The Motley Fool's Bill Mann recently interviewed Ming Zeng, Alibaba's (NYSE:BABA) former chief strategy officer, who now heads up its Academic Council. Below is a transcript.
Bill Mann: This is Bill Mann. I'm joined by Dr. Ming Zeng, who is the chief strategic officer for Alibaba? Is that correct?
Ming Zeng: I had that position for 10 years, and now I'm in charge of the Academic Council....
Mann: The Academic Council. A lot of people who will be reading this transcript or listening to this audio will have heard of Alibaba. A lot of people will be customers. They're also, pretty sure, going to be familiar with Jack Ma and his story, but they may not be as aware of your role in the growth of this massive company.
Zeng: Yes, I'm very lucky to have the opportunity to go through all these years with the company. I met Jack first in April of 2000 when I was trying to write a case study about Alibaba and then I did some internal training in the following years. I then became the strategy advisor to the Group in 2003. I then joined full time in 2006. I'm very grateful for the opportunity to work closely with Jack because the best you can hope for as a strategist is to work with a visionary leader.
Mann: As a strategist, when you started in 2006 what did you feel like Alibaba was going to look like in 10 years? Did you have an idea that it would be as expansive as it is today?
Zeng: I describe in the book a milestone meeting in September 2007. We had a strategy meeting trying to plan for the next 10 years and then we had a lot of heated discussions. And, somehow, we came up with the idea that our future strategy would be building an open, collaborative e-commerce ecosystem. And after we came up with that idea, for the first time we suddenly realized we could have the potential to become a $100 billion a year company. That was the first time we realized that the company could become very big.
Mann: At the time were you thinking $100 billion in revenues or is this market cap?
Zeng: Market cap.
Mann: Market cap. So you were off a little bit.
Zeng: [Laughs] Well, we were only talking about 10 years.
Mann: [Laughs] Let me add back. So you pretty much got it right if I recall.
Mann: So your book, which is coming out this next month? Is that correct? It comes out in September.
Mann: It's called Smart Business: What Alibaba's Success Reveals about the Future of Strategy. I think one thing that people might not understand about the Chinese market, who are here in the United States, is just how big it is and just how innovative it is. Maybe you could tell us some things about operating in China as Alibaba or even with some of your smaller subsidiaries that people in the US may not know or may not think about.
Zeng: For example, I open the book with this Singles Day event which is November 11 ... Our online e-commerce marketplace started this online promotion about nine years ago and now it was the largest online shopping day in the whole world -- larger than the whole week of online sales in the US after Black Friday on Thanksgiving. And Alibaba's online sales, alone, are larger than the total of e-commerce in the US.
Mann: It's an amazing statistic and I think a lot of people may not understand that China is the largest e-commerce market in the world. What is it about China that makes it so open to even the concept of e-commerce?
Zeng: I think it is a combination of two very powerful forces. First is the technology revolution of internet, cloud computing, big data, artificial intelligence, and the waves after waves of technology revolution. And on the other side it's the leapfrogging of the emerging market. When Alibaba started, the business infrastructure in China was very poor and the retailing service was almost non-existent. ...
When the internet provided an opportunity for everybody in China, no matter where you are, to have access to the same products at the same price as people who are living in Beijing or Shanghai, it was a revolutionary concept, and the people love the service. That's how we could get started.
Mann: If you could describe what it was like prior to that? Was it that goods and services were unavailable, or they were available at costs that kept them out of reach?
Zeng: It was actually the time more than retail... I'm talking about around 2003.
Zeng: About 15 years ago. At that time, only in metropolitan cities in China we had supermarkets or shopping malls. It was just the beginning. And we hardly had grocery stores like 7-Eleven. We hardly had convenience stores like 7-Eleven in Japan. So even for people living in major cities, shopping was not convenient and there were not many goods to choose from.
And beyond the first-tier cities, even second-tier cities like Hangzhou, there were hardly any supermarkets at all. So if you go into inner cities in the areas in China, basically you had a very selective base of products and the price may be two or three times higher because after four or five layers of distribution, it should add more cost.
Mann: No scale and no efficiency.
Zeng: Yes, and everything becomes too expensive when they reach the poorest parts in China. So, in other words, a very bad combination.
Mann: Maybe good for a company like Alibaba that recognized it, though.
Zeng: Yes. Initially people came to our website mostly not because of the prices are cheap. In many cases it was simply they [were] able to buy things not available to them at all.
Mann: That's kind of what I was asking. That things that were available at a good price, but they were also things that were absolutely unavailable to them any other way.
Mann: That's generally speaking not something that Americans would be familiar with and I think it really gives a great insight into the market in which Alibaba developed.
Zeng: If you think about Walmart, Walmart started with a very small rural city and then covered, gradually, all over the US. So retailing in the US had reached a very high level of efficiency and quality of service, even before the internet started.
Mann: Well, you know, Walmart and there are even some companies that were focusing on even smaller towns than Walmart was. In some ways, they had some of the same environment in which they went specifically to places where there wasn't that much efficiency. ...
