3 Takeaways - Growing Alibaba into the World's Largest Online Commerce Company with 1 BN Customers: Alibaba Group President Michael Evans (#82)

Episode Date: March 1, 2022

Sometimes, and mostly outside of China, Alibaba is referred to as the Chinese Amazon, but in reality, it’s very different and much larger.Alibaba Group president Michael Evans shares how Alibaba grew to become the world’s largest online commerce company serving nearly 1 billion customers each month, how it’s different than its Western counterparts, and what international companies need to know in order to succeed in the China consumer market. Michael also shares how he sees the future of retail and how Alibaba creates new businesses that are innovative and different from what you see elsewhere. He also explains how Alibaba is using its platform to help its merchants understand consumer trends, manufacture more efficiently and make the future greener.

Welcome to the Three Takeaways podcast, which features short, memorable conversations with the world's best thinkers, business leaders, writers, politicians, scientists, and other newsmakers. Each episode ends with the three key takeaways that person has learned over their lives and their careers. And now your host and board member of schools at Harvard, Princeton, and Columbia, Lynn Thoman. Hi, everyone. It's Lynn Thoman. Welcome to another episode. Today, I'm excited to be with Michael Evans. He's president of Alibaba, and Alibaba, of course, is a Chinese multinational, and it's the largest online commerce company in the world, bigger even than Amazon.com. Each month, Alibaba serves about 1 billion customers which is more than triple the population of the United States Alibaba is a

fascinating company and I'm excited to learn more about their businesses which are unlike those of any Western company and I'm also excited to learn about their innovations from FinTech to luxury goods. Michael has been a board member of Alibaba since 2014. He was named president in 2015, and he has known Alibaba founder Jack Ma since 1999. Michael has many talents. He and his twin brother rode for the Canadian Olympic team where they won a gold medal

at the 1984 Olympic Games in Los Angeles. Welcome, Michael, and thanks so much for our conversation today. Thank you, Lynn. It's great to be here with you. It is wonderful to be with you. Michael, can you tell us about the journey that led you to Alibaba? Yes, it's a little unconventional. I started off as a banker and spent 30 years in that industry and worked all over the world. But probably the most influential and the most interesting for me part of that journey was working at made a small investment in what was then Alibaba.com in 1999. I continued to meet with Jack and see Jack in the 14, Jack was the first guy to call. And he and Joe Sy said, hey, come on to Alibaba, help us globalize the company. We're going to go public at some point.

You can help us with that as well. And I joined then and been there ever since. How would you describe Alibaba to those that are less familiar with the company? I think the best way to describe Alibaba is to understand our three core strategies. And this is the way that we communicate to the market, but it's also the way that we talk about it internally. And those strategies are very straightforward. One is the core China business that you referenced in your very kind introduction. The second is our cloud technology business. And the third is globalization. Because if you look at Alibaba, we have tens of businesses,

but all of those businesses fit into one of those three categories. So the China commerce business is both a B2C business and a B2B business. It's online, it's offline. It's the business that touches those 1 billion consumers that you mentioned. And it includes local services and all sorts of activities which are designed to serve the consumer preference. The cloud technology business was really developed and built in order to handle the scale of our own business, but also to provide services to other companies, small companies and large companies in China. And our globalization activities are basically a combination of our expertise in core commerce, e-commerce and cloud technology and building those businesses outside of China in different

markets around the world. So that's the easiest way to describe what is a massive ecosystem of businesses and people and technology and services that we're providing. Alibaba has a fascinating history of growth, having created businesses that address specific social needs. Can you take us through the history of how Alibaba has grown

and also how it is very different from Western companies? I think the way that we've grown is around the three core strategies that I just mentioned. So if you think about our domestic consumption business, we've been the beneficiary of a wonderful market in China. When I say wonderful, if you think about the size of the consumer base, if you think about the rapid growth in GDP and the increasingly important role of consumption

as a percentage of GDP, and in particular, digital consumption with the advent of smartphones and internet technologies, that's been a huge source of growth and scale that you don't see in many other markets in the world. The best way to put this in context is to think about where were we in 1999? And I picked that year very important because that's really when the Internet was first introduced in China. We know it was introduced long before that in the Western world, but that was the first year that the internet was in China. If you looked at GDP then, it was about 991 billion in China. Today, as of the end of September, it's about 17.1 trillion. So this is a massive economy, almost as big as the United States.

