safer environment, Alibaba created TrustPass. For a small fee, a small business’ licenses, bank accounts, and other personal information were verified via a third party. Ebay, on the other hand staunchly backed its PayPal payment system, which was gravely ill fitted to the Chinese environment. Foreign banks were strictly regulated and credit cards were highly uncommon. Chinese were accustomed to cash-based transactions and wiring money between bank accounts. In January 2005, Ma introduced Alipay, an escrow payment system that ensured security and ease of payment. Payments were delivered once the buyer made confirmation of receipt. Alipay also partnered up with China Post to ensure that its users could top-up their account without a debit or credit card. One of eBay’s competitors understood the importance localization. At the 2012 China Internet Conference, Amazon.cn CEO Wang Hanhua explained his success in China. “Localizing your service isn’t about what you and I think, it’s about how the market thinks.” That is why Amazon was the first to introduce the portable POS, so users could pay at their doorstep, using debit, credit or cash.
The End
As eBay’s shares started to fall in the US, Whitman made a final desperate attempt at regaining a foothold. She contacted Ma and attempted to negotiate a partnership agreement. However, Ma could sniff the spicy aroma of victory in the air and refused. In August 2005, in one of the biggest deals in the history of Internet, Yahoo invested $1 billion dollars for a 40 percent stake in Alibaba. Taobao immediately sealed the deal by announcing that it would extend free service to its users for another three years. By March 2006, the underdog was the clear victory with nearly 70% share in terms of users. In December of 2006, Meg Whitman announced their retreat from the Chinese market by a new joint venture with Tom Online, a Hong-Kong based company providing wireless value-added multimedia services. Yes, a former English teacher that had a dream but little knowledge of technology beat the e-commerce mogul. Jack Ma summarized eBay’s embarrassing failure best when he said, “eBay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win.”
This article was first published in The Nanjinger Magazine, May 2015 Issue. If you would like to read the whole magazine, please follow this link.