Your new book is called Smart Business: What Alibaba's Success Reveals about the Future of Strategy. In your book you talk about two really interesting concepts by which Alibaba is run; the first of which is that Alibaba is driven by mission, value, and vision. I thought maybe you'd like to talk about what that means for a company the size of Alibaba.
Zeng: For any company to become a phenomenal success of its time, you really have to be driven by vision, because it asks you to see through the future and you have to see ahead of others. And also vision is a great way to mobilize all the resources within and outside organizations.
However, who has the vision? Who is waiting to sacrifice the short-term gains for long-term success? Who is waiting to suffer all these tough challenges to build something may be bigger than themselves? Only those people who are driven by mission.
So Alibaba started in 1999 with a clear mission that we would make doing business easier for anyone anywhere. And based on that we developed a vision that the internet is the best tool to transform business to make things easier for everybody.
... and also for a company to have a strong mission and vision, they usually tend to have strong core values that they build on. Core values help a company to go through different times and can maintain a coherence in their vision.
Mann: So when you have a discussion internally, all of the decisions that you and senior leadership are making are driven, first and foremost, by your values?
Zeng: Yes. So values and the mission and vision. Let me give you a very interesting example: cloud computing. When we started with cloud computing initially back in 2009, it was still very early. There was a lot of debate internally, especially among technology people. Even our CTO at that time didn't like this idea. So there was lots of debate. And then the question came to Jack. What should we do?
And Jack's point is what's the value of cloud computing? It's most likely to bring down the technology barriers to make the internet or big computing accessible to all the SMEs at a very low cost so start-ups will not have big hurdles when they build up their internet services. This is where we're aligned with our mission to make doing business easier for SMEs, although at this time it turned out to be a disruptive service for a traditional IT industry.
And after five years of hard work, we finally made it work and now [it's] the strongest anchor of our ecosystem, and we are very clearly the No. 1 player in the China market.
Mann: Did the IT industry recognize the fact that you were competing with them immediately, or did it take them a while for it to register?
Zeng: Of course, it was difficult for them to understand, just like in the US. Most people underestimate the power of AWS in the presence of traditional IT service. And in China, when we looked at the cloud service, it was growing like crazy, because a lot of SMEs were not using any IT services at all. And then it found using cloud service actually easy, so there were less legacy issues in many scenarios.
Mann: This is what I think is so interesting. Thinking about cloud computing, specifically, you have competitors in the IT industry, but they weren't going after the small and medium-enterprise clients at all, so they may not have even been aware, long term, what your move into that market meant for them.
Zeng: Yes. And also because it's extremely difficult to penetrate the SME market, because their demand is less hard to provide service that can make money for yourself.
Zeng: But cloud service offers a new combination of value and service ...
Mann: It's amazing to think how much of the value accrued to Alibaba -- it has to be a small percentage versus how much value was created at your SME client companies.
Zeng: Definitely. Very early on Jack made it a point to us. The best business model is when you create one hundred dollars of value for your customer and you are only asking for five dollars. Everybody will be very happy.
Mann: That's right.
Zeng: But if you save two dollars for your customer and you're asking for even ten cents, they will not be happy.
Mann: Right. If it's transformational and you're asking for a little bit, that's no problem for them.
Mann: The second concept in your book is that Alibaba seeks to operate your business with total transparency, which when I heard it, to me it doesn't really sound like a public company, but it sounds somewhat different from what we would think it takes to operate in China.
Zeng: Yes. By saying that, I'm pointing to our attitude toward communication. Of course as a public company we have to abide by all the rules set for financial information, but when we communicate internally and externally, we would try to be as transparent as possible.
Let me give you two examples. One example is internal. Recently there was a heated debate about a particular management issue on the internet, and what we did is we have internal broadcasting of how senior managers are dealing with the particular issue. And a lot of our employees listened to that broadcast and they found it much more satisfying because they see the whole process [as to] how the particular issue was managed internally.
The second example is how Jack Ma dealt with our stakeholders. Even when we were doing our roadshow for IPOs, Jack made it clear that Alibaba believes in customer first, employee second, and shareholder comes third. So we made that clear to everybody. This is something we believe and we communicate it clearly with every stakeholder.
Mann: These are conversations that could only happen that broadly. I'm just thinking about what you were saying -- that if everyone knows what your values are.
Mann: Otherwise if your values aren't clear, a debate like that just sounds like turmoil.
Zeng: Of course. Initially, we were scared by all that turmoil it created, where everybody was complaining. You get lost. You are afraid of how bad we are and that's why everybody is complaining. And right now you realize when people start to complain that's really bad, so now you're in the best interest of the whole operation.
Mann: Yes, if it's constructive and they know what the values are, then I think that that's entirely the case.
Mann: You've also called China a petri dish for innovation. For years in the US, the impression has generally been of Chinese innovation that it came on the back of Western innovation, particularly in coming up with low-cost solutions. Do you think this was ever right and if so, what's changed in your mind?
