APF Canada Webinar | Navigating the China Market Post COVID-19 w/ J. Michael Evans (Alibaba Group)

Michael, just want to make sure people can hear me. Great. So thank you, Christine. Thank you, Pierre. Sorry about the technical difficulties. Hopefully the rest of this will go smoothly. Good afternoon and good morning, I guess, to some people from Asia who joined. So thank you for getting up early, and I very much appreciate the opportunity to speak to the Asia-Pacific Foundation of Canada. It comes at a timely moment in terms of both the pandemic but also in terms of escalating geopolitical tensions between China and the US, but also China and the rest of the world. So I thought what I would do is give a very brief presentation. I've got a few slides. I'll talk a little bit about Alibaba and who we are, since we may not be familiar to everybody on the call. Secondly, talk a little bit about the pandemic and how it's changed our business, particularly for consumers and questions. And then finally, talk about the types of things that Alibaba as a company that I guess would fall into the category of social responsibility, in terms of looking after our partners and our merchants and brands and consumers and the people that are on our platform that in part make our success possible. So if we flip to the second page or the second slide here, you'll see a very interesting picture. This is a shot. Jack Ma, the founder of the company, is the one that's standing on the right as you look at the screen, and this is the original group of 18 founders of Alibaba back in 1999. And this is one of the few pictures that actually hangs in our museum in Hangzhou, because most of the museum is dedicated to the future, not to the past. But these 18 founders together cobbled together a very small amount of money, about $54,000 between them, to actually start what was then called Alibaba.com, which was the B2B business. And Jack had just come back from a trip to the West Coast where he had been meeting with other entrepreneurs and was hoping to raise some money. He met with 20 or 22 venture capital firms; they all said no, they weren't going to fund Alibaba, they weren't going to put any money into it. So he came back and he said to these founding partners, 'Listen, I want you to give me what you can, but keep enough money aside for your family and for your children and for their education and things like that. But let's pool the money that we can, put it together, and start the company.' And that's how Alibaba started. And for quite a long time, Jack ran it out of his apartment. That apartment still exists today in Hangzhou, and we use it for training, because we think that what happened in that apartment in terms of the inspiration from Jack but also from his co-founders is a great place to send new businesses and new business people in our ecosystem to hopefully reflect and come up with the next generation of great ideas. So this picture is a very, very important symbol both of our culture but also the history of how things got started. If you flip to the next slide, this is Alibaba today. And this is just one of many campuses that we have. This is our Hangzhou campus. It's lit up because this was for our 11.11, or Double 11, festival, or Global Shopping Festival, which I'll touch on in a minute. But the business has become much bigger since 1999. Twenty years on, we just celebrated our 20th anniversary. We had at the time 88,000 employees huddled into one stadium to celebrate that last fall, and it was a fantastic event. But we realized how far we've come. But our mission has remained the same over that last 20 years, which is to make it easy to do business anywhere for small businesses or large businesses and for consumers. So the B2B business today has significantly expanded, but we've also added many, many other businesses, and I'll touch on those in a minute. If you go to the next slide, just a quick snapshot of some of the things that we do and who we are. We've just passed this year, in fact we just announced it three weeks ago at our board meeting to announce our fiscal year end results, we passed two trillion US dollars in sales. The number itself is not as interesting as the fact that 90% of those sales happen on a mobile phone. So people have completely moved away from laptops and home computers and do pretty much everything on a mobile phone. You can see our revenue and net income and market cap information, again interesting because it's large, but much more interesting are the 846 million highly engaged customers on our platform. And I say highly engaged because they spend on average about 25 minutes a day in our app, and that means that they probably open it at least eight times a day. And this is a very important feature because we are not a place, Alibaba is not an ecosystem that you go to necessarily just to buy things. We think of it as a lifestyle app, and you'll see in a minute what I mean by that in terms of all of the services and opportunities that a consumer has to live within our ecosystem and in our app. We have about 12 million merchants on the platform. We started as a small business in 1999. Small businesses are the foundation of our success. We love small businesses, and what we're doing in Canada, in the United States, and around the world, but also of course in China, is to look after small business. We love the little guys because the little guys do a lot of great things. You'll see that we're investing $15 billion US dollars in frontier technology. What does that mean? Those are technologies for the future, and I'll mention a couple of them in a few minutes, but things like new retail and quantum computing and lots of developments in artificial intelligence. These are great technologies for us to use not only for our platform but which we want to make available to small businesses, to large businesses, and even to our competitors or to people who want to be on our platform and develop their businesses. We're a huge importer of goods, so you see