Jack Ma is furious. It's been two weeks since the lead founder of Alibaba Group, China's largest e-commerce enterprise, told the world about the scandal at his company. Now, in his first interview since, he's leaping out of his chair, still worked up about the 100 salespeople he fired for cheating thousands of foreign merchants--or looking the other way. Their crime: knowingly setting up fraudulent sellers and certifying them as so-called Gold Suppliers, who accepted payments for but never delivered popular consumer electronics like laptops and flat-screen monitors. "What I'm angry about is [the salespeople] suspect--they know, probably--the [dealer] is probably not right, but they just assign the contract," says Ma, speaking rapidly and emphatically. "This is the trust issue."
And by far the biggest setback to rock Alibaba, a family of Web operations--including business-to-business sales, a consumer marketplace, e-payments and data services--in its 12-year history. Ma is tiny (5 feet, 3 inches), slight (he weighs just over 100 pounds) and full of coiled energy. He says he first learned of the skulduggery from a Jan. 22 e-mail from Jane Jiang, a cofounder who late last year took over the trust and safety unit of Alibaba.com, the group's business-to-business platform. Her missive shocked him and a small group of executives. "Ta ma de," she wrote (rough translation: "F---!"). Ma called her immediately and asked, "What happened?"
Late that night Ma called together senior colleagues at a bar near the company's headquarters in Hangzhou, his hometown. "Then we had a long talk, and I said, 'Wow, we've got to pay attention to this.'" So began an internal investigation and the most painful month of Ma's career. "I'm thinking, 'What am I going to do if that is true?'"
On Feb. 18 some Alibaba board members held a videoconference. The internal task force had uncovered a "systemic" problem. The damage was small, with a total take of maybe $2 million. But it involved more than 2,300 fake storefronts. Moreover, "the company was at risk of developing a culture of pursuing short-term financial gain at all cost," said Savio Kwan, the lead investigator. Senior management had to take the rap. That weekend Ma called for the heads of Alibaba.com's CEO, David Wei, and Elvis Lee, its COO, even though neither was charged with any wrongdoing. Ma, who is 46, felt he had to send a message to protect his company's reputation.
"We are probably the only company in China that senior management takes responsibility," Ma says, sitting in the seventh-floor VIP reception area overlooking the vast (1.5 million square feet) Alibaba.com campus of seven interlocked buildings. "People think, 'Jack, you do too much.' I mean, too drastic. But I believe China needs this."
That's because Alibaba's problems are, in a very real sense, China's problems. What his country needs, Ma says, is a company the world can believe in--that values people over profits. His goal this next decade is to help 10 million small companies get a boost online, create 100 million new jobs and serve a billion consumers worldwide. Hoping to change the world might register on the cliché meters of Silicon Valley. But it's sincere enough in China to make Ma something of a rare species. The scandal headlines played to the cynics in a nation steeped in corruption.
China Inc's brand is in crisis, even as its money and products are flooding markets around the globe. Chinese toys, pet food, pharmaceuticals and drywall have all come under suspicion. Fair or not, "Made in China" suggests made cheaply; perhaps unsafely, too. A 2010 survey for the Pew Research Center suggests that 70% of Americans do not trust prescription drugs from China.
Chinese people also have become deeply wary of China Inc. On the morning of Feb. 21, the day Ma cashiered his lieutenants, he saw the news on television that Hong Kong was sold out of milk powder for infants because of overwhelming demand from mainland Chinese who refused to believe domestic milk was safe. "Oh, my God," Ma wondered. "What kind of business world are we living in?"
