Editor’s note: The following is an unedited transcript from the 2018 Code Conference. It may have spelling or grammatical errors that will be corrected at a later date.
Jason Del Rey: Alibaba is obviously one of the most powerful companies in the world, one of the most innovative, and I’m thrilled that we have one of the companies leaders here today. Joseph Tsai, who’s the Executive Vice Chairman, and one of the companies co-founders. Joe, please join me on stage.
So Joe thought the good way to avoid hard questions today would be by wearing a Yale lacrosse shirt, and making me ask him about it, so, “Okay, Joe. Why are you wearing a Yale lacrosse shirt?”
Because Yale just won the national championship in lacrosse on Monday.
Okay, okay, okay.
By the way, I was wearing this shirt on Saturday, during the semi-finals, so I haven’t washed it yet.
Oh, so okay. We’re getting spicy. I thought you were gonna say something with the Under Armour logo, and their-
Oh, no. Maybe I should cover it.
Oh, okay … their business.
I keep people in the …
So, we’re gonna start with the really fun stuff, which is policy, but there’s just obviously a ton in the news with this current administration and trade relations with China, on again off again trade war, most recent announcement around 25% tariffs proposed on 50 billion dollars worth of goods coming out of China. There’s still a lot that hasn’t been decided, but you’re watching this and I’m sure you’re thinking, or I’m thinking, “How does this potentially affect your business, globally?” Can you give us a little insight into that?
Well, I think we already got a little bit of a preview when Trump was on the campaign trail. He talked about being unpredictable, so we’re seeing a lot of this on again, off again unpredictability. You know, a week ago they came out after the summit meeting to say that the trade war is on hold, but now there’s tariff’s on 50 billion dollar goods. I think we are … In a way, we kind of predicted the unpredictability. There’s always gonna be volatility, but what we’re focused on is in the long term.
One thing that Alibaba’s business here, what we’re trying to do in the United States, is to get small businesses and farmers to see how big of a market there is in China. China, right now, has over 300 million middle class consumers. We’re in the process of upgrading the economy so that the economy is going from export driven to consumption driven. Your average consumer, now, cares about buying better food, healthier products, and things like that. So, they’re looking outside of China to bring in more imports. That’s a great, huge opportunity for the producers all around the world, including farmers, including small businesses in the United States, and that’s what we’re focused on.
So, that’s been the companies messaging since your IPO in New York.
So, we’ve been consistent.
Yes, you could call it that. I’m wondering, how much of that is a business decision versus a recognition of perhaps the challenge to do business in the U.S. in a big way, if you were to try to do it? Whether it be big M&A activity in the U.S. … and I should have pointed out earlier, you run M&A globally for Alibaba.
And there’s a lot of that, which we’ll get to, but how much of it is decision on, “Well, we might not be able to get the deals we want to get done in the U.S., so this is our strategy?”
Well, the thing is, four years ago when we went public, there was no trade war. There was not even a threat of trade war, and we talked about helping small business, helping American companies to sell into China. So, that’s been very, very consistent. That’s very much driven by business. If you look at our mission, “To make it easy to do business anywhere,” implied in that mission is we want to help small businesses. That’s how Alibaba was founded. We were founded as a marketplace for small businesses, actually for Chinese companies to sell overseas, so that’s very much in our DNA to help the small business.
So, the opportunity today is that there are a lot of consumers in China. We’re basically a consumer facing company, over 500 million consumers on our platform buying things, but most of those consumers are inside China.
So, the trade flow-
Is it 90% of revenue, or more than 90%?
More than 90% of the revenue is coming from China, so the trade flow is going from the U.S. … If you’re sitting in China, you’re importing stuff into China from all over the world, including the United States, and that’s always been our business model.
So, the on again, off again speculation that you’ll see sometimes in the press, of a big move by Alibaba in the U.S., M&A-wise, is we’re not gonna see that? Is that …
Well, we have not tried to do a big M&A transaction in the United States. We’re making investments. We’re trying to partner with entrepreneurs here, and invest in minority equity stakes in companies here. We’re looking for innovative people. We’re looking for people that are highly entrepreneurial. We’re looking for people who want our help in expanding their markets into China.
