By Susan Kuchinskas

In 1995, Jack Ma, now the CEO of Alibaba, founded China Pages, probably China's first Internet company. After a stint as head of the China International Electronic Commerce Center's Infoshare division, he launched the Alibaba business-to-business trading site in 1999.

Today, Alibaba operates three online marketplaces: Alibaba International, an English-language site focused on international trade, with one million registered users from more than 200 countries and territories; Alibaba China, which enables domestic business-to-business trade, mostly among small and medium-sized enterprises, and counts 3.8 million among its registered users; and Taobao, a consumer-to-consumer (C2C) trading site with 2.2 million registered users.

Ma was happy with his B2B niche until eBay bought a third of EachNet, a Chinese C2C presence, in June 2002. In May 2003, Ma launched his own consumer trading site, Taobao, hoping to distract eBay from the lucrative Chinese small business market. In July 2004, Ma invested another $42 million in the operation in anticipation of a wave of investment and advertising by eBay.

The outspoken Ma seems to relish his image as an underdog. He talked with internetnews.com about the opportunities in China, what foreign businesses do wrong and how Jack goes about killing the giant.

Q: Now that eBay has moved into China with its acquisition of EachNet, how do you plan to compete?

Every time when we read about China, they say that the C2C game is over. They say eBay has taken the lead, and Yahoo is second. But that's not the truth. The C2C game is not over in China. When we launched Taobao, everybody said you're ridiculous, fighting something that is so huge. I strongly believe we have a chance. Last year, before we launched, Chinese Internet usage had grown to over 82 million. EachNet still has less than 5 million users.

We have the experience of building an electronic marketplace with Alibaba China. EBay may be very famous in the U.S.A., but in China, if you ask 100 people if they've heard about eBay, I believe that less than 10 percent have heard of them. But if you ask 100 people if they've heard about Alibaba, 90 percent know about us. Our name is growing.

Q: But are those business owners or consumers?

In China, there are so many small businesses that people don't make a clear distinction between business and consumer. Small business and consumer behavior are very similar. One person makes the decisions for the whole organization.

Q: Still, wasn't it risky to launch the consumer trading site?

At the beginning, when we launched our C2C, we thought eBay was very powerful. We launched Taobao not to make money, but because in the U.S., eBay gets a lot of its revenue from small businesses. We knew that someday, eBay would come in our direction.

Q: You may have awareness now, but can't eBay outspend you?

EachNet spent more than us last year. We prepared the Taobao site last May and launched July 10. Last June, eBay injected a lot of money in EachNet. When we came out, they paid no attention to us. They thought we were a peanut. In September, they spent millions of dollars and signed exclusive rights with all the portal sites -- because they had more money than we did. After one year of their advertising and exclusivity, we had more traffic than they did. We still have more traffic.

EBay is now very nervous. They committed the same mistakes that most multinational companies make when they come to China.

First, they are very successful in the U.S and Europe, so they believe their model will work in China. But the environment is different. You have to start from scratch.

When they go there, I suggest they should send people with leadership and entrepreneurship and start from nothing. Fight for the market, and make the customer happy.

Second, they want to replace the local management. I think the EachNet team has been there for five years, and they understand the Chinese market very well. But they suddenly replaced the general manager with a German guy who does not speak Chinese and who doesn't understand the market; they brought in a CTO from the U.S. -- and the whole thing crashed.

Next, they spend too much money. They think, 'I have more money than local companies, and with money, I can destroy you.' The way Taobao fights with eBay, they have 100 bullets, I have 10. So we make them waste bullets shooting at a wall. They're wasting money like water.

They also pay too much attention to the government relationship. China has changed from the 80s when you had to have a close alliance with the government. Now, 90 percent of the companies that claimed they had a strong relationship with the government are bankrupt. Government employees move on, and then you're screwed.

Another thing eBay did wrong was to too quickly globalize their technology platform. When eBay announced that eBay China had moved to the eBay platform, there was a big celebration. I call it the kiss of death. Read the forums; they're all complaining. In China today, it's not the technology that's important, it's how you meet the customers and understand them

Q: Aren't there significant barriers to e-commerce in China, including unreliable shipping and a lack of an electronic payment infrastructure?

I don't expect China will have as efficient an economic environment as in the U.S. in three years. You always have to work within in the current environment. Shipping may not be so sophisticated as in the U.S.A., but it works. We have our own ways on how to pay. People wire the money. They use escrow accounts, wire the money to Taobao, and we pay the seller.

Q: You're building a mobile commerce platform with Intel. What's the status of that?

There are over 300 million mobile phones in China. Intel sees the 4 million small-business Alibaba members and wants to target them. We have only 350 engineers for 4 million members, and we don't think we can meet their needs. So we're looking to partners to help us develop some new platforms, applications and technologies. Intel came to us and asked us, 'Why not do a wireless platform?' It will let anybody who wants to buy and sell thru Alibaba communicate from a mobile phone to our Web site. A lot of our customers are rich people, and they want to buy a mobile phone that has business use. The project is still in its beginnings, but the phone is on the market.

Q: How is next year shaping up?

EBay is very strong, but the first battle was just finished after one year. The result is, in the first round, Taobao didn't win, but eBay lost. We'll see in the next year what happens.