the number $200 billion is what we expect to import over the next five years. We have a huge consumer business and a huge consumer base, the 846 million people that are on our platform. We aspire to get that number to at least a billion or larger in the future. And China has really changed. People still think of it as a country that is manufacturing oriented, a manufacturer to the rest of the world, and it will be a manufacturer to the rest of the world for a good deal longer, but it is also the largest consuming country in the world now. And these consumers love international products, particularly from North America, because they're safe, they're high quality, they're well priced, and they're beautifully made. So the import business for us is a huge part of our overall success and the way that we serve the Chinese consumer. We've got 30 offices around the world. We build businesses in Southeast Asia and South Asia, India, Russia, Turkey, and those are local platforms. So those are local businesses that we're looking after local merchants and looking after local consumers the same way we do in China. And we have about 110,000 employees, most of which are in China, but about 22,000 of them are now working outside of China. So if you go to the next slide, this will help you understand a little bit more about our ecosystem. And I wouldn't try and read everything that's in every box. Let me try and frame our ecosystem so that you understand what I meant when I said we're more of a lifestyle app than we are a place where people go to shop. In that upper left-hand quadrant where you see Core Commerce, those are all of our core commerce platforms. Some of them are in China, Lazada is in Southeast Asia, Trendyol is in Turkey. You'll see Alibaba.com, that's a B2B business. Taobao and Tmall are B2C businesses. But they're all basically integrated so that our consumer, if they want to buy things, can go to the core commerce platform and find whatever they want. We have about 2 billion products that the consumers can choose from. Right below that box is the second group of businesses which we call New Retail. And the definition of new retail in our ecosystem is where we have integrated an online and an offline business and digitized the offline business. So a merchant, for example, could be on our platform digitally, but we would also digitize his offline operations so that inventory and the consumers can have the experience wherever they want, whenever they want. In the post-COVID-19 environment, this may be one of the most fundamental shifts that takes place, because digitized offline businesses can operate when they're closed. And that would have been very useful for businesses all over the world, offline retailers all over the world, during COVID-19. In the upper right-hand quadrant, you see our Digital Media and Entertainment business. This is everything from music to movies to e-books to short videos, all of the things that people love to experience everywhere else in the world you can also experience on our platform. And then you see a series of things in the bottom box called Local Services. They include food delivery and maps for cars, digital maps for cars, and movie tickets, and in-store dining, and all of those types of offline services, local services that are customized for what people want all across China. When you put all of those four groups together, that's what those 846 million mobile-savvy consumers are tapping into on a daily basis. That's why they're spending 25 minutes on the platform. But in order to make those four groups of businesses work, you see all the enabling services down below. So you have to have payments, because people have to buy things and they have to be digital payments, so that's Alipay. You must have logistics, because we'll ship a hundred million packages a day. But if somebody orders something, they expect to get it the next day or in two days. We need to offer brands our advertising and data management, because they're spending money on our platform to increase awareness of their products and also generate new consumers. And all of these other services in terms of digital maps and navigation and traffic information make a consumer's life easy if they're moving around or traveling within China. And finally, all of the data and all of these businesses run on our cloud, and without cloud we wouldn't be able to manage the scope and the scale of this business. So if you go to our next slide, I want to draw your attention to something that I think many of you might have heard of, which is our Global Shopping Festival. And it's one of two big events that we do annually. The other one is coming up as well; it's called 618, so June 18th. And these are super sale days for hundreds of thousands of brands to all of our consumers. And this is something that started. Our current CEO, Daniel Zhang, came up with this idea in 2009. And when we first started it, in the first year we sold $8 million of product, and there were about 27 brands involved. As you can see, last year when we did this, 2019, we sold $38.4 billion US dollars of product in a single day. And most people are astounded by that number, first by its size, but also what is the capacity of the systems that are required to generate that much volume, whether it's in logistics, so we had to deliver 1.3 billion packages, or whether it's in our cloud and our payments business, where you have to be able to process at the peak 540,000 orders per second. So we see 11.11, the Global Shopping Festival, as a tremendous opportunity for our brands and for our consumers, both international brands but also domestic brands. But it's also a chance for us to test the capacity of all of our systems to make sure that as the business grows, and it will continue to grow, it is capable of withstanding the loading that we see in the future. And we expect the business to get much, much bigger. So if you go to the next slide, just give you a few insights on some of the consumer and merchant behaviors. And