“At Taobao, seven cosmetics products or ten phone recharge cards can be sold in the blink of an eye; about 63 items of men’s wear and 190 articles of women’s wear are sold every minute; an average of 1,028 mobile phones and 1,042 laptop computers will be sold during dinner time; and 180,000 small household appliances and 260,000 maternity and infant products are sold every day.”
Those figures are from Zhang Yong, the CEO of Taobao.com. When they hear these kinds of numbers, most people are shocked. They have no idea that Taobao has become so influential.
Ten years ago, the first Internet entrepreneurs in China, including Wang Juntao, Shao Yibo and Yu Yu, imitated the American models and copied localized versions of Amazon and eBay operations to China. While they were determined to reach the top of the e-business peak in China, nobody expected that peak was going to be conquered by Taobao, a company that didn’t emerge until five years later.
Hangzhou is now a rising Internet center because of Alibaba Group, China’s e-commerce leader. In less than ten years, it has set up a service network closely related to business and transactions. The network, including the two largest transaction platforms in China (B2B and C2C), third party payment tools, IM tools, sales and promotional platforms, and search engines have created unlimited potential for Alibaba. A previous internal survey asked employees to vote for the Alibaba subsidiaries with the biggest business potential. Alibab’s largest C2C marketplace Taobao was the overwhelming favorite. The staff at Alibaba believed that it had the potential to compete with retailing giants like Wal-Mart.
“We hope that Taobao will outstrip the global transaction volume of Wal-Mart in ten year’s time. By then, Wal-Mart will regret the existence of Taobao in China and regret its failure to cooperate with us in the beginning,” said Alibaba Chairman and CEO Jack Ma at the fifth anniversary party of Taobao.com. Wal-Mart’s global turnover in 2007 was RMB3.5 trillion (US$512 billion); Taobao’s 2008 goal is RMB100 billion (US$14.6 billion).
Jack Ma didn’t care whether people would laugh at him when he made such comments. A US investor he visited as he was setting up Taobao was apparently very interested in Alibaba. When Ma started talking about Taobao, the investor walked away after just ten minutes. He told Ma before he left the room, “Jack, this time you are doomed.”
Taobao has since beaten eBay in China to become the third-largest online transaction website in the world.
Searching for New Competitors
“I am going to give you the Russian market. Do you want it or not?” asks Huang Ruo, the vice president of Taobao and general manager of its B2C Business Department. He often finds himself asking the same question to company managers when he enrolls businesses into the new B2C platform at Taobao.com.
Huang used to work for the Chinese division of an international supermarket chain. He joined Taobao early this year after a senior management shake-up and is now in charge of operations and promotions for the new B2C platform at Taobao.com. Inside the company, everybody calls him Pharmacist Huang. There have been some big changes in Taobao’s management this year. Sun Tongyu, Taobao’s general manager, went abroad to study, and Lu Zhaoxi, the general manager for Alibaba’s payment arm Alipay, took over Sun’s position. Zhao Xiaofeng, the vice president of Taobao.com, was appointed president of Alipay. It was during these changes that Huang Ruo showed up.
Since Taobao was established in April 2003, Sun Tongyu has spent several years battling Eachnet.com, a similar marketplace acquired by eBay. Taobao eventually built up its own leading position in the C2C market in China, and nowadays, 80% of all online individual transactions are carried out on the Taobao platform. Taobao sells virtually any essential for day-to-day life. The history of Taobao so far is the story of how a local Chinese business successfully fenced out a multinational company. In other words, how Taobao shifted from an alternative to a mainstream shopping platform. Now Taobao figures it can go after traditional retail giants like Wal-Mart. Huang Ruo doesn’t think it is odd to consider Wal-Mart a rival even though it’s in a different industry. “When an entity is able to compete with or even replace another entity, the former must have some distinctive advantages that the latter doesn’t have.” When the topic of traditional businesses versus new businesses in the retail industry comes up, Huang believes it’s all relative.
Retail chains were regarded as a new business type when they entered China more than ten years ago, when the wholesale markets and supply and marketing cooperatives were the traditional retail outlets. The advantage of retail chains is their centralized management and purchasing. They cut down operational costs and also standardize the services. Today, Huang feels the new sales model followed by Taobao is competing against Wal-Mart’s fully developed retail chain model.
“In terms of circulation costs, there is no way that the retail chain model can compete with us,” offers Huang. He explains the advantages of e-business over other companies from his own work experience after joining Taobao. “Costs for warehouses, shelves and trolleys, parking lots and cashier counters are unavoidable for retail chains. Our type of business only has to pay for deliveries, labor, and service costs. Our goal is to be less than or equal to 50% of the offline costs,” explains Huang.
In addition to the cost advantage, Huang also thinks that Taobao has the ability to develop markets rapidly and is in line with the home shopping habits of the youth. When UNIQLO, a famous Japanese casual wear brand, was hesitant about entering China, Huang offered a suggestion to their boss. “You must go into online sales if you want to cut into the market quickly, and the consumer group in Taobao suits you,” he said. “It is going to be very difficult to develop offline sales in China.” After plenty of lobbying from Huang, Taobao has since negotiated a deal with UNIQLO.
The biggest advantage of Taobao is that full-scale market feedback can be collected in real time on its platform. “In a platform model, I can know what the bestseller is within a short period of time.”
“Do you know my biggest challenge at the moment?” asks Huang with a raised voice. “It is those companies that don’t know how to operate in this new market. It’s the same problem I encountered 12 years ago when I was working in retail in China.”
Huang still remembers a time long ago when he worked for an international retailer. He went to Tsingtao Beer to discuss cooperation with a senior executive there. The meeting was held on the second floor of the 21-storey Tsingtao Beer headquarters building. The person who turned up to meet him was just a low-level sales supervisor who didn’t take him seriously. Huang was quite upset, and he told his colleague, “Let’s wait for two years. When we return, we will definitely be invited to the top floor.” Sure enough, on the third year, the president of Tsingtao invited Huang to a party on the 21st floor, “because we became a big distributor of theirs,” explains Huang. He says the current Taobao has some similarities to the retail chain he used to work for.