Alibaba Page 8

  Les wasn’t quite sure how to “tell everybody” on the Internet but eventually it was agreed that he would send an email to a particular distribution list. On May 17, 1994, the first real Internet connection to China was established.

  Although IHEP was host to China’s first Web pages, the Internet soon became more than a privilege reserved for particle physicists.

  At the same time as this first connection was being established, China was on the verge of a massive expansion in its communications infrastructure, a policy it called “informatization” (xinxihua). China’s communist rulers had watched the collapse of the Soviet Union in 1990 with alarm, attributing it in part to the yawning technological gap that had opened up with the United States. At the beginning of 1994 China had only 27 million phone lines and 640,000 cell phones for a population of 1.2 billion. The early users of cell phones were either government officials or the getihu who could afford to shell out $2,000 to buy one, with others making do with pagers.

  The Chinese government resolved to change this, seeing an improvement in telecommunications as a tangible improvement they could deliver in the lives of the masses. Just as King Henry IV of France cemented his legitimacy by putting a chicken on every dinner table on a Sunday, with xinxihua the Chinese Communist Party began to roll out phone lines, then cell phones, then broadband connections to hundreds of millions of people.

  In 1993, Vice Premier Zhu Rongji launched the Golden Bridge Project to create an information and communications network spanning the whole country. In 1994, the government ended the monopoly of telecom services held by the Ministry of Posts and Telecommunications (MPT). To inject some competition into the market, a second carrier, called China Unicom, was established. Other countries, starting with the United Kingdom, had used private capital to finance the competitors taking on state-owned telecom incumbents. China, obsessed with control of information, could not contemplate this—twenty years on it still hasn’t—and opted instead to launch China Unicom as a new state-owned enterprise, backed by three other ministries and a number of other state-owned enterprises, effectively pitting one government department against a coalition of other departments in a uniquely Chinese approach to telecom deregulation.

  Spurred into action by the loss of its monopoly, the new minister of MPT, Wu Jichuan, responded with massive new investment in telecom infrastructure.

  During a visit by U.S. secretary of commerce Ron Brown to Beijing shortly after the first SLAC-IHEP Internet connection was established, China signed an agreement with Sprint to set up a new Internet connection linking Beijing and Shanghai with the United States. This was the beginning of the “ChinaNet” Internet service provider link that would allow members of the public, including Jack, to dial up to the Internet in China for the first time.

  China’s First Technology Entrepreneurs

  As word spread that China was finally investing in its telecom infrastructure, the country’s first technology entrepreneurs began to emerge. Mostly U.S.-educated engineers, they started new ventures to help build out China’s communications networks. One of the most prominent was James Ding (Ding Jian), a master’s graduate in information science from the University of California, Los Angeles. After the suppression of pro-democracy protests in Tiananmen Square in June 1989, he and many other U.S.-educated Chinese instead shifted their hopes for radical political change in China to a faith in the power of technology to reshape the country. In 1993, James Ding joined forces with Beijing-born Edward Tian (Tian Suning), who had recently completed a Ph.D. at Texas Tech, to cofound AsiaInfo. In 1995, they moved the company’s operations to Beijing to work on the data network buildout for China’s telcos, including China Telecom’s ChinaNet dial-up Internet access network. Edward Tian would go on to become a leading figure in China’s telecom market, and both he and James Ding would become high-profile investors in the technology sector.

  In 1995, another influential Chinese technology firm, UTStarcom, was formed. Started by Chinese and Taiwanese entrepreneurs in the United States, the company soon set up its China operations in Hangzhou. UTStarcom would play an important role in spurring the growth of China’s telecom market by promoting a low-cost mobile system called Little Smart (xiaolingtong). This success helped put Hangzhou on the map for investors as a technology hub.

  A key investor in UTStarcom in 1995 was the newly established Japanese investment fund SoftBank, a firm that five years later would start to play a critical role in the success of Alibaba. Founded by Japanese billionaire Masayoshi Son, SoftBank took a 30 percent stake in UTStarcom.