this is very interesting. So during 11.11 last year, one of the areas that we were really focused on was to develop the rural parts of China, so the tier four, five, and six cities and rural areas. And so you can see 54% of total GMV came from consumers in those areas, and 57% of those consumers purchased an international brand. So what's true in the tier one, two, and three cities now appears to be also true in the lower tier cities in the rural areas, which is demand for international products, imports, is very significant. And on the right-hand side, you can see with the brands and merchants that we have, over 200,000 brands participate in this, 22,000 of which come from international countries all over the world. And we have an enormous demand for their products. You can see 15 brands succeeded over a billion of GMV, a billion RMB of GMV in a single day. So this is a great educational exercise for us and for brands about what is the status and the health of the consumer in China, what do they want, what are they interested in. It's a huge opportunity to introduce, as you can see, 1 million new products, where people are just saying, 'Hey, let's try it, let's see. We have the consumers' attention in China.' Moving to the next slide, before somebody asks the question, I'll answer it, which is what are we doing in Canada? Canada is actually a small country in terms of the consumer base, so we don't have a local business, but we have over a thousand brands from Canada on our platform. You can see some of them in the middle, in terms of our Tareq's and Lululemon, obviously Canada Goose, the sports Jameson, but we have another more than a thousand brands that are participating on our platforms, and they're selling their products directly to consumers. That business grew by about 44% in 2019, and year-to-date has grown by 30%. So COVID-19, the Chinese consumer, Canadian brands, even with all of the geopolitical issues between Canada and China, demand for Canadian products, high-quality Canadian products, remains strong. The top selling categories you can see at the bottom. And for those of you who are watching who are not on our platform, I had a conversation yesterday with someone from Canada who I won't mention what the business is, otherwise you'll know who it is, but they're not yet on our platform but will probably come on our platform soon. But anything from fashion and apparel to clothing to beauty to vitamins to mother and baby products, electronics, 3C, all of these things that are manufactured in Canada are in high demand. Okay, if you go to the next slide, really the last two slides, I just want to talk about the pandemic impact and what we saw and what we've seen from a China perspective. All of our people are back to work, and business is really quite back to normal. I would disagree just a little bit with Christine's characterization of the consumer, because we've got more than half the country as our consumers. I would say consumption has come back quite strongly. Certain categories, auto parts, home furniture, luxury, have been a little slower to come back, but other categories like groceries and FMCG products have performed very, very well. So from a brand and merchant standpoint, what's really happened here is that they've realized that the cost of the pandemic was that most of them had to go home and close their businesses, and because their businesses weren't digitized, that basically meant that they weren't able to do anything. So we've seen an accelerated rate of merchant onboarding, which is to say to digitize the merchant so that they could make online sales to the extent that their offline business was closed. And I think that COVID-19 has basically accelerated the digital transformation of enterprises and organizations. And we can give you some examples of this. But I mean, the work that we've seen in public cloud, for example, is that the video that is now being uploaded, video is being used as a sales tool all the time by merchants. The video uploads have been significant, for example. But more practically and understandably, online education and online work from home has been a huge part of the digital transformation that's happened. So a business like DingTalk, think of it as not a social app but it's an enterprise software, we had 150 million users of that, and we were educating most of the public schools in China during the COVID-19 epidemic. So that was never what DingTalk was meant for, but it sort of became like Zoom, which is it became a very stable and useful network in order to take on a new application. From a consumer standpoint, consumers have been forced to adopt a different lifestyle. Most of them have been at home for eight to ten weeks or even longer. They're no longer able to travel. Last year, more than 145 million Chinese people left the country to travel around the world. This year, it will probably be a fraction of that or zero. But the repatriation effect is all the money they were planning to spend on their travels is now being spent in China, and the effect of that is much of it is being spent digitally on our platform. I mentioned the online education and the healthcare and working from home. This has been a huge part of every country's reaction or adaptation to COVID-19, also true in China. Nobody wants to take risk with children, so they were all educated at home through our networks and through others. And I think the one that's most interesting to me is that senior citizens or older people who typically would not have used a mobile phone to buy anything, but may have been in the category of consumers and citizens who were most at risk, actually started to buy things online, particularly groceries. And we notice that as people have come back to work, that has continued. So these things are actually quite positive. They're not what we would have asked for, the pandemic, in order to allow these things to happen, but having had it and dealt with it, these things have happened. It's been quite positive.