And if you look at consumption back in 1999, it was about $380 billion versus $6.7 trillion today. Internet, online, there was no online consumption in 1999. And today, it's about $1.6 trillion. So this has just been a massive consumer market. And domestic consumption is such a core part of everything that we've done and been able to grow. I think the other piece of it is the globalization piece, which is we observe the trends that have taken place in the domestic market. And then what we said is, where would we find similar markets where the Internet penetration and smartphone penetration is high, but where e-commerce or online is relatively small. So you saw a very big focus for us in Southeast Asia, South Asia, in Russia, in Turkey, in India, markets around the world. And that's a big part of how we've decided to globalize as well.

We take our expertise and what we learned in China, and we take it to these other markets. Can you talk a little more about some of your businesses in China? Many Westerners are not familiar with them, and the types of businesses that you've created in China are unique to Alibaba. Well, they're not that unique to Alibaba. I mean, our core commerce business looks like a lot of commerce activity that takes place in other parts of the world, in Europe and in the US. But we're doing a number of interesting things to take those capabilities to lower tier cities in China, tier four, five, and six cities, and into local communities. So we've created very interesting new businesses that are designed to serve communities and people with lower incomes so that they can be the beneficiaries

of the e-commerce revolution, if you will, and the digitization of the Chinese economy. So that's really development of platforms and capabilities that are really very specific to the China market and probably don't have as much applicability in a Western market, although maybe very, very useful in other South Asian markets and Southeast Asian markets. That's one aspect of it. I think the other is that if you look at our technology and our cloud business, this is a service that started it in massive scale, but also our small businesses and larger businesses that needed access not only to infrastructure services, but also software and product capabilities in order for them to grow. So we've done things a little bit differently in China and on our platform, but many of

the businesses do look similar to what you would find in other parts of the world. How do your businesses aimed at lower income Chinese, can you talk a little more about those businesses? And also the businesses and services that you provide to merchants are pretty unique. Can you talk about that as well? I think in the lower tier cities, the issue is that you're dealing with a consumer that has less disposable income. So that means you need to change your assortment strategy. We can't sell the same things that we'd sell in tier one, two, and three cities to people in tier five or six cities, or even in rural communities. So there's a much greater focus on what assortment is

appropriate. And then how do we deal with the issues of fulfillment and logistics? How do we actually get those products to those people? Because if the cost of the product is five RMB or even two RMB, but the cost of fulfillment and delivery or the logistics is 10 RMB, then it's not going to work for us and it's not going to work for the merchants or the consumers. So this then results in programs like community group buy, where we figure out what large groups of people want to buy and we buy in bulk and then deliver to a common location or to several common locations. That reduces the cost of logistics. It allows the savings to be passed on to the consumer and the consumer gets what they

need and the merchants are happy as well. The product assortment is the needs are very different. Some people want relatively inexpensive products, a lot of agricultural products as well. So it's a bespoke service and bespoke capabilities that reflect what the consumer needs and what the merchants are capable of providing. And to put it in a Western context, you're talking about goods that sell for one or two US dollars, and that's what you can deliver? That would be an expensive product. We're talking about products that sell for as little as one or two renminbi. The renminbi exchange rate is roughly six and a half to the dollar. These are very, very inexpensive products, all produced by small businesses.