Got it. So, you’re looking for strategic fits versus simply an ROI situation of a good investment?
Absolutely. We never make … I mean, I’m responsible for M&A of our company, and I just want to reiterate, we will never make an investment or acquisition purely for EPS or IRR financial reasons. It’s always with a very strong strategic lens that we look at these things.
Okay. I know … One more related topic. I know you weren’t here this morning when Senator Mark Warner was here, but he stands on the other side of the aisle from the Trump Administration, and he had some strong comments about a big Chinese intricate, and that company is Alibaba named. He talked about them being deeply penetrated by the Communist party in China. This is, I’m sure, not the first time you’ve heard comments like that from a U.S. politician. What do you think when you hear that? Is there a nuance there the center is missing?
Well, I’m sure in a lot of American companies there are Republicans. There are employees who belong to the Republican party, right?
So, China happens to have a single party system. That’s a difference in the political system, but there’s nothing … The Communist party, per se, is not a … It seems like a dirty word here, but in China, that’s the form of government. What’s happening right now is, over the last 30 years, China has been a manufacturing country, but it’s focused on … A lot of the manufacturing is low-end apparels. We’re assembling iPhones and making $20 per phone, while Apple, with all the IP and the technology, makes $600 of profits on an iPhone, right? So, there’s a recognition by the government of China that we need to upgrade our technology. We need to upgrade our manufacturing sector, focus more on higher value-end manufacturing, things like robotics, aeronautics, high-tech medical equipment. That’s part of the China 2025 manufacturing plan.
There’s nothing wrong with a country wanting to upgrade its own manufacturing sector, go higher tech, be more innovative. But then, from the Chinese perspective, what we’re seeing is, there are a lot of people in America that want to stop China from doing that. So, that’s kind of an unfathomable … You know, we’re wondering why that’s the case, and I think Senator Warner’s in that camp. They want to hold China back. I still don’t understand it. I would disagree with this characterization of Chinese companies.
So, you’re one of the senior most leaders of the company. What is the balance you’re striking between … You talked about what the Chinese government wants to see, and the balance you’re striking between that, what the Chinese government wants to see, and what’s good for Alibaba and Alibaba shareholders. My assumption is they don’t always align.
Well, I think we work for customers. Jack Ma has always said, “If you have to rank our constituencies by priority, you start with our customers first, employees second, and shareholders third.” Okay, it’s because if you’re pushed, right? You have to choose among the three. You always want to serve your customers, otherwise you wouldn’t have a business. Then, you need to have the talent, the employee resources, to be able to enable you to serve those customers. If those first two things work out, then the shareholder will be taken care of. So, we never think of ourselves as only serving our shareholders. We have a lot of constituencies. Government is important because they regulate us. They create the environment in which we operate, so we have to have good relationship with the government. I think it’s no different from a company in the United States where every company here as a government relations department, or a regulatory department, that deals with the day-to-day interaction with the government. Sometimes regulation may not be totally consistent with making profits, but that’s fine because there should be constraints on making profits if you’re destroying social value. So, I think, you know, I don’t see China being anywhere different from the United States-
Okay. We’re gonna shift gears for a second. In the U.S., in retail, one of the biggest news items of the last year was Amazon’s acquisition of Whole Foods. The idea of a digital first company buying a big physical retailer is a very new idea here. Alibaba’s been at this in their own way for several years now. Why don’t you just quickly walk through what is the innovation you think you all have created with the convergence of digital and offline? I know you have grocery stores called Hema, which are part offline, part digital. Can you just quickly lay out what you’re seeing there that we’re not seeing here in the US?
Sure. I think what’s different is the consumer. The consumer is very, very mobile in China. We have more than 80% of our transactions that’s being done on a mobile phone. Okay? When you have a mobile device, the distinction between online and offline is kind of blurred, because you could sit at home and order something online, and have it delivered to you on a mobile device, or you can carry your phone and walk into a store, and use that phone as a device to learn more about the product, and also pay for the item. That’s really the insight we have when we talk about new retail.