The categories I touched on before: some things have gone down, but many things have gone up. I think the biggest concern we've had is really around supply chain, because 12 million small businesses on our platform — many of the people went home, they didn't have the technology, the information, they didn't know how much risk there was, their employees were very concerned. So we've had to work very hard with those small businesses to bring them back in, to make them feel comfortable that they can start up and get going again in order to grow, but also to be the critical link in the supply chain of products they're providing for sale on the platform, both domestically and internationally.

Just want to touch on social responsibility and the business customer support programs. This is something we took very seriously from the beginning of the pandemic. Jack Ma was directly involved in this, and the Jack Ma Foundation and the Alibaba Foundation made donations of PPE and equipment to 150 countries around the world, including Canada, where we sent 500,000 face masks and 100,000 test kits. We were early on this and managed to do it with our own logistics capability and foundation money. Some people interpreted this cynically as a PR exercise, but a PR exercise doesn't usually include 150 countries. This is a real commitment and an understanding that at a time of great need and great manufacturing capability, it was a good thing for China and for people like Alibaba, led by Jack Ma, to help the rest of the world. We also spent a lot of time vetting and sourcing PPE because there were the usual quality problems. We worked with governments, both local and federal, and delivered lots of medical supplies. We did sharings, particularly of key doctors from Wuhan and Hangzhou who helped us get through the epidemic in China, to share what we learned with doctors all over the world. I was working hard to set that up with many Western countries, and they appreciated the sharing. Other things like AI technology for COVID-19 diagnostic CT scans — we developed that because it was necessary and we've shared it. On the business customer support, we realized that if we didn't help as a very large company with financial and technology capability to help the little guys — especially these small businesses, whether with funding when they were losing money, or helping them onboard new employees, or new initiatives like what we call Spring Thunder, which is taking businesses that had typically exported their products to international markets and finding buyers for those products domestically, working to digitize agriculture and SMEs — these were all new initiatives we got involved with because we realized it would expedite the recovery not only in China but also for our consumers and merchants outside the country. So I'm going to stop there. That gives you the thumbnail sketch of who we are, what we've been doing, and how we've been impacted by COVID-19. I'd be delighted to take any questions.

We held a very big event in 2007, 2008 in Toronto with Jack Ma, with Prime Minister Trudeau, and with many other folks. We had almost 5,000 attendees. The message was very clear: first of all, how do you digitize, and then how do you actually sell your products outside your local market, outside of a provincial market or even a town or city market, and is there an interest by Chinese consumers? Since then, we've put thousands of small businesses onto our platform who sell their products directly, but we would like to put many more Canadian SMEs onto the platform. The challenge in doing that — there are several challenges. First, you have to target the right SME. Our platform is not right for everyone. There are 50 million SMEs in China, only 12 million of them are on our platform, so you have to pick the SMEs that are producing products that will generate consumer demand. Secondly, there are some geopolitical considerations which have slowed down our ability — not because the government says something to us, but because Chinese consumers are more concerned about buying Canadian products based on some of the concerns that are well-known in Canada and well-known in China. But our commitment in North America, both to Canada and the United States, to small business and working with them continues. We have a team of people in the US and a team of people in Canada that continue to focus on small businesses, and we would like to continue to onboard as many as possible and get great Canadian products sold to China.

