Crazy Jack

This article on Alibaba and its founder “Crazy Jack” was published on 29th September last.

“When the team is all a bunch of scientists it is best to have a peasant lead the way”.  How did an English-language teacher — and self-confessed peasant! – emerge as one of the wealthiest in his country,  and indeed the world?

With a personal net worth of more than US$22B,  the multibillionaire is nicknamed ‘Crazy Jack’ and was raised in one of the most beautiful places on the planet.  “In heaven there is paradise:  on Earth there is Hangzhou” as the Chinese saying goes.   When a young lad,  Jack Ma improved his English by gate-crashing the reception area of a local tourist hotel at Hangzhou’s magnificent West Lake and offering his services to foreigners as a guide.  He failed his college examinations twice before finally earning an English degree at the local Teachers Institute.   He became an English language teacher,  but also set up his own translation service for local companies keen to export to the West.  He then began experimenting with web sites for them,  even though on a slow dial-up connection loading a web page could literally take hours.

He started one of China’s early internet companies,  a Yellow Pages telephone directory service in 1995,  before founding Alibaba in 1999.  Alibaba’s rise is told – from the perspective of a former American employee – in the 2012 movie documentary “Crocodile in the Yangtze”.

Alibaba first consolidated online,  the product catalogues from local companies in Hangzhou,  and later throughout China.  Ma undertook a personal crusade to convince consumers and exporters to adopt the internet.  Alibaba became a one-stop online bazaar where both Chinese but also importers from around the world could browse products, and place orders via a trusted financial settlement system.  However,  unlike Amazon in the USA,  Alibaba did not (and does not) fulfill customer orders:  instead these are placed directly with the vendors concerned.

Ma always asserted that his competitors were not in China,  but in Silicon Valley.  By the start of the millennium,  Ma was lining Alibaba up for an IPO,  but then had to rapidly retrench in the face of the dotcom crash of 2001,  closing his Silicon Valley presence and cutting costs.  Meg Whitman’s eBay created further pressure in 2003 by investing heavily into the China market via a failing Chinese company EachNet,  which — like eBay — enabled consumers to directly sell to other consumers.  Ma realized that his business to consumer focus would come under threat from eBay which by then held 85 per cent of the Chinese e-commerce market.  Many thought it suicidal, but Crazy Jack started his own consumer to consumer business — Taobao, as an Alibaba subsidiary — to directly fight back.   He underwrote Taobao for its first three years so that its services were completely free to Chinese consumers, unlike eBay.  He undertook some ‘guerilla marketing’ and gained considerable domestic media coverage via a military-themed stunt emphasizing his fight against eBay.

Crazy Jack became a cult figure,  particularly with the Chinese youth,  who abandoned eBay. Under her own investor pressure,  Whitman invited Ma to her Valley headquarters in 2005 to discuss a partnership or even merger.  But then Ma stunned Whitman when Yahoo partnered for the Chinese market by investing US$1B for a 39 per cent share in Alibaba.

After the NYSE IPO of Alibaba last week,  Yahoo’s investment is now worth about US$26B,  having already in 2012 sold back half of its holdings to Alibaba for U$6.3B.  eBay has long extricated itself from the China market,  and Crazy Jack has been busy buying stakes in US companies.  In a flurry of deals over the last year or so,  Alibaba now has part ownership of TangoMe (a social networking app);  Lyft (an Uber competitor in the personal transportation market); 1stDibs (an art and antiques marketplace);  Kabam (mobile gaming);  Fanatics (sports merchandise);  ShopRunner (retailing);  and Quixey (app search).   Investing into high tech start-ups gives Alibaba an option on buying rather than itself building new services in the future.  At the same time an Alibaba investment is a two-edged sword for these companies:  it certainly gives them credibility and investment,  but may make it harder for them to form strategic alliances with other major players.

But perhaps Crazy Jack’s biggest coup so far has been to persuade international investors to actually purchase his shares.  Alibaba’s publicly traded shares are not actually shares in Alibaba,  but instead in a “variable interest entity” in the Cayman Islands.  This structure enables foreigners to bypass Beijing’s strict regulations on ownership of Chinese assets.  While VIEs are becoming a common structure,  it is certainly possible that Beijing and the Chinese courts may reexamine VIE structures,  particularly since they in effect allow wealth generated in China to “leak” overseas to foreigners.   

There is national pride in what Alibaba has achieved,  but the Chinese public themselves are currently unable to own foreign-quoted stock.   Crazy Jack has been prudent to ensure that certain of the Chinese elite have benefited from Alibaba holdings,  but several of the country’s major banks, led by the Industrial & Commercial Bank of China, are deeply concerned by Alibaba’s online payment services.

With over 60 per cent of parcels in China containing Alibaba transacted products,  the company has deep knowledge of consumer behavior and purchasing patterns.  A single company which knows so much about society in a country watchful over its population,  and then generating considerable wealth which may be expatriated abroad,  is clearly raising eyebrows.

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About chrisjhorn

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