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Sep 9, 2019

Alibaba's new chairman says he has to reinvent retail before someone else does

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Bloomberg Businessweek -- For months, Daniel Zhang huddled with a small team in an underground garage in Shanghai. The chief executive of Alibaba Group Holding Ltd. was working on a secret plan that would sound crazy even to many of his own colleagues 100 miles away in Hangzhou. Zhang wanted to launch a startup inside the e-commerce giant that would combine a grocery store, a restaurant, and a delivery app, using robotics and facial recognition to speed up logistics and payment.

That project, Freshippo, has since become a major part of Zhang’s blueprint for Alibaba’s future, with 150 stores (and counting) across 17 Chinese cities. On a recent weekday afternoon at a store in Hangzhou, plastic bins shuttle automatically along tracks in the ceiling, collecting goods from around the store for online orders. Deliverymen stand by to transport the goods anywhere within a 1.9-mile radius in as little as 30 minutes.

Zhang is the little-known 47-year-old with the unenviable task of stepping into the shoes of China’s most famous businessman. On Sept. 10 he’ll add the title of chairman at Alibaba after assuming the CEO role in 2015, and he’ll be the first person since co-founder Jack Ma to hold both positions at the same time. Ma is a global figure known for hobnobbing with heads of state and for his fiery speeches at gatherings such as the World Economic Forum. Zhang is slight and soft-spoken, often proceeding haltingly in English during calls with investors. Even in China, he’s largely unknown. At Alibaba headquarters, an employee’s parent mistook him for the janitor.

Yet in his understated way, Zhang is proving as radical as his predecessor. He says Alibaba is uniquely positioned to pull together the online and offline worlds in groceries and beyond, and dozens of his new initiatives are leading Alibaba deeper into fields including finance, health care, movies, and music. Especially in the U.S., where the company’s shares trade, these efforts have baffled some investors, who worry about overreach. In Zhang’s view, they’re a matter of survival. “Every business has a life cycle,” he says during an exclusive interview at Alibaba’s Hangzhou headquarters. “If we don’t kill our existing business, someone else will. So I’d rather see our own new businesses kill our existing business.”

Alibaba’s online marketplace made it China’s largest public company, with a market value of about US$460 billion, but recent months have provided several signs of strain. China’s economic growth is slowing, squeezing consumer spending and advertising. Investors have pushed down the company’s share price. And protests in Hong Kong forced the delay of a stock offering that could have raised US$20 billion. “He’s got to find new seeds for revenue growth,” says Mitchell Green, managing partner of Alibaba investor Lead Edge Capital. “He’s planting a lot of seeds.”

Born and raised in Shanghai, Zhang followed the path of his accountant father to Shanghai University of Finance and Economics. Early in his career, he saw up close how quickly established institutions can vanish. He was interviewing at Barings Bank when one trader lost more than US$1 billion and took the 233-year-old institution under. Instead, he became an auditor at the Chinese affiliate of Arthur Andersen, and was working in the satellite office when Andersen went down in connection with the Enron accounting-fraud scandal.

 

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Alibaba's Xixi campus. (Yuyang Liu for Bloomberg Businessweek)

“This is a very funny story,” he says, with the comic timing of a man who loves bookkeeping jokes. “After I joined Arthur Andersen, I had a joke with him. I said, ‘For many years, you didn’t want me to be an accountant. Then I became an auditor.’ I was never an accountant for even one day.”

Zhang later became chief financial officer at game developer Shanda Interactive, at the time the largest internet company in China. That’s where Alibaba Vice Chairman Joseph Tsai, the next-most influential co-founder after Ma, found Zhang in 2007. “Daniel really understands business,” says Tsai, who recently plunked down US$3.5 billion, about a third of his wealth, to buy control of the Brooklyn Nets. “You can’t disrupt unless you really understand what you’re trying to disrupt.”

It was at Alibaba that Zhang truly distinguished himself. When he joined, the company’s hottest website was Taobao, an EBay lookalike that was losing money and full of phony goods. “When I looked at the financial statement, oh Jesus,” Zhang says. “Revenue? Zero. Bottom line? A lot of losses. Then I moved to the balance sheet, even worse.”