  UTStarcom was formed by the merger of Unitech Industries and Starcom Network Systems. Unitech’s Taiwanese founder, Lu Hongliang, had studied with Masayoshi Son at the University of California, Berkeley. Starcom’s cofounder, Chauncey Shey, went on to head SoftBank China Venture Capital, which led Masayoshi Son’s investment in Alibaba in 2000.

  By late 1995, with China’s telecom and Internet buildout beginning to gain momentum, Jack and his customers were finally able to connect to the Internet from Hangzhou, using the ChinaNet service that had already been rolled out in Beijing, Shanghai, and Guangzhou. Soon after, Jack traveled back to the United States with Li Qi, his newly appointed chief engineer, to visit VBN in Seattle. On returning to China they ended their venture with VBN, setting up their own servers and a new China Pages site.

  This helped cut costs, but boosting revenues was proving hard. In 1995, only 1.5 million personal computers were sold in China, mostly to business or government users. Priced at roughly $1,800, the PCs cost a fortune for average Chinese at the time. The costs of getting a fixed line installed and getting online, combined with a lack of awareness about what the Internet actually was, meant that China Pages was having a hard time finding enough customers.

  Jack stepped up his efforts to evangelize the Internet. He even enlisted Bill Gates, in a manner of speaking. In late 1995, Gates’s book The Road Ahead became an instant bestseller in the United States and soon after in China, too. Although the book hardly mentioned4 the World Wide Web, to convince prospective clients of the importance of the Internet Jack started citing a quote from Bill Gates: “The Internet will change every aspect of human beings’ lives.” A useful marketing message for China Pages, Jack had in fact made it up, as he later confessed, “In 1995, the world started to know Bill Gates. But if I said, ‘Jack Ma says that the Internet will change every aspect of human beings’ lives,’ who would believe it?” But, he added, “I believed that Bill Gates would definitely say it one day.” (Shortly after the book was released, Gates famously did realize the importance of the Internet, dramatically stepping up Microsoft’s efforts and releasing a second edition of the book with a much greater emphasis on the Internet.)

  Meanwhile, in Beijing, an entrepreneur, Jasmine Zhang (Zhang Shuxin), had started to attract growing media interest after founding in May 1995 one of China’s first privately owned Internet service businesses. She called her venture Yinghaiwei, a rough, phonetic equivalent in Chinese of the English term “Information Highway.” Other China Internet founders credit her as the source of inspiration for starting their own ventures. One told me: “One day I was driving to work and saw one of their billboard ads saying, ‘How far is China away from the Information Highway? Fifteen hundred meters ahead,’” referring to the company’s office. Building on a tradition of internal BBS (bulletin board systems), popular in leading academic institutions such as Tsinghua and Peking universities, the company started to serve a few hundred users keen to experience the Internet, then mostly dominated by websites in English, and share comments in Chinese about what they were discovering.

  Back in Hangzhou, Jack stepped up his efforts to promote his own venture, scoring a breakthrough when the Zhejiang provincial government invited China Pages to build its website. The government official in charge of commissioning the website, Yang Jianxin, later recalled his dealings with Jack: “The first time he came to my office, frankly speaking, as I understood him to
be an Internet guru I didn’t expect to meet such a young guy.” Jack launched enthusiastically into an explanation of the Internet. Yang recalled Jack talked “nonstop for two hours.” Although Yang indicated the government was unable to pay for the project, as its impact was unknown, Jack and his team quickly built the site, hosted by China Pages, in cooperation with a local unit of Zhejiang Telecom called Hangzhou Dife Communications—a partnership that soon after would sour dramatically. The site was one of the first projects in a national initiative5 to bring the Chinese government online, generating a lot of publicity for Zhejiang. Within a few days Yang received congratulatory emails from overseas, including from members of the U.S. Congress.6 The coverage also boosted Jack’s profile, a local newspaper7 ran a feature story on his company and his dramatic first visit to the United States.

