ALIBABA WORKS MAGIC DESPITE ECONOMIC DOWNTURN

UNCLAS SECTION 01 OF 04 SHANGHAI 000124

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SUBJECT: ALIBABA WORKS MAGIC DESPITE ECONOMIC DOWNTURN

SHANGHAI 00000124 001.2 OF 004



1. (SBU) Summary: Hangzhou, the provincial capital of Zhejiang
Province, prides itself on its rapidly growing high-tech sector.
City leaders often draw comparisons between the city and
Silicon Valley, citing the symbiosis of its numerous high-tech
companies and rich academic community. Perhaps nothing better
symbolizes Hangzhou's drive to be a high-tech capital than
home-grown Alibaba.com, the world's largest business-to-business
sales network. During a November 2008 meeting with the Consul
General and a February 2009 follow-up meeting with Econoff,
Alibaba.com exceuctives reported that business is continuing to
grow despite the economic crisis, at least in part because more
businesses were turning to online procurement to shave costs.
Alibaba executives also discussed business environment issues,
labor issues, and intellectual property (IP) among other topics.
End summary.



Alibaba's Big Umbrella

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2. (SBU) Alibaba.com belongs to Alibaba Group, the largest
e-commerce company in China. Besides Alibaba.com, Alibaba Group
includes: Taobao, China's largest e-commerce company (80 percent
market share in China, with one third of China's population as
users); Alimama, China's largest online advertising exchange
platform; Alipay, China's largest online payment service (100
million registered users - roughly twice the number of Chinese
with credit and debit cards); Yahoo! Koubei, an online
classified listings for local services and search; and Alisoft,
an Internet-based business management software company, which
targets SMEs in China. Jack Ma, a former school teacher,
founded Alibaba in 1999 with a loan of USD 2,000. He has since
become an icon in the Chinese business world and was recently
listed by BusinessWeek as one of the world's top 25 most
influential people on the web.



Global Commerce Turns to E-trade in Lean Times

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3. (SBU) In a November 2008 discussion, Alibaba.com CEO David
Wei said the global downturn had little impact on business as
many companies have turned to e-commerce to reduce costs. He
noted that immediately after the financial crisis started there
was actually an upsurge in orders for goods as many companies
decided to save money by sourcing products on-line rather than
coming to China directly to buy. Buyers and sellers tend to
more readily use e-trade in lean times, Wei noted. In a
February 2009 discussion, Alibaba.com Director of Credit and
Payment Division Gao Jing confirmed that the membership base and
trading volume continue to grow, but Alibaba executives are
unsure exactly how much can be attributed to firms seeking to
cut costs through less expensive means of procurement. Wei
added that even if the company experienced a slowdown, it would
still be in good shape since it has low debt and a large amount
of cash on hand. Currently Alibaba.com has over 29 million
domestic users and 7 million international users. Approximately
17 percent of the international users are from the United
States.



Strategy Changes with the Times

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4. (SBU) Wei estimated there are approximately 50,000 SMEs
within China alone that use Alibaba's services. Alibaba's top
priority is penetrating small and medium-size enterprises
(SMEs). Currently only one percent of all Chinese SMEs and

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three percent of Chinese exporters subscribe to Alibaba. Wei
said the vast majority of Alibaba's income is derived from
subscription fees that are paid on a yearly basis. He added
that virtually all of its current subscribers choose to renew
each year. Only about 15 percent of Alibaba's revenue comes
from "value-added" services. Alibaba is not focused on serving
big companies, but some big companies use Alibaba for sourcing
products. About 100 of the Fortune 500 are registered
customers. As of yet, Alibaba has no direct competitors,
although Google and Microsoft may soon be in the running.




5. (SBU) Wei said that in August 2008, Alibaba launched a new
program specially dedicated to assisting foreign businesses
export to China as a way of tapping into the increased demand in
China for foreign products. The program is currently in the
pilot phase with only 2,000 suppliers. He believed the
appreciated value of the RMB can be credited for whetting the
appetite of Chinese for foreign products. The response has been
"astounding" with three to four thousand requests from Chinese
SMEs every day for foreign products. The company plans on
expanding the site in 2009. U.S. trade associations, such as
the U.S. Wine Association, have approached Alibaba about selling
their products through the site as a way to "cut-out"
distributors in China. Wei said the main products requested
thus far from the Chinese importers are: luxury products,
second hand machines, and chemicals and raw materials. The last
category is by far the best-selling. According to a March 14
Shanghai Daily news report, Alibaba is currently exploring
relationships with companies such as Google, eBay, Yahoo! And
Microsoft to expand its business network. Alibaba sent over a
dozen of its executives to the United States in late February
for preliminary discussions.



A Solid Business Environment

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6. (SBU) Wei rated Hangzhou's business environment as very
supportive. Although Alibaba does not receive financial support
from the municipal, provincial and central government, Wei said
the "moral support" at all levels was very good. He added that
part of the reason for the broad support was because Alibaba is
not involved in the media or on-line gaming.



