Former President and COO of Alibaba Savio Kwan on how the ecommerce major survived SARS and thrived later
Very few people knew or could remember what Alibaba looked like in 2001. It had only a non-profitable local yellow page business around the world. And its corporate account had only $10 million left, and was burning $2 million every month.
That was the circumstances when Savio Kwan arrived in Hangzhou after 17 years at GE, one of the best companies anyone could work for back then. Alongside Jack Ma and Joe Tsai, Savio managed to cut down its cost to $0.5 million per month. It bought Alibaba a runway of 18 months to figure out a new business model in just 30 days, during when Jack managed to lead the business into profitability with a cross-border B2B listing platform that helps SMEs in China to sell overseas.
This not only helped Alibaba to weather SARS later, the culture they built between 2001 and 2002 laid the foundation for its future growth in Taobao, Alipay, TMall, and AliCloud. In Alibaba’s astonishing $559 billion market cap now, the original B2B listing business accounts for less than three percent.
In a recent webinar we did for entrepreneurs navigating through COVID-19, I spent an hour with Savio, and asked him how he turned Alibaba’s operations around, navigated through SARS, and set up the unique Alibaba culture. Here’s an edited version of the conversation.
You can watch the recorded video here:
Hans Tung (HT): When Alibaba first approached you, what made you decide to join a new economy company with an old economy background?
Savio Kwan (SK): I was approached by a headhunter to join Alibaba. Never heard about the company before, I asked the headhunter, “What can somebody like me, from the old economy, contribute to the new economy like Alibaba?” The headhunter told me that its founder Jack Ma needed an ‘old economy’ guy to help build the nuts and bolts of the business. He didn’t need people to help him build a good website, but he needed help building a great company. Upon hearing that, I decided to throw my hat in the ring for the role.
HT: Soon after you joined Alibaba, you realised the company only had about five months of cash flow left. How did you and your team put together a strategy to overcome that?
SK: This is actually one of the defining moments of my career. The company had about $10 million, but the burn rate was $2 million per month. We (Jack, Joe, John, and I) quickly huddled together and came up with a cohesive strategy - we called it 3 ‘B2C’. This stood for three things: Back to China, Back to Coast, and Back to Central. Essentially, we had to pick where we were going to fight our last battle for survival.
Very quickly, we closed down all overseas offices and scaled down to around 150 personnel. It was important to do all this within 30 days because if we didn’t do that, it would mean another month, and another burn rate of a few million dollars.
All we did back then can be translated into the phrase ‘last man standing’. Do not die, do not give up.
HT: How did you tell the employees that you are letting them go? How do you talk to other country offices that they have to go back to China, focus on the coast, and the core business?
SK: I knew it was going to be really hard, so I asked a favour from Jack. I said, Jack, for the next 30 days, please do not answer any mobile telephone from any of our employees, because everybody’s going to ask you to spare them. So, I have cut branches to restructure quickly, and Jack agreed to this, and he kept his promise very well. So, I was being the new guy who knows nobody, and then Joe and I, we put a plan together and started restructuring.
I remember, before going to the US office to deliver the news, my wife packed my suitcase and asked are you going to the US to fire people? I said yes. And she said do I need to pack a bulletproof vest for you? I thought she was joking. But there was actually a financial service company doing restructuring, and a disgruntled guy went back to the office to kill the HR director, his boss, and himself in the end. So those were the kind of things that we actually saw.
Joe and I went there quickly, and we talked to all 40 of them and made sure all of them knew their contract. We did the right thing, we paid up whatever the contract says, and we made an offer to anybody who wants to take a stock instead of a cash compensation. Only one or two of them did, and they became really well-off afterwards. So, we did this really quickly.
Then, we went back to China and cut all the offices outside the coastal area, Zhejiang, Jiangsu, Guangzhou, Fujian, and Shandong, and left only Beijing and Shanghai. So, we cut from 360 people to 150 after 30 days, but we were down to half a million burn a month and left with nine million after restructuring. The fact we did it quickly within 30 days is key, because if we didn't do that, it would be another month, that means another burn of a couple million.
HT: We all know that letting people go is a difficult choice - how were you able to cut the staff without demoralising the remaining team?
SK: Firstly, we were very clear from the start that we wanted to preserve our opportunities in China. So, if you’re not within that operation, you know you are vulnerable.
Secondly, we were very candid with everybody. We did not hide anything. I remember telling our engineers in Silicon Valley that we could not support the operations anymore. And then you have to honour their contracts, give the people you laid off what’s due to them, and don’t try to argue. You have to help them, and you have to give them everything you can afford.
The last thing was speed. We did all of this in one go. You do not want death by a thousand cuts.
HT: With the extended runway, what did you do on revenue and strategy to make a difference so that you were able to raise a very sizable round from SoftBank after 18 months?
SK: After the restructuring, we were able to report to the board that we stopped the burn and we have 18 months. It is good news, but we still do not have a (profitable) business model after the board meeting. Joe, Jack, and I started a deep discussion on whether we should give bribes or not and decided that we must not, which led to closure of business lines that needed to give bribes and eventually decided to try one last business line that we haven't tried, which is to help SMEs who are trying to export find buyers from overseas, then we suddenly realised it is not the company we’re helping. We should be helping the bosses of the company who owns the company. And when you do that, there’s no bribe needed, which was a major concern for us. Once we did that, it actually gave us the business model, which gave us the B2B business. So, we started working on it.