The cold consumer experience has been transformed because of the mobile phone, and we want the same customer to be able to walk into a store, buy something, take it away. Then the next week, they’re on the phone. They’re sitting at home or in the office, and they don’t want to go into the store, but then they can order and have something delivered to them. One of the most important things about having store-based operation for an eCommerce company is that those store locations are also fulfillment spots. It’s not a secret to say that if the inventory is closer to the consumer, the logistics, the delivery is faster. Its very, very important, I think … You think about the Amazon scenario. There’s over 400 Whole Foods stores. If people are ordering groceries online, if they can fulfill and deliver from those Whole Foods stores, that’s a much faster proposition.
In our case, in the Hema case, we can deliver items within 30 minutes. In fact, that’s our core value proposition. That’s our promise for the consumer.
This is someone not coming into the store and having it delivered from there?
Or coming into the store and then picking out and having delivered to them?
It’s not coming to the store.
Just simply, you’re sitting at home, or you’re in your office, and you could schedule it and say, “I want this item to be delivered to my home because I’m cooking dinner at 6:00, but right now, I’m in my office.” There’s a lot of flexibility, and we want to give the consumers a total experience, whether they are online or in the store.
The economics on a business like that … you know, delivery in the U.S., for a lot of companies, is very challenging. I think even Amazon, and their Prime now, you know, one hour, two hour … They won’t talk about the numbers, but I think, you know, it’s clear it’s a challenge to make those numbers stand upright. Are these delivery businesses profitable already? How do they economics work out?
We are profitable. Our grocery stores, if you combine the online and offline PnL, there profitable. So, including the delivery, it could be run on a profitable basis. The reason it’s profitable is, number one, they had Skale. With Skale, you can actually map out delivery routes in a much more efficient way. If the store only gets 15 orders a day, then each trip is … and if you only deliver to one customer on each trip, that’s pretty costly. But, if the store gets like 1500 or 5000 orders a day online, then there’s a lot of room to map out your delivery route. So the same guy that’s making the delivery, is serving five to ten customers. That’s where technology, and the data about mapping out the routes, makes a lot of sense. We can make that a much more efficient operation than a one-off type delivery situation.
How tempting is to … If you feel you’re ahead in a space, and this is just one example … How tempting is it to license that technology, or export that excellence in a certain category, whether it’s a mature market like the U.S., or an emerging market?
Yeah, absolutely. I think the model has to be, you have your own operated stores, but then you take the standard operating procedure and the technology, and you license it to other people. The key thing is, the licensee, whoever licenses your technology is willing to make the change, and not just say, “Oh, now I’ve got this great technology, then everything will work out.” Changes like, for example, organizational structure, how do you manage an online presence with an app? Who runs the app and who runs the store? Every store has a store manager and you have to make sure that the people that are running your online operation, and your offline business, their interests are perfectly aligned. Most retailers are not organized that way. There has to be-
Most retailers here in the U.S.?
Most retailers in the U.S. or in China are not organized that way. There has to be a lot of willingness, and true resolve and commitment to making those changes, to make it work.
So, that’s “no” on bringing some of this to the U.S., or have you not even entertained those conversations?
We have not entertained those conversations. I think the U.S. market, when you’re serving U.S. consumers, is a very different market from China.
Let’s talk for a bit about your global M&A strategy. We’ve talked about the U.S., and I can harp on it for another hour, but that would be a little boring. How do you think about where you’re going to buy, where you’re going to invest, and the types of businesses, whether they’re consumer facing or other? Weigh this out for us.
There’s sort of, two areas, two things that we think about. Number one, what we’re good at, can we be helpful in a new market? So, we’re good at developing emerging markets. Our experience in China, over the last 19 years, you know, growing in the eCommerce marketplace from basically zero to something that’s really large, what does that experience tell us about helping a company in Indonesia or India, for that matter? That’s one area.