So just think about the business model that allows you to provide those services, that assortment, and the capability to deliver a product that's that inexpensive. And that's a real service. I think some people get confused and think that that's a part of a social program that we're engaged in. It's not at all. It's part of a model, a business model that's designed to basically serve all consumers in China, not just the consumers that live in big cities or mid-sized cities. That is extraordinary. Can you talk a little about the services you provide to merchants? There are many services that we provide to merchants, and we have very large merchants,

and we have very small merchants. So the services are, in cases very different. During the pandemic, for example, we realized that many small businesses would have gone out of business had we not helped them with very basic things like supply chain and logistics and even finding people that would come to work because not everybody wanted to go to work during the pandemic. People were scared. They didn't have information. Some businesses were closed. So we spent a lot of time looking after the merchants, small merchants on our platform to make sure they could stay in business. And of course, that was important to us too, because we needed their products because consumers wanted to buy those products. There are going to be different services and capabilities that we provide at different times of the business cycle, and I guess different times of the health cycle. The larger merchants are very, very focused on what digital tools we can provide to them, because what they're trying to do is to connect directly with consumers. And they're very interested in the data insights and the digital tools that allow them to understand

what do the consumers who are interested in their products really want to do. So when we have 11.11, for example, it's not about big sales. It's about what are consumers telling you that's really interesting in terms of new product design and development? Because the Chinese consumer is very interested in new products from great brands, but they want certain types of things. And brands are very interested in developing products that are specific for the Chinese market. We try and provide tools and services and capabilities to the brand so that they can engage with the consumer. They can benefit from data

insights. They can take advantage of short form videos and live streaming and all sorts of immersive, engaging content that makes the consumer experience great, but tightens the relationship between the brand and the consumer. Michael, you lead Alibaba's international efforts. Can you tell us about Alibaba's international strategy and how you are working with companies to grow? As I said earlier on, the globalization or internationalization, some people call it, is one of the three core strategies. It's been a very, very important strategic thrust for the last six or seven years. And we've made a lot of progress. And I think it's easiest to define in thinking about what parts are China specific and then what parts are local outside of China. And we have very big B2B and B2C businesses that are selling products from China to the international market. So those would be things like AliExpress and ICBU, which is the B2B business. And then we have a lot of local businesses. So we've got very big businesses in Southeast Asia called Lazada, a great business

in South Asia called Dara's, another business in Turkey called Trendyol, AliExpress, building local businesses in Spain and France, and a very large joint venture business in Russia. And those are local businesses where we're selling local products and cross-border products, but local products to local consumers. And the combination of those two big business focuses are what define our globalization. We then have offices in many locations around the world that have what we call embassy leaders. And these leaders are very important because they're all local. So Spain, France, Italy, United States, Australia, New Zealand, Japan, Korea, they're all local leaders and they have business development teams plus IPR specialists, government relations, and PR specialists. And their job is to protect

the brand and reputation of Alibaba to make sure their job is to protect the brand and reputation of Alibaba to make sure that we strictly comply with the rules and regulations in these local markets, and then to support the businesses and help them grow. So to put all this infrastructure in place takes quite a bit of time, but it's in place and it's very exciting to watch it develop. But it's still a long way to go. We're in the early days. Michael, you've mentioned AliExpress. Can you explain what that is and what the main financial products that you provide are? AliExpress is a business in China. So it's a platform in China. It's an English speaking app, and it basically connects to about 80 countries around the world.

And if you go on to the AliExpress app on the platform, you'll find about 150 million different products that you can purchase, which are made by Chinese manufacturers. So it's a cross-border business originating from China to international consumers. And the big markets are in Europe, United States, Russia, but they touch 80 countries around the world. And it's the only English speaking app that Alibaba has right now. Their primary focus is cross border, but they're starting to build local businesses in France and Spain, and they will select other countries in the future as well. They're not actually providing financial services, they're providing e-commerce and products to consumers.

