VZCZCXRO1402
RR RUEHCN RUEHVC
DE RUEHGH #0124/01 0760951
ZNR UUUUU ZZH
R 170951Z MAR 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7747
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHAAA/NSC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8382

UNCLAS SECTION 01 OF 04 SHANGHAI 000124 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OASIA/INA/HAARSAGER AND WINSHIP 
DEPT FOR EAP/CM, INR/B, EEP/TRA/AN 
USDOC PASS BUREAU OF ECONOMIC ANALYSIS 
USDOC FOR ITA DAS KASOFF, MELCHER, OCEA 
STATE PASS USTR FOR STRATFORD, WINTER, KATZ 
NSC FOR LOI, SHRIER 
USPTO FOR BOLAND, WU 
USDA FAS WASHDC 
 
E.O. 12958: N/A 
TAGS: ETRD EINT PGOV EINV ELAB KIPR BEXP OIIP CH
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 
 
---------------------- 
 
 
 
¶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 
 
--------------------------------------------- - 
 
 
 
¶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 
 
------------------------------- 
 
 
 
¶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 
 
SHANGHAI 00000124  002.2 OF 004 
 
 
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 
 
---------------------------- 
 
 
 
¶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 
 
--------------------------------------------- ------ 
 
 
 
¶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 
 
------------------------------------------- 
 
 
 
¶8.  (SBU) Wei said with over 120 million products listed on 
 
SHANGHAI 00000124  003.2 OF 004 
 
 
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 
 
------------------------------- 
 
 
 
¶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 
 
SHANGHAI 00000124  004.2 OF 004 
 
 
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 
 
--------------------------------------------- ---- 
 
 
 
¶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