Alibaba Welcomes Cooperation with the United States

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7. (SBU) Wei emphasized that Alibaba would like a closer
working relationship with the Consulate and the U.S. business
community, suggesting a number of avenues for cooperation. In
particular, he welcomed U.S. business associations' ideas for
collaboration and suggestions on ways Alibaba.com can improve
business. Wei also offered to assist U.S. businesses wishing to
export to China, saying Alibaba would list their businesses the
first year without charge. In addition, Wei said that Alibaba
receives many requests from their customers who experience
difficulties obtaining U.S. nonimmigrant visas. Many are
"verified and trusted business partners" who hope to travel to
the United States for business reasons.



The Three-Pronged Attack on IP Infringement

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8. (SBU) Wei said with over 120 million products listed on

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Alibaba, it is impossible to track whether all are legitimate.
The "illegal stuff" is easy to ferret out, but it is the gray
area of IP infringement that causes trouble, according to Wei.
The company has built a "knowledge base" to help track
infringement and those companies and individuals that may engage
in such sales. Protecting patents and designs is particularly
difficult on the internet, but trademarks are more easily
verified and protected. Wei described Alibaba as having a
"three-pronged" approach to protecting IP. The first method is
through the company's automatic filter that checks and screens
for possible counterfeit material. Second, there are
approximately 60 to 70 employees that screen postings everyday,
checking for illegal and pirated material. Last, the company
takes complaints from rights holders and acts promptly to
investigate. Wei stressed that rights holders themselves need
to be vigilant about counterfeits. Often, unless the rights
holder approaches Alibaba, the company has no way of knowing if
the product is legitimate or is being distributed legally. If
the rights holder objects to the sale of an item on Alibaba's
site on the basis of IP infringement, the item is immediately
de-listed. Wei said the biggest illegal activity Alibaba has
found on its site is cigarette smuggling and illegal
distribution.




9. (SBU) Regarding Yahoo! Koubei, Wei said that it uses filters
to ensure that its search engine cannot be used to access
illegal music and movie downloads. Yahoo! Koubei also tries to
steer clear of media and entertainment. Alisoft, Alibaba.com's
sister company, which develops, markets, and delivers
Internet-based business management software, uses programs which
are "impossible" to copy. Through its leasing programs, it is
actually helping "kill software piracy" in China by making
software affordable to the average Chinese SME. Alisoft only
charges 1 RMB per day per user for each software application.
He said approximately 600,000 customers legally lease Microsoft
software through Alisoft. Alisoft currently leases 165 software
applications, 162 of which are developed by other companies. It
then "rents" these software applications to other companies and
pays a royalty fee to the software owner.




10. (SBU) Alibaba also finds that its IP rights are being
infringed as hundreds of copycat websites attempt to lure
Alibaba companies away. Wei noted that these websites have not
only copied Alibaba's user content, but have even copied the
company's user contract. Since these copycats are hard to
pinpoint and are able to change so fast, it is impossible to for
Alibaba to protect its own IP one hundred percent of the time.




A Labor Force to Match the Task

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11. (SBU) Wei said Alibaba has approximately 1,000 IT engineers
working at its Hangzhou headquarters, fifty percent of whom have
graduated from a post-graduate program. In total, Alibaba
Holdings has over 12,000 employees and is now the second largest
tech company in the world, after Google. Gao added the company
continues to expand despite the economic downturn. According to
Wei, Alibaba is set to open its new 1.3 million square meter
campus in the summer of 2009 to coincide with its 10-year
anniversary. Wei said the campus is equipped with
state-of-the-art technology and is environmentally friendly. In
total, approximately 8,500 people will be working there.
Alibaba also has 300-400 people employed in Shanghai.




12. (SBU) According to Wei, Alibaba actively cooperates with
Zhejiang University and about 200 other educational institutions
throughout China. The company funds a post-graduate program at
Zhejiang University at no cost to the university. Alibaba also

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sends its IT engineers to teach at many universities around
China. According to Wei, the company has an intern program, and
about 25 percent of the interns stay with the company after the
internships conclude. As for corporate social responsibility,
Wei said that rather than assist poor students, Alibaba has a
corporate program to assist teachers. Alibaba sponsors a number
of low-income teachers throughout China as a means to help
people, who in turn help a greater number of other people.



Internet Freedom - Shying Away from the Sensitive

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13. (SBU) Wei noted that Alibaba, as the owner of Yahoo! China,
is not interested in on-line media, entertainment or gambling,
so it attempts to steer Yahoo! China towards commercial
activities and away from sensitive topics. Alibaba has
developed an internal filter system that screens for
objectionable material on its Yahoo! China website. Wei also
showed the CG the company's web-casting studio which broadcasts
two live shows daily and has a viewership of roughly 300,000.
However, content is primarily commercial issues. Alibaba also
allows companies to post video clips introducing their products.
CAMP