The other is to look at the demographics, whether the country has a young population. How mobile is the population? When you look at most of the Southeast Asian countries, they’re basically leapfrogging. Nobody uses computers. Everybody’s accessing the internet on a mobile phone. You look at all those things, and also-
Those are attractive, absolutely. The young population, mobile population … Also, another thing people kind of overlook is whether the country has a small manufacturing base. Alibaba has been successful in China. Well, there are a lot of consumers, but the flip-side of the coin is that the merchants can easily find sources of product that they can buy, they can source, because China is a large manufacturing base. So, in countries where they don’t produce a lot of things themselves, you have to import, that’s different kind of organization of your merchant base because you have to provide the sourcing opportunities for them. So, those are some of the factors that we look at when we grow into a new market.
Let’s talk about India for a second. One, I’m fascinated by it. Two, there’s been a lot of activity there very recently. Amazon set up shop in India back in 2013. Probably in the past month, Walmart has announced their intent to buy majority stake in the number one or number two homegrown player there, Flipkart. You also have investments in payments company, Paytm, grocery delivery company there, BigBasket, and you also invested in Snapdeal, which was an eCommerce site, distant third. For Amazon, they failed in China. They’re still in China, but they will say they missed it. So, this is the market they say they can not miss. What is your strategy in India?
Well, if you look at India, it’s very, very early. We’re in the first inning, right? Total industry GMV for eCommerce this year is going to be less than 20 billion U.S. dollars. China is close to one trillion, today. So, you know, very, very early days. We want to take a very patient approach. In fact, Amazon is doing a very good job in educating consumers the benefits of buying online, and good service. They provide a very good service in India.
Our strategy is to look at high-frequency use cases, so online payment. We have an investment in Paytm, which is the largest mobile payment company in India. The app is no longer just a payment tool. It’s your portal to access other services that require payment, like buying movie tickets, buying train tickets, buying Gold fund for investments. India gold is a very important asset to own. So, with all these use cases, you’re creating high-level engagement. That’s why we’re involved in a grocery company, because grocery is almost daily. It’s something that’s highly engaging. So, we want to enter through high-frequency use cases, and building e-commerce business on top of that. I think some of the other e-commerce players go into the market, and they focus on electronics. Lots of GMV, lots of volume today is selling Samsung phones, and Huawei phones, and a little bit to Apple, a lot of phones. But how often do you buy a phone? I mean it’s going to be once every six months, or 12 months.
Come on, I’m a journalist, once every two years maybe. Six months for you, two years for me.
Yeah. Anyway, it’s not every day.
We’re going to open up to questions in just a bit. Hopefully we have some good ones. I’ll acknowledge you guys have a big cloud business, big media business that we have not even gotten to. So if you have any questions there, that would be appreciated. One last question, US related. Private company in the US called Wish, valued at $8 billion on paper. They’re competitive with one of your products, which is AliExpress, selling globally to consumers outside of China. Knowing a little bit about where AliExpress is strong globally, and where Wish is strong, it seems like there could be a complimentary match there. Do you follow that business, Wish closely? And is it something you think could make sense in the future as part of the Alibaba umbrella.
Yeah, of course I follow that business. And every time I watch a Lakers game, they sponsor the jersey, Wish. And so I’m like, “Yo, they must be making a lot of profits.”
So it was worth the $40 million dollars right there, they got Joe’s attention, yeah.
No, look, first of all, I think they’re in a similar business as ours, sort of this cross border consumer business. We’re very positive about that business. Because having one foot in China, serving global consumers, for Alibaba is an advantage, because we’re close to the merchants. We’re close to the factories. We’re close to the sellers. I think this business is bound to have competition, because other people can see opportunities. And our view of competition is, that makes us better. We have to keep asking ourselves, are we serving consumers better? Are we falling behind? And it’s just like in sports, you have to play against good teams in order to get better. So we welcome that competition, and we follow the company, and hope to have a chance to talk to them at some point. But at this point we’re not doing anything to … we’re not having any conversations.
Is that a question there?
Jon Fortt: It is.
Jason Del Rey: Okay. Just tell us who you are?