The owners of companies don’t put money from the left pocket to the right pocket, so that is actually what sustained us. That business grew up to a billion US dollar. And that is where we have the cash flow to support the Taobao, the Alipay, and so on.
HT: It can be easy to come up with a brilliant strategy like what you mentioned above, but much harder to implement it. How did you manage to do it?
SK: We actually knocked on doors and offered our help to our customers - bosses and owners of SMEs. Many of them then were not tech-savvy, and they did not know how to use the Internet. We had to train them, and even help train operators, so that once they got connected with a China supplier, they had an operator to help run the website. We managed to break even in 2002 with several million dollars’ worth of surplus cash flow.
HT: In between 2001 to 2003, what kind of people-related initiatives did you implement that in hindsight, prepared Alibaba for SARS?
SK: For me, it started with something close to Jack’s heart. And those are Alibaba’s company values. This was an exercise unto itself - we spent seven hours debating and refining what Jack saw as Alibaba’s company values. We finally got it down to nine company values. Putting this into action, we decided that we were going to do performance evaluations.
In Alibaba, you could be in sales, or an engineer, or in HR. So, 50 percent of your measurement is on performance, but the other 50 percent will be measured on your behaviour, vis-a-vis our company values. The other key thing we did was a lot of training and development for everybody. Most people think that new employee training should be for three to four hours. Our training for new employees happens offline for two to four weeks. We make sure everybody understands the company’s values, vision, mission, and expected behaviour.
In times of crises, like SARS, our employees were actually empowered to navigate and make decisions on their own. When faced with difficult decisions, they pull out our company values and measure what they plan to do against that.
HT: Tell us what happened when SARS hit, and the steps that were taken to manage the business.
SK: One of our employees who came back from the Canton trade fair exhibition at the end of 2002 ended up getting diagnosed as a suspected case with SARS. She had to get isolated, as did the rest of her team.
Very soon, the whole company was made to work from home, and isolated from their work premises. What happened before that was completely voluntary. People were coming to me asking for cash for equipment to work from home - telephones, broadband, laptops, and mobile phones. Basically, they were telling me, I need you to empower me to perform.
Our engineers also built a platform where all telephone input into our fixed lines could be picked up anywhere. It was a virtual platform where our staff could get access to and start dealing with their customers. Any customer that called into Alibaba would get their phone call picked up. So, we ensured that even in a crisis, we took care of our customers.
HT: Taobao launched in 2003, and has gone on to become a multi-billion-dollar business. What was Jack’s reasoning or confidence that was the right time to do it?
SK: Just after we broke even in 2002, Jack told us that we should attack the C2C business. We thought he was crazy then, because we didn’t feel like we got B2B right yet. But he had a vision for an Internet model where we do not stop providing services, creating services to our target customer, regardless of the timing of the day. He saw no boundaries between B2B, C2C, and B2C. Of course, it turns out that he’s completely right.
The second thing that helped us was the formation and belief in Taobao’s hyperlocal culture. This is especially poignant against eBay trying to dominate the market in 2004. eBay signed advertising rights with major portals with the intention of blocking Taobao-linked advertisements. They spent a lot of money building its China operation (named eBay EachNet) without realising that the language on the platform is in English. So, they lost 90 percent of the people.
Taobao has a very good culture, which is the ‘Dian Xiao Er’ culture, or translated to the ‘Inn-Keeper’s Mate’ culture. The inn-keeper is the boss. But the inn-keeper’s mate is the guy who provides the service. So, everybody has a nickname. And this actually reduces the distance between the customer and us, it breaks down the barriers. This is why users preferred us to eBay and EachNet, because we understood them.
HT: Based on your experience with SARS, what would be the key lessons that current startups can use in this climate?
SK: The first thing is to go back to basics and ask what the key value proposition is. In Alibaba, it’s to make doing business easy, in Google’s case, let’s make every search useful. Every company or startup founder has a dream to do something valuable for their target customer. Articulate and communicate that to the team. Give your team a reason for their work.
In the heat of surviving this pandemic, you should stop and ask, what are we doing here? Are we just doing things, or are we winning? A company with strategy knows how to win. The company without a strategy only knows how to look very busy, because they do not know what they have to do to win. So, first thing, do not die - be the ‘last man standing’. Deliver value to your target customers and figure out a strategy to win.
HT: What are some valuable lessons you learnt from Jack?
SK: He is very contrarian. In all the time I’ve been in Alibaba and in my dealings with Jack, the most valuable is his contrarian thinking. He used to tell me, Savio, if everybody is going in that direction, don’t follow. Because by the time you get there, there will be nothing left for you. Start looking at something that nobody knows. It’s common sense, but you have to have the conviction and courage to follow through.
The second thing is that of Yin-Guo - cause and effect as at Alibaba the goal is never that of making money but that of making doing business easy for business people. I also remember him telling me that we are the little ants. In a sense that there are many of us. Our business should not depend on just 10 customers because any of them can hold you ransom, and it’ll have a devastating impact. Therefore, we go after the mass market. 10 million customers. If you lose one of them, the impact is relatively small. It’s a lot more work dealing with 10 million customers. Jack believes that if you’re creating something valuable for an equally valuable group of target customers, they will ultimately reward you.