What do you think are the opportunities for international businesses in China? In a market where there are so many nuances to navigate, what do companies need to keep in mind in order to succeed in China? I think for international brands, there's a huge opportunity in China. And just in the last almost seven years that I've been at Alibaba, we've been onboarding international brands to the Tmall and Tmall Global platforms, which are the two big platforms for international brands by the thousands. So we have tens of thousands of international brands that are on the platform and across every category from fashion and apparel, luxury, toys, consumer electronics, you name it, they're on the platform. And China is a huge

market. We talked about the size of the consumer base. It's a wealthy market. We talked about the size of consumption as a percentage of GDP. They love international brands. And I'm often asked, why do they love international brands? And I think it's pretty straightforward. These are products of very high quality. They're safe. They're reasonably priced. And brands are always reinventing the next generation of products or the next season of fashion or the next luxury design that hasn't been seen or the newest car or the latest gadget or toy or the newest iPhone. And consumers love that. And Chinese consumers are really not that different than the rest of the global consuming

population. We all love this stuff. And so they find it fascinating. And that's a consumer dream is to have access to all of these brands, to be able to get the products and know that they're genuine and they're safe and they're very high quality. And there's a never ending development potential going forward. So that's one big thing. I think the second thing is, if you look at the

size of the market, it's not possible for these brands to open offline store locations in four or 500 cities in China. It takes too long. It's just too expensive. Coming onto our platform or onto an e-commerce platform is a very, very efficient way to engage directly with the Chinese consumer and grow a business over a long period of time into something truly significant. The retail landscape in China is advanced compared to the West in many cases because of Alibaba's digital innovations. Can you tell us about some of Alibaba's innovations? Yeah, but I think I want to address, is it really more advanced? I think it's different. And I'll tell you what the principal difference is,

is that much of the retail infrastructure in a country like the United States or in countries across Western Europe has been put in place over the last 40 to 50, 60 years. But none of that retail infrastructure existed in China. And so, yes, of course, if you go to a Beijing or Shanghai or Hangzhou or any one of a dozen or two dozen tier one cities, you'll find a lot of retail infrastructure. But if you spread out across the country into the next couple of hundred cities, you don't find the offline retail infrastructure. The online business, e-commerce, has become a very, very important way for consumers that are living a long, long way from a city that would have an offline location to be able

to see products and buy things, and for brands to reach a huge consuming population where they may be a thousand miles away from that consumer who's looking at their products. The United States probably wishes, and Europe wishes, it didn't have as much offline retail infrastructure. And in many respects, I think China wishes it had more. So it just was a function of where China started and where many of the developed countries started in terms of retail infrastructure. So once that is established as a foundation, then those markets developed very differently from there. And so to get to your question, what's happened in China? What are some of the

examples of these innovations? And I think, for example, if you look at consumer operations, well, what does that mean? It means that brands are leveraging consumer insights in China in a way that is currently not done in other parts of the world. And that's because we've developed a business which has such large scale and has so many brands on the platform that we have enormous amounts of data, which the brands can use because they have access to all of their own data. And that helps them develop new products and new marketing strategies and ways to engage directly with the consumer. But there are also distribution channels, because remember, I said that we do B2C and B2B, but we also do online and we do offline and we do 1P and 3P, so marketplace and retail,

and we do duty-free and duty-paid. So you have all these different channels which are available to brands, which can be found in other markets, but usually not all part of one ecosystem. I talked a little bit about product innovation before, but this is where brands use consumer insights, but also something that we call the Tmall Innovation Center, where we work with brands to basically come up with products that will be bespoke to the Chinese consumer. And it can be consumer products of any type. We start to understand what does the consumer like, And then we create a product for them. So think about it not as B to C, but C to B. You don't see a lot of that in other parts of the world. So these are just a few of the

examples of things that we do and that are being done in China today that are quite innovative and quite different than what you see elsewhere. The idea of C toB, consumer to business innovation, is really exciting. Can you give an example or two of products that that products are introduced by brands is they think first in seasons and then they have to basically design the products well before the season starts. I have very little insight as to what the consumer wants. Their designers and their teams come up with ideas that they think are going to work and they hope for the best. But what happens is that they don't get it 100 right and a lot of what goes on to the shelf for sale is not sold ends up in outlets or sold in discount stores so the idea is to try and understand what do people want and this is actually something that we're working on with our own factory to understand what the consumer desire is and to produce a smaller number of quantities, like 100 pieces instead of 5,000 pieces. And shorten the timeframe between figuring out what the consumer wants and your production capability to get the product to market quicker. So you don't deal with the enemy of time