  But the publicity also triggered problems for Jack and the official who had commissioned him. One of Yang’s colleagues reported him to the provincial government, accusing him of “hobnobbing with a getihu.” The disgruntled colleague’s report thundered that “government information dissemination was a serious issue, how could it be handled and published via a getihu?”

  After encountering resistance at the local level, Jack started to spend most of his time in Beijing. There he met up with Jasmine Zhang of Yinghaiwei. The two did not hit it off, Jack later sharing his first impressions: “I though if the Internet’s demise comes one day, hers will be earlier than mine. I was already very idealistic, but here was someone who was even more idealistic than me.”

  Jack and his partner, He Yibing, set about raising the profile of China Pages in Beijing. Jack had brought with him some articles he had written about the Internet, and asked his friends to help publish them. In Beijing, thanks to a relationship with a driver at the publication who was introduced by a friend, he met Sun Yanjun, deputy editor in chief of China Trade News. Sun was impressed by China Pages and invited Jack to give a lecture about the Internet to his colleagues. Afterward he published a front-page article on Jack and his company.

  While Jack was good at gaining publicity, China Pages still wasn’t winning much business, and its efforts to open doors with the central government came to naught. In July 1996, China’s national broadcaster, China Central Television, broadcast a documentary called Ma Yun the Scholar, which showed Jack being rebuffed by a government official. The documentary was produced by Fan Xinman, married to the famous director Zhang Jizhong, who has brought a number of Jin Yong novels to the screen. Fan was also from Hangzhou and sympathetic to Jack’s cause. As she filmed Jack getting shown the cold shoulder, Fan became increasingly concerned for Jack’s prospects: “He no longer had his base in Hangzhou, and was crushed in Beijing. He was almost bankrupt.” In the documentary, through a window to the Beijing streets outside, Jack made a resolution to himself: “In a few years, you won’t treat me like this; in a few years, you will all know what I do. And I won’t be in dire straits in Beijing.”

  The problem for China Pages was that it really was just a directory. The site was pretty rudimentary, merely listings of a company’s products for sale. There was no way for prospective customers to make purchases online, so there was a limit on what China Pages could charge for its services.8

  Squeezed Out

  China Pages was running out of cash to meet its payroll. Switching sales staff to commission-based pay relieved the pressure for a while, as did a 10,000-yuan contract from a client in the textile industry. But China Pages was in a vulnerable state. Yet things were about to get much worse. The company that had worked with China Pages to build the Zhejiang government website, Hangzhou Dife Communication, made a bid to take over the company. China Pages was a small, privately owned company, but Hangzhou Dife was a unit of a powerful SOE, Zhejiang Telecom. In February 1996 the two entered into a joint-venture, Dife-Hope. Dife had a 70 percent stake in the venture, investing 1.4 million renminbi ($170,000). Jack would remain the general manager and China Pages would hold the remaining 30 percent, which was valued at 600,000 renminbi ($70,000). At the time, this seemed like a significant achievement for a tiny, cash-strapped company. Zhang Xinjian, then an official with Hangzhou Telecom, termed it the first merger and acquisition transaction in the history of China’s Internet; local media9 provided positive coverage of the joint venture.

  But the reality was a lot more sinister. Jack had discovered that when working with China Pages on the Zhejiang government website, Dife had registered the domain name www.chinesepages.com, very similar to his own venture’s www.chinapages.com, and a new company called “China Yellow Pages.” Yet because Dife was a subsidiary of a powerful SOE, Jack couldn’t fight back. Gritting his teeth he had to give interviews with local media lauding the new venture: “The establishment of Dife-Haibo will further strengthen China Pages.” He concluded by saying, “We have every reason to believe, with the right policies of the Party and the State, and with the tremendous support from every walk of life in the society, China Pages will surely achieve great success. China’s information high-speed train will be faster and faster!”