It's an interesting question because Canada is not the only place that asks exactly that question. In fact, all countries and all SMEs, particularly to the extent that they're going to move beyond the domestic market, want to know how they will get their product from where they are to where it needs to go, either to a business or to a consumer. One of the things we've been working on, particularly in the last three to four years, is a system whereby every step of the process has an application that a small business can use and that we can facilitate to help them move their products. Let me give you an example. One of the first questions people ask is exactly the logistics question: where will I send my product? Will somebody come and pick it up, or do I have to send it to a warehouse? How do I consolidate my product because I've only got two boxes of soap I want to sell? We're not sending a whole container. So the logistics consolidation for pickup in first mile, then for long haul, and on the other side when it gets to China, is a critical piece. It has to be done at a scale that makes it efficient and cost-effective, but also in a way that's efficient so you don't wait a month to move your product. This is what we've been refining, because the aggregation process of orders from small businesses actually allows this to be an efficient and scalable process, but it requires a huge amount of technology and digitization so that you know where everything is and how you're going to consolidate and move it. The second thing is always about how am I going to get paid? By the way, I don't know anything about the Canadian dollar-renminbi cross rate, so am I being paid in dollars or in renminbi? Do I get my money upfront or do I have to deliver my product? Is there trade finance capability? How does all that work? You need secure financial infrastructure that supports this, including the ability to help finance it. You need secure and fast logistics, and you need to make sure there's visibility and transparency about where the process is at any point in the continuum. These are things we can provide. It costs a lot of money to create this infrastructure, but we also understand that small businesses are not large corporations with teams of lawyers to protect their IP, with hundreds of people in procurement and sales departments. So we have to do a lot of the heavy lifting for the businesses that want to move their products halfway around the world, and we're very happy to do it and we're doing it successfully.

Canada's tricky because the vast majority of people live within a hundred miles of the US border, so there's a thin line across the country with your logistics and aggregation capabilities out across this vast country. It's much more difficult to do this than in a country where you have large centers of business where you find an aggregation of both large and small businesses. But there is a role for government, but we don't want to become dependent on government because particularly now when government goes through a difficult time with deficits and capital becomes short, we don't want that to be the limiting factor. We're not constrained from a capital standpoint. Where we need partnership with government and with local organizations is to help facilitate the understanding of what we're trying to do and to have the validation and endorsement by the government that this is a good and safe thing for small businesses to do.

The biggest challenge for us was to be able to communicate a sense of confidence that it was okay to come back to work. Not for our own employees — we have lots of ways to communicate with them and their safety was our primary goal — but we also knew that if we couldn't encourage small businesses to come back to the platform, then it would be very difficult to satisfy consumer demand. That's why I spent a few minutes talking about the types of things we've done to help small businesses get back on the platform in China. Outside of China, if you talk to many international brands, there's been a huge opportunity to be on the platform in China when most of their offline retail stores have been closed. Many brands will tell you that China is the best performing part of their business this year, not because there's anything extraordinary going on in China other than the fact that people are back to business, while so much of the offline retail infrastructure in North America, Europe, Japan, and other parts of the world is closed. Brands and small businesses are hoping that the China market will be probably the largest part of their business this year and a very important part in the future. So getting the confidence of people to come back to work is the most important thing.

Every country will have a different set of rules and stipulations in terms of social distancing and wearing face masks, but most of those are going to restrict the volume of traffic in stores. We see it here in the United States now: offline retailers will let two, three, or four people into a midsize store, but not more. So traffic is definitely down. The question is: is offline retail in its current format going to be successful in the future? We don't know. But we do know that if we digitize those operations so that a consumer, instead of being in the store, can see those products in inventory online and order online in addition to possibly going to the store, there's a much greater opportunity for that retailer to survive if the current environment continues for a long period and physical traffic is reduced, or to survive even if the environment changes very rapidly and people decide they can go back to normal. We don't believe normal is going to return to what it was. We believe that normal is going to be the need to digitize everything so that you always offer the consumer the choice, and it doesn't have to be done at a great cost to the merchants.

