How China's Alibaba Is Surviving and Thriving

Jack Ma has built Alibaba over a decade from a simple B2B Web site for manufacturers to an online empire

By Bruce Einhorn

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Jack Ma says he saw it coming. Over a year ago, when Lehman Brothers and Washington Mutual were still going concerns, many business leaders and economists in Asia thought China would avoid damage from America's deepening financial mess. Ma, founder and chairman of e-commerce power Alibaba.com, wasn't one of them.

Alibaba has more than 8 million small and midsize companies using its business-to-business online marketplace, and Ma's salespeople were already hearing about trouble from many of its export-reliant customers. "We are talking to factory people all the time, and with the data we collected, we knew something was wrong," he says. "We smelled something bad."

So Ma decided the times demanded a more cautious strategy. In February 2008, he ordered his managers to conserve funds. In July, Ma sent a letter to all Alibaba employees, warning them of hard times ahead. The message, Ma recalls, was simple: "Winter is coming, and we better prepare for it."

Net Booster

Descriptions of Ma typically don't include words like cautious and conservative. The 44-year-old former teacher has made a name for himself as an outspoken booster of the Internet in China, building Alibaba over a decade from a simple B2B site for small, unglamorous manufacturers into an online empire. In addition to its business marketplace, Alibaba's holdings include Taobao, an eBay-like (EBAY) site that is China's largest consumer-to-consumer service; Alipay, an online payment system with 150 million registered users; Alisoft, a provider of inexpensive software delivered online; and Yahoo! China, the Chinese-language site of the U.S. portal and search engine. In 2007, Alibaba raised $1.5 billion in an initial public offering in Hong Kong. Yahoo! (YHOO) owns 39% of Alibaba.

Raising all that cash—and then hoarding most of it—helped Alibaba survive the deep freeze of the global economy. Alibaba has $2.2 billion stashed away, Ma says, and the Hong Kong company earned $176 million, on sales of $439 million, last year. Earnings were up 25%, on a 39% increase in sales.

Not bad for a company that, because of its reliance on exporters, is especially vulnerable to a crisis in global trade. The recession in the U.S., Japan, and Western Europe has hammered China's exports, helping drive Alibaba.com's stock price down 55% from a year ago. More recently, though, investors seem to be more confident in Alibaba, with the stock price doubling since October. Year to date, Alibaba.com is up 35%, while the benchmark Hang Seng index is almost flat.

One key to Alibaba's success has been its trailblazing approach to marketing inside China on its flagship site, Alibaba.com. The site has two channels: one in English, the other in Chinese. The English-language site uses the keywords model perfected by Google (GOOG), but the Chinese channel relies largely on a subscription model, with members paying extra fees for special services. Companies that pay $2,900 a year to become "Gold Suppliers," can, for instance, post an unlimited number of products online, offer virtual tours to would-be buyers, and (to reassure potential trading partners) receive vetting by a credit reporting agency.

Stellar Sales Success

To get companies to sign up, Ma has deployed 4,300 Alibaba salespeople across the country.