and you don't deal with the enemy of uncertainty and you don't deal with the enemy of having produced a huge amount of product, a lot of which might not be sold. So we think that this is the value of data. This is the value of understanding consumers better and better, such that the consumer will tell us what products they want, and we will manufacture what they want. And it's very exciting for the future, we think. And very efficient and also very green. Extraordinary. Alibaba recently held its 13th 11.11 Global Shopping Festival. Can you tell us about 11.11 and what the significance of this holiday is? Well, the most important thing to tell you is that 11.11 and what the significance of this holiday is?

Well, the most important thing to tell you is that 11.11 was created by Daniel Jang, our chairman and CEO, and he created it in 2009. In that year, this is really interesting for context, we sold a total of $27 million of product. Actually, I think it was less than that. I think it was $7.8 or $8 million of product. Actually, I think it was less than that. I think it was 7.8 or $8 million of product. And we had 27 brands that participated. This last November just passed,

the GMV was about 84 billion US dollars and 290,000 brands participated. Not 290,000 international brands, 290,000 brands in total. So some people say, oh, 11.11, it's all about the sales. 11.11 is not about sales. Of course, there is a sales component to it. But most of the brands that are participating are much more interested in what they can learn about new product introductions.

So they use it as a testing opportunity for new ideas because they have hundreds of millions of people focused on the event, or they use it to explore new ways to engage with a consumer. So you hear a lot about live streaming. That's something we started five years ago. It's become very popular and is probably the most important digital consumer engagement tool today. We also think that that will change going forward. And so short form videos, other types of digital engagement are also very popular with consumers. Brands, yes, they see it as a promotional event, but it's a chance to extend their engagement with consumers and try new things. Consumers, it's a great opportunity to buy things, but it's also a super opportunity

to explore new possibilities. I'll give you one example of this because we're both very proud of it, but we thought it was very innovative. During 11.11, we launched what we call the One Shoe Program, designed to cater exclusively to the disabled population,

people that probably lost a leg, amputated or otherwise, and only needed one shoe. Now, the traditional approach to disabled people is, well, they can buy two and just keep the extra shoe. But what we did is we went and designed shoes, just one shoe, a left shoe or a right shoe. And you may say, well, that's pretty simple. You just throw the other one away. No, no. It's all about how you change the supply chain and the manufacturing to actually produce the product so that it can be part of a business. And so you can actually serve the constituent, but also do it on a sustainable and a continuing basis, as opposed to just a one-off. This program was hugely popular. One of our teams

came up with the idea. And of course, it's serving a narrow segment of our consumer population, but it's the type of thing that we do in 11.11. Interesting. You mentioned live streaming. What are you doing in live streaming and video? Well, we lead in that. Live streaming is the single most important digital engagement tool for brands. It was initially built around KOLs, very famous people, and it still is very popular to get the most important KOLs to support products. But live streaming has gone way beyond KOLs. Brands now use their own personnel to perform live streaming services

because somebody who's working in an offline store is just as capable, maybe not as well-known, but it's just as capable of talking about the product and generating excitement or explaining a new product or a new design that's come out as a KOL. And I think that live streaming will continue to be very important. The question is, what comes after live streaming? Because five years ago, there was no live streaming until we introduced it. And it became very popular. But we, of course, are always thinking about what will the next thing be? What is a KOL? A key opinion leader. In the U.S. parlance, you would think about this as the Kardashians or others who have millions of followers. And in China, you have a large group of KOLs who appeal

to different segments of the 950 million people on our platform. Looking ahead, Michael, what shifts do you see in consumer behavior and changes in retail? I think the big shift that we've seen is what we've been talking about, which is consumers want a very engaging and immersive experience. It isn't about just going on a platform and buying a product. They do that. But if they can do it in a way that's more engaging and more immersive and fun, then they will do it. And they would prefer to do it that way. Brands like it because good engagement probably means a repeat customer and a repeat