Zeng: I think the first point I want to make is there are different types of innovation and each type of innovation has its own value and we have to respect that. There's, of course, invention. There's also people like Einstein who can come up with groundbreaking theory for centuries that nobody can come up with better ideas. So there are different types of innovation, all creating value for society.
I wrote a book in 2007, also with HBR. In that book I coined the term called "cost innovation," which means Chinese companies are strong in coming up with innovation at low cost and, also, they have found very many ways to reduce costs. So a lot of people in the US don't appreciate how much effort, how much innovation you need to really develop good, low-cost solutions. Did I make myself clear?
Mann: Oh, absolutely. I was just thinking a few years ago I was on a trip. We were analyzing companies. We went to go visit a Chinese company called Mindray.
Zeng: The medical equipment corporation.
Mann: That's right. They're based in Shenzhen and they make ultrasound equipment. I remember talking with their management and thinking, when you were talking about cost innovation, that's exactly what they were talking about. Like this is as good of a solution and we engineered this. We've put hundreds of thousands of hours collectively into engineering this in a lower-cost way. It's not just we have lower-cost employees and lower-cost space. There was a lot more to it than that.
Zeng: I actually used my case study example in the last book. Over the last 10 years, the world has benefited greatly from the cost of innovation of Chinese manufacturers. And then the other concept I want to mention is I call the "business model innovation." This is what happened over the last five or eight years in China, especially in the internet area.
Alibaba has a unique business model that there's no counterpart in the West. Another great Chinese company, Tencent, has a very innovative model that doesn't look like Facebook or Twitter at all. Despite we are not the original inventor of the technology, we are able to apply technology to write different scenarios and also create tremendous value in the process [that also] releases innovation.
And the last point I want to make is in this process, Chinese companies are getting closer and closer to the frontier of innovation. Like Alibaba -- we are spending more and more resources on the cutting-edge technology like quantum computing, or blockchain, or even chip designs. So it's a gradual process of Chinese companies moving forward and spending more money on R&D when the markets become more and more mature and then competition bets more on invention and innovation. So it's a natural progress, and China has come a long way to the time that more and more companies will be the original inventors.
Mann: Alibaba has also made some substantial moves into India and some other international markets. Do you think Alibaba could have fulfilled its mission if it had remained completely focused on China?
Zeng: No. We are spending globally because of our mission. We want to build a global online marketplace that can really link consumer, producer, and service providers all over the world. And we are pushing the digital economy for the whole world to go forward. That's why Jack proposed the eWTP concept in the last G20 meeting. eWTP is the concept that we are hoping the whole world is moving to a new trading paradigm that builds on internet platforms, rather than the traditional trade wars more or less led by big, more conventional firms.
Mann: I was thinking about what you were saying. I want to pivot a little bit and ask a question. Maybe we call this ripped directly from the headlines and I'm thinking about what's called here a trade war between the US and China. I'm really interested in your view about the impact on American capital -- not so much operating businesses, but capital -- because one of the senses that I get looking at the number of companies that Alibaba has funded; that this is not a positive for American investing.
Zeng: What do you mean by that?
Mann: Maybe we'll have a sidebar conversation. I get the sense that a lot of innovation in the US is being funded through a lot of the big venture capital firms. They've got enormous resources in Silicon Valley. In Boston. And I think that a lot of Americans believe that at least one path for the US to remain a technological leader is for us to invest well. And so I'm wondering about your view of US versus Chinese capital, Indian capital, Japanese capital.
Zeng: I'm not an expert in trade or capital markets, but I think in general we are moving beyond this stage already. That's another key message in my book. Capital is no longer playing a crucial role in innovation. There's an abundant supply of capital almost everywhere -- Silicon Valley, Shanghai, Bangalore -- most anywhere there's an abundant supply of capital and capital flows that you reach mostly across borders. What we really need is the best organization and the best environment that can really foster the creative talent to grow, so the real shortage is the best ideas and the best people.
Mann: And capital has become somewhat fungible as a result, or it's become...
Zeng: ...much, much less important than maybe even just five years ago.
Mann: Well, I do want to be sensitive to your time and I really do appreciate the time that you've spent with us. I do want to ask one last question which was, as you went through the process of writing your book, was there anything you learned that was surprising to you just in the process of writing?
Zeng: I think most people will be interested in the China story. It's kind of fun and fresh, but I think what is more important is the lessons we learn here have a universal implication for everybody in the future. Every business is becoming smart and we are facing the same challenge everywhere.
Mann: And that's something that became more clear to you as you were researching the book?
Zeng: Yes. It's not just the China story or an Alibaba story. If you think about it, all the top companies today, including Alibaba, Tencent, Amazon, Google, Facebook; none of these companies existed 20 years ago, and they all became in the top ten, and they are all different types of smart business. This clearly shows where the future goes.
Mann: I think that's exactly right. Dr. Ming Zeng is the executive vice president at Alibaba and has just written a book called, Smart Business: What Alibaba's Success Reveals about the Future of Strategy. And the book will be in wide release in September, is that correct?
Mann: Well, we're looking forward to getting our hands on it and I really appreciate your time today.
Zeng: Thank you very much.
Mann: Thank you so much.