Jon Fortt: Jon Fortt from CNBC. I want to ask you about 5G, and if you will, give us a couple of scenarios. People expect the US and China to lead in 5G, the next couple of years will be key. What are a couple ways you expect for 5G to be an accelerant to Alibaba’s cloud business, and an accelerant to the commerce business, both in person and may be offsite, at home, on the phone. What are the ways that that low latency network is going to, I guess, allow you to pull ahead? You said you expect to pull ahead of Amazon in the next couple years.
Joe Tsai: Yeah. We’re looking at the proliferation of 5G as a catalyst for a internet of thing strategy, with the ability of devices at the edge, to run data and have computing that’s done locally. That’s going to slightly be different, it will be different from a cloud business, but that’s something that’s very exciting from our standpoint. You can think of scenarios where a lot of compute can happen locally, and consumers will benefit from that. So that’s going to be a very important catalyst for e-commerce business, or a gaming business, or a lot of other types of businesses. And these devices will proliferate.
Jon Fortt: But how so? How are people going to be buying more in the store, or buying more at home because there’s a 5G network? What kind of scenarios are you giving out.
Joe Tsai: Well, I think you could be buying not just from your cell phone, you can buy from your refrigerator. If you run out of milk, and you push a button on your refrigerator, and the smart refrigerator makes the order. So there could be a lot of scenarios where different devices are … the device is going to get smarter. The device is not your phone, but it’s going to be something else.
Jason Del Rey: Not an Amazon Echo?
Joe Tsai: Oh, maybe an Amazon Echo, maybe. By the way our Tmall Genie, which is a similar product, is the best selling personal assistant in China today.
Jason Del Rey: That’s a good comeback. Here we go. Tell us who you are please?
Jeetu Patel: Jeetu Patel from Box. You know, if you think about a lot of Chinese companies that are getting to scale, one of the big reasons why there’s a lot of success, is you folks seem to intrinsically understand scale at a very different level than what some of the American companies have been advantaged and doing. What would you give as advice to people over here, on principles around understanding scale, that we don’t have the benefit of just being able to experiment, because we don’t have a billion people in an addressable market over here that you have the advantage of doing? What lessons would you teach us, from a scale perspective?
Joe Tsai: Well first, I think you have to make sure that your technology systems, and also people can scale. We’re kind of spoiled in a China market with 800 million internet users. And everything that you do, you’re assuming that it’s going to be tens of millions, or hundreds of millions of people that is going to be using your product. I think for a company that’s in this market, first of all, there’s plenty of scale in this market as well. And I think a lot of the companies in the United States are also looking at overseas markets, including China. So my advice is, don’t listen to politicians that criticize China, look at the Chinese market as an opportunity. And there are a lot of partners, potential partners, companies, ourselves included, could be your partners to explore the China market together.
Jason Del Rey: One last quick one. Just tell us who you are please?
Hans: Hi Joe. This is Hans from TV.
Joe Tsai: Hi Hans.
Hans: Hi. As investing Alibaba, and then also Wish … Some of our companies compete against you, some of our companies collaborate with you. So I get a lot of question in the US, like, “Is Alibaba good for the startup system in China, since Alibaba is so strong, and it’s everywhere, and is investing in all these companies?” And then secondly, if Alibaba is so strong in China, does that encourage startups in China to expand beyond China, and go for the rest of the world? What do you see, and how do you answer when people ask you, “What’s Alibaba’s impact on the startup system in China?
Joe Tsai: I think Alibaba is good for innovation, and good for entrepreneurs. Because the space that we’re in, e-commerce is a pretty good business. So there’s always new competition. Five years ago, there’s company A, now there’s company B. You’re investing in a lot of them. So I think there’s always going to be entrepreneurs that see the opportunity and say, “Alibaba is doing it this way, but we can find a different way of doing things, and beat Alibaba at their own game.” I think there’s plenty of people today that think that way. And I think that’s healthy, it makes us better, it keeps us on our toes.
Jason Del Rey: All right. I think that’s all the time we have Joe, thank you so much.
Joe Tsai: Thank you.
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