Artificial intelligence is misunderstood, at least in terms of its application on our platform. When we have 850 million consumers on the platform, the most important thing for us is to be able to personalize the app. So when you get up in the morning and turn on your phone and open the app, what you're going to see is a product of your activity in our ecosystem over time. Artificial intelligence or machine learning learns more about you or more about me, and therefore shows you things that we think will be interesting to you. That's what we call personalization of the app. So as 846 million individuals in China open that app and 200 million outside of China open the app, they all see different things. We're not focused on you as an individual; we're focused on you in terms of your behavior — your consumption behavior, your viewing behavior, the things you're most interested in. We don't want you to waste the 25 minutes you're going to spend in our app looking at things that are being advertised by other people that we know you have no interest in. If you have an interest, you'll search and find them. We want to show you things that by your behavior indicate this is really what you care about, whether it's news feeds, the latest movies, cool products for sports, cosmetics, or anything. We want to personalize it in a way that people feel, 'Wow, this is very cool, this is what I'm interested in, I want to focus on this.' That's how we use it. Artificial intelligence has many other applications in other businesses and sectors we're not involved in, but this is how we use it. For collaboration purposes, it's wonderful for brands and consumers. The brand application is that they learn more about their consumers since we give the data from consumers to the brands so they can learn about their consumers, which is very helpful in terms of how they spend their advertising and merchandising dollars on our platform. So it doesn't matter whether you're a Chinese merchant, Chinese consumer, or an international merchant trying to sell to the Chinese consumer, our artificial intelligence is serving both parties well.

It's not changing our strategy or our corporation. We're not a government entity; we're a corporation, and we have a very clear strategy and a very simple mission: to make it easy to do business for our merchants and consumers. So we stick to that mission. Whether it's our B2B business or B2C business, we execute against it. Are we mindful of the geopolitical considerations? Yes. What does that mean? It means we need to remember that we're a guest in countries where we're operating outside of China. Secondly, we need to be transparent about exactly what we're doing. I spend a lot of my time with governments, regulators, and officials discussing what our business is and what we're actually doing in your country. Then we need to try to pursue business opportunities that cater to our distinctive capability, as opposed to doing things that are going to hurt domestic businesses that are already trying to do the same thing. When I told you before about imports from North America or Canada to China, that is something we do that Canadian companies can't do. So we're not taking an opportunity away from a Canadian company by doing it; we're basically providing an opportunity to brands and small businesses that wouldn't otherwise exist. If we follow that pattern and that grouping of thoughts and actions, then we feel we differentiate ourselves or avoid being lumped into a general categorization of a Chinese technology company, because people know what we're doing and they know we're making a contribution, and there's no issue around the transparency of our intent or our actions in a country.

They are certainly welcome to send me an email and I'll direct them in the right direction. But we have an office in Vancouver, we have seven or eight offices in the United States, we have business development people that are speaking to both small businesses and working with both provincial and federal institutions to work with small businesses. So we're around and we're available, and we're always interested. Four years ago, we had no Canadian brands on our platform; five years ago, we had no Canadian brands. Now we have more than a thousand. So we're working hard and we are available. I'm certainly a good point of contact, and I'm very happy to take calls. As I said earlier, somebody called me last week and we had a discussion, and that's how it happens. That's the manual part that technology doesn't replace. We're still a people-driven business in that respect.

It's a very tricky situation. I think Canada has managed to get itself caught between a rock and a hard place, and it's not one that has either a simple solution or a quick solution. There's impatience in this trilateral relationship that is defined by the issue for a resolution, but there isn't an obvious place to go. It requires an enormous amount of work at the geopolitical level between the leadership of the countries to try to find a resolution, and until that happens, I think it's going to be quite tense.