sale and an opportunity to grow that relationship. So you have very good alignment between what the brand wants and what the consumer wants. I want to be clear that it's not just live streaming. They're short form videos. You may remember several years ago that gamification was the rage. So make it fun by building a game around whatever the product is that you're selling. Very popular for a period of time and still quite popular. So there are many see now, buy now, magic mirrors, virtual try-ons, all of these things that allow a consumer to do more than just look at a picture or a 3D image, to imagine themselves or to be able to recreate themselves in a new jacket or a new dress or with a certain type of lipstick. That's the kind of

engaging experience that people find fun, but also useful. So they don't have to wait to have bought the product. They can virtually look and see what they would look like with the product. They were intriguing ideas that have now become realities on our platform and on some other platforms. And that's what holds people's interests and brings them back. I think the other thing that's going on is what I would call category expansion. Sounds a little boring, but things that, and the pandemic was helpful in this respect, but things that people said would never sell online, now they all sell online.

Luxury cars, expensive jewelry, houses, furniture. People would say, no, we don't want to buy it. Why would anybody buy a couch online? The answer is because you can tap in the dimensions of a room and know whether it will fit. And you may know the color scheme in the room already. So not only will you get the color right, but you'll also get the design and positioning of it. This can all be done digitally. There's no requirement to take those measurements to an offline store. You can still do that. The things that were viewed as being quite difficult are now quite easy. That's just the process of digitizing everything. It makes it easy for people to do business. And that's really because of Alibaba's innovation in digitizing and in verifying the luxury and expensive goods so people have trust purchasing them on your platform.

Well, there are two different things there. One is technology and digital capabilities and tools and those types of things that are on our platform. The trust and verification is a very important issue. And the platform rules for things like Tmall and our luxury pavilion is there can be no fakes. There can be no fake products. The authenticity of what is being represented is guaranteed. And the brands care about this, of course, but the consumers care too. And so it's our responsibility as a platform to ensure that people are buying authentic products. Michael, before I ask for the three takeaways you'd like to leave the audience with,

is there anything else you'd like to mention that you haven't already discussed? Or what should I have asked you that I didn't? You didn't ask me anything about competition. And normally I don't like talking about the competition, but I would address it in a slightly different context, which is, as somebody who came from the West, and who spent 25, almost 30 years thinking about working in China and now working for Alibaba, one of the things I hear all the time from people all over the world outside China is that there really isn't any competition in China.

Alibaba is like a monopoly. And I think that I can assure your listeners and people who are watching this podcast that there is tons of competition in China. The competition just in the core commerce business is brutal. It's interesting. The way that people have become competitive is by using technology and consumer engagement, social live streaming, innovative engagement techniques with consumers to basically get into the commerce business. I think it's a fascinating thing to watch. It's competitive. It's tough. We have to fight. We learn a lot from our competitors. But I think there's an illusion out there that somehow there is no competition in China. And you also hear it from politicians, of course. It's a brutally competitive market.

Michael, what are the three takeaways you'd like to leave the audience with today? The first takeaway would be the need to stay agile, stay adaptive, and to see innovation as a continuum that never stops. That's what I'm living every day working for Alibaba. It's not static. It's completely dynamic. Second would be to the importance of leveraging the power of data and digital technologies, both today and as they continue to rapidly develop. Livestream is a good example of something that's here today, but there are going to be many, many different digital tools and capabilities in the future. And you have to stay current and you have to continue to leverage those because everything's going to be digitized in the future. And you have to stay current and you have to continue to leverage those because everything's going to be digitized in the future. And the third is probably the most

obvious, but I think it's the most important, which is focus on the customer and know their pain points and solve those pain points. Because if you don't, your competitors will. Michael, thank you. This has been terrific. Thank you, Lynn. Great to talk to you. If you enjoyed today's episode and would like to receive the show notes or get new fresh weekly episodes, be sure to sign up for our newsletter at 3takeaways.com or follow us on Instagram, Twitter, and Facebook.

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