Starting in 2008, Zhang took over the development of Tmall, an online marketplace more like Amazon.com Inc.’s that’s now Alibaba’s most lucrative operation. To attract brand names to the site, he furnished top merchants with new levels of information on their customers: who was buying what, where they lived, which kinds of ads worked best. Sales boomed, and Zhang slowly coaxed global brands such as Procter & Gamble Co.’s Tide and SK-II into selling online in China. He showed Alibaba was serious about fighting fakes by installing software to detect copycats, and by giving companies a hotline to report violations. P&G estimates that only about 1 per cent of goods carrying its brands on Alibaba sites are counterfeit on average, though Taobao remains on the U.S. government’s list of “notorious markets” rife with copyright infringement.

In 2009, Zhang and his team created Singles’ Day, an annual deals-fest that coincides with a relatively obscure Nov. 11 celebration of singlehood. Zhang spent months pushing merchants to get on board, then oversaw sales, promotions, and items to be featured on key webpages. Sales hit US$135 million the second year, then US$5.8 billion in Year 5. Last year the total hit US$31 billion, far beyond the U.S.’s big shopping holiday, Black Friday.

 

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Alibaba's Xixi campus. (Yuyang Liu for Bloomberg Businessweek)

The momentum from Tmall and Singles’ Day “basically made the company the retail giant that it is today,” says Duncan Clark, author of Alibaba: The House That Jack Built. Jerry Yang, a member of Alibaba’s board and a co-founder of Yahoo! Corp., says Zhang’s low-key style is a plus. “Daniel’s results speak louder than words,” says Yang. “He’s all about execution.”

Subsidiaries such as Freshippo are part of what Alibaba is calling, optimistically, “new retail.” The combo stores were conceived by Freshippo CEO Hou Yi, who was planning to create the company on his own when he met with Zhang in 2014. Over coffee, Zhang persuaded him to join Alibaba instead and gave him US$100 million to start with no expectations of profits for the first two years. “Then I knew how determined he was,” says Hou. “This is the equivalent of Daniel’s second startup. He said after so many years, he finally saw a project that could surpass Tmall.” Only now is Hou working out a business model.

Freshippo is far from a guaranteed success. Margins are woefully thin in the grocery business, and several well-funded startups are competing with Zhang’s effort. An Alibaba delivery venture called Ele.me is also bleeding money in its battle against Meituan. Wang Xing, Meituan’s founder, told Bloomberg Businessweek earlier this year that Alibaba wouldn’t be able to keep up the fight into 2020. Zhang says he’s wrong, and that Alibaba is determined to take at least 50 per cent of the market in food delivery to obtain an advantage in related businesses, such as digital-payments services.

Expansion abroad may be the biggest challenge. Ma pledged that Alibaba would one day generate at least half its revenue from outside China, a target Zhang says he’ll pursue. But foreign sales are far from the goal, and gains are proving expensive. Alibaba has already sunk US$4 billion into Singapore’s Lazada Group to expand in Southeast Asia, but it has struggled in key markets such as Indonesia. In March, Lazada got its third CEO in nine months.

While Alibaba’s spending raised few questions as consumer demand surged in China and capital markets rallied, it’s looking tougher to maintain. The company’s shares more than tripled from the time Zhang took the CEO role in September 2015 through June of last year. Since then, they’ve lost 15 per cent of their value.

The new initiatives take a toll on Zhang, too. Even by the standards of China’s tech industry, which views working “996”—9 a.m. to 9 p.m., six days a week—as normal, his schedule is intense. During the week in Hangzhou, it amounts pretty much to work, eat, and sleep, according to a former colleague. On weekends, Zhang usually meets two or three CEOs. Besides trying to out-hustle his rivals, he’s also got to contend with the memory of Ma; successors to iconic chief executives often get pushed aside when the business hits a rough patch and nostalgia sets in. “It’s always hard to follow founders,” says Jeffrey Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management. “It’s even harder when you’re following someone with global stature.” —With Philip Glamann