  Years later, after Alibaba had become successful, Jack was free to comment on the experience. China Pages was dwarfed by its new partner, and while Jack was the general manager, the position turned out to be of little value. “When the joint venture was formed, disaster followed. They had five votes on the board, and we had two. Whenever there was a board meeting, whatever ideas I put forward, if one of them voted against it, the rest of them followed suit. During five or six board meetings, none of our ideas were passed.”

  Jack had lost control of his pioneering venture: “At that time I called myself a blind man riding on the back of blind tigers. Without knowing anything about technology or computers, I started the first company. And after years of terrible experience, we failed.”

  The China Pages episode provided him with some important lessons, as well as good material for his speeches, such as, “It is difficult for an elephant to trample an ant to death, as long as you can dodge well,” and “With good strategies, you will definitely survive. To this day, I’ve realized one thing: Don’t be nervous if you face huge competition in the future.” He would later draw on his experiences when taking Alibaba into battle against eBay, in the David versus Goliath struggle that would raise his profile on the global stage.

  Jack also points to China Pages as influencing the way he would structure his subsequent ventures: “From then on, I have held a firm belief: When I start businesses in future, I will never hold the controlling stake of a company, making those controlled by me suffer. I will give plenty of understanding and support to lower levels. I have never once had a controlling stake at Alibaba. I am proud of this. I am the CEO of the company, because I lead it with [my] wisdom, courage, and resourcefulness, not capital.”

  In November 1997, Jack convened an off-site meeting with the China Pages team in Tonglu, announcing that he was giving up his stake in China Pages and moving to Beijing, leaving his partner He Yibing as CEO.

  Jack’s invented quote that the Internet would change everything was right. The problem was he had launched his venture too soon. Jack put his dreams on hold, taking a job in Beijing at a unit of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). There he was like a fish out of water, counting the days until he could jump back into the entrepreneurial sea of China’s Internet, which was about to get a whole lot bigger.

  Chapter Six

  Bubble and Birth

  Alibaba might as well be known as “1,001 mistakes.” But there were three main reasons why we survived. We didn’t have any money, we didn’t have any technology, and we didn’t have a plan.

  —Jack Ma

  Third time lucky. After his struggles with Hope Translation and China Pages and an uncomfortable period working for the government in Beijing, Jack went on to found Alibaba at the beginning of 1999. But extricating himself from China Pages and then from his government job cost him two years. Meanwhile, other Internet entre
preneurs in China began to gain traction. Without a venture of his own Jack was running the risk of becoming irrelevant.

  Just as Jack had lost control of China Pages to his SOE-linked partner, in Beijing Jasmine Zhang had been forced out of Yinghaiwei by her largest shareholder, rumored to be connected with China’s Ministry of State Security. Other entrepreneurs, especially those who had set up Internet service providers (ISPs) to roll out dial-up services to consumers, found themselves squeezed out by large SOEs like China Telecom. Yun Tao from Beijing-based ISP Cenpok summed it up:1 “It is not yet possible to make money in China on the Internet. . . . I have been at it for the last few years and I tell you, I am bleeding now.”

  While the telecom SOEs were actively protecting their turf from encroachment by the private sector, China’s state-owned media companies proved surprisingly incapable of competing with entrepreneurs building out Internet content businesses. A new generation of Internet entrepreneurs was coming to the fore in China, inspired by Yahoo, the most influential company of the dot-com boom gaining speed in the United States.

  Listed in 1996, Yahoo at first commanded little attention from investors. They preferred established technology companies, which they could value with traditional measures such as price/earning ratios (P/E ratios). But Yahoo and its generation of dot-com companies were years from becoming profitable. Fortune magazine’s Joe Nocera later summed up the valuation challenge: “You can’t have a P/E ratio when you have no ‘E.’” But all of this started to change in the summer of 1998. Yahoo’s shares ran up more than 80 percent in just five weeks, taking the company’s valuation to $9 billion and making billionaires of its Stanford cofounders, Jerry Yang (Yang Zhiyuan in Chinese) and David Filo. The dot-coms that had sprouted up in Silicon Valley now suddenly were the center of attention for Wall Street, too.