Dangerous waters of Chinese e-trading

Alibaba.com doesn't have to worry about the 40 thieves. What's more problematic for the Chinese e-commerce firm is a poor understanding among the public in how to use its services, and a lack of recognised payment methods - issues that global heavyweights eBay and Amazon are also trying to tackle.

But those problems are minor compared with the trials and tribulations the business-to-business website has already gone through, including the tech-bubble implosion and the emergence of Sars.

The Hangzhou-based company is proving that its business model of introducing manufacturers and buyers online can work. In the process, it is pioneering the e-commerce concept in a country that's lagging in internet savvy - and building itself into a highly profitable operation.

"We're going to be bringing in US$100 million in revenues [this year] and eBay is going to spend that much, but they don't expect to be profitable" in China, said Porter Erisman, Alibaba.com's vice-president of corporate marketing.

The concept behind Alibaba, founded by English teacher Jack Ma in 1999, is simple. China's thousands of factories and exporters didn't have an easy way to get in touch with each other to see, for example, who had the cheapest cold-rolled steel, solenoid valves or aluminium cots.

So Ma, with 18 staff, set up a Chinese-language site out of his apartment linking these buyers and sellers. Then he set up another site in English for international companies. In mid-2003, the company also launched Taobao.com, Alibaba.com's no-fee answer to eBay.

Ma had already started a different website in 1995 with an aim similar to Alibaba.com's, but the Government shut it down in a general crackdown in 1997. Today, Ma is one of China's most famous internet entrepreneurs, and has had his face on the cover of Fortune Magazine.

As with most things in China, it's hard to understate the size of the potential e-commerce market.

About 94 million people used the internet last year, according to the China Internet Network Information Centre, and that figure is expected to hit 176 million by 2010. More than 40 million people in China bought or sold something online last year, while a report by Shanghai-based iResearch estimates the country's B2B e-commerce market was worth US$38 billion last year and may jump to US$62 billion in 2005.

Those numbers have caught the attention of the likes of Amazon.com and eBay, who have already made their first forays into China. Amazon bought Joyo.com, China's biggest online bookseller, in August for US$75 million and intends to beef up warehouses around the country.

Meanwhile, eBay is gunning for top spot in online auctions in China. The world's biggest e-commerce company got thumped in Japan in 2002 and withdrew; it clearly intends not to repeat that mistake. In 2003, it bought local auction site Eachnet for US$150 million and announced in April it would invest a further US$100 million in marketing.

That's not worrying Alibaba.com, which bills itself as the world's biggest B2B website. Chairman and chief executive Ma shrugged off eBay's investment, saying that while Ebay was the shark in the ocean, "we are the crocodiles in the Yangtze River. When they fight in the Yangtze River, they will be in trouble. The smell of the water is different." Also, eBay and Amazon will be competing only with Alibaba's as-yet unprofitable Taobao site and not the B2B operations.

The firm turned its first profit in late 2002. Erisman declined to say exactly how much profit the company earns, though he said last year it raked in $68 million in cash revenue. The two B2B websites handled US$4.5 billion in merchandise sales last year and users bought US$120 million of goods on Taobao in the first quarter of 2005.

Alibaba.com makes most of its money not by taking a cut of each transaction but by charging customers a fee to list detailed information about themselves and to have an independent outside company verify their creditworthiness. It's a service many are willing to buy - more than 80,000 users already pay up to US$10,000 for the services because trust is still one of the biggest issues in online business, Erisman said.

"You can go to Amazon and buy a book online, but you're not going to buy 15,000 books online unless you really understand who you're buying from," said Erisman, who has run the international site for two years. "You still need to do due diligence."

The trust issue also crops up in other areas, for example in completing online payments. Paypal, an online wallet familiar to eBay users, has been slow to launch in China, forcing people to find other ways to settle purchases such as meeting in person, or using bank transfers.

To solve that problem, Alibaba in February launched its own payment system called Alipay, an online escrow service. After agreeing on a deal, the buyer sends money to Alipay, where it's held until delivery of the product is verified.

"There's a lot of new online payment companies popping up, it's kind of hot," Erisman said. "But the problem is it's chicken-and-egg. If they don't have customers it's tough to develop a payment platform.

Another challenge is getting the word out about the benefits of e-commerce, particularly to business users. Alibaba's international B2B site has 1.4 million users in more than 200 countries while its China site has 6 million, a drop in the bucket compared with the overall size of the country's market.

To fix that, staff have spent a lot of time teaching businesses around the country how to use the site.

"The biggest issue for growth in China more than anything is educating users," said Erisman, who is 35 and originally from Colorado.

He joined Alibaba in 2000 after stints at PR firm Ogilvy & Mather and state broadcaster China Central Television (CCTV), where he worked on an English-language show promoting tourism in the country to foreigners.

"A lot of the people who started e-commerce in B2B were traditional manufacturers of nuts and bolts and ball bearings. They weren't so internet savvy, so we spent the first five years travelling around China doing road shows and tours to educate people on [doing] business online," added Erisman, who just completed one such road show around Shanghai and is planning another one to the northeastern coastal cities of Qingdao and Dalian.

Lastly, there is also the perception that running a website in China is hampered by the Government's tight restrictions on the internet, which include a national firewall to screen out any foreign websites deemed undesirable.

The Government also announced earlier this month that it would require all private websites and blogs to register or face stiff fines. An estimated 30,000 people are employed by the Government to monitor locally operated sites.

But that's not something e-commerce companies need to worry about, Erisman said, adding that his company had never had a problem with the Government.

"E-commerce is exactly why the Government wants the internet in China," he said.

"Portals like news sites, dating sites, pornography sites - those are the things the Government is worried about. E-commerce is employing people at the grassroots level."

A top expert on the country's internet filtering system concurred.

"It creates some barriers, but over all, there is still huge space for e-business in China," said Xiao Qiang, director of the China Internet Project at the University of California at Berkeley.