One that he has helped create. Almost anything produced in China can be bought and sold and paid for via one of Ma's online emporiums. They carry throw weight all out of proportion to the size of Alibaba.com, the group's only publicly listed company, which has an $8.8 billion market cap and last year netted $225 million on revenue of $853 million. Privately held Taobao, Alibaba's online consumer retail exchange, earnedan estimated $36 million on $640 million in sales in 2010, says Goldman Sachs ( GS - news - people ). Taobao has vanquished eBay ( EBAY - news - people ) in China, capturing nearly 80% market share with $60 billion worth of online sales last year; close to half of all parcels shipped within China are from Taobao transactions, say government statistics, and, as a result, Alibaba Group and partners are investing billions of dollars in logistics. Alibaba.com is the largest e-commerce clearinghouse for global trade, with 18 million registered users on its international English site and 44 million more B2B users in China--small and medium-size businesses, buying and selling goods, most of them made in China.
All told, Ma's e-commerce empire is worth $20 billion. He himself is worth $1.6 billion. But, as he ruefully notes, that does not make him a hero. Before the scandal broke Alibaba.com was known to have fraudulent sellers; websites exist to expose scams on the site. And Taobao listings are rife with knockoffs. A recent casual search unearths a "top grade Louis Vuitton look-alike bag" selling for less than $60, a pirated DVD of Oscar winner The King's Speech for 75 cents and a fake Rolex watch for $220.
Taobao does take down dubious listings--14 million last year in response to complaints and via filtering, with an anticounterfeiting team of 400 employees. There is a new effort with 89 brand owners to track down suspected fakes. But, dissatisfied with the company's policing so far, the U.S. Trade Representative's office recently cited Taobao as a "notorious" marketplace for counterfeits. With Taobao's chief, Jonathan Lu, taking over at Alibaba.com, critics dismissed the ouster of Wei as window dressing and called Ma's e-mail to the staff, which circulated on the Web, a publicity stunt. Ma had let both online marketplaces grow faster than efforts to police them, detractors contend, allowing criminals to flourish. Ma bristles at the criticism. "I'm not the guy who created the cancer," he says, his voice rising, "I'm the guy curing it!"
Few success stories are as inspiring as the self-made ascent of Jack Ma, born Ma Yun in 1964. Growing up during the Cultural Revolution, when many schools were closed, Ma taught himself English. As a kid he biked to the one hotel in Hangzhou where foreigners were allowed to stay, offering tours to practice his English. After failing his college entrance exam twice he got into a poor school, Hangzhou Teachers College. A stint as an interpreter on a trade mission sent him to the U.S. in 1995, where he discovered personal computers and the Internet. Once back in China he borrowed $2,000 to start one of the first commercial websites in the People's Republic. The Web directory China Pages failed. A few years later Ma, while at the Ministry of Foreign Trade & Economic Cooperation, made a critical friendship with a Taiwan-born entrepreneur: Yahoo ( YHOO - news - people ) cofounder Jerry Yang.
Ma launched Alibaba in his apartment in 1999 with 17 other people, raising $60,000 on the vague notion of helping Chinese companies connect with the world. Later, companies within the group--Taobao, Alipay (e-payments) and AliCloud (cloud-computing data services)--extended the idea of using the Internet to lower the barrier for the little guy to sell online.
Trust was an issue even in the earliest days. The name Alibaba was meant to evoke "open sesame" (as in opening global markets)--not "40 thieves"--and the company sought to reassure buyers and sellers that the Web was a safe venue for business.
Ma's company started out as a free Internet listings service for small Chinese manufacturers looking for overseas customers. Sometimes it was pilloried for not chasing a quick buck. Revenue was negligible, mostly from selling software to help these companies set up online, but the number of Alibaba.com users was growing. So were expenses.
Ma was fond of telling early-stage investors like Goldman Sachs, which kicked in $4 million for a 23% stake in 1999, "I don't care about revenues." It wasn't an act; the same reasoning puzzled his own right-hand man and alter ego, Alibaba Group CFO Joe Tsai (employee number 19). "Early on I didn't quite understand Jack's thinking," Tsai tells me in a rare interview. "I said to Jack, 'People say that our website is nothing but a bulletin-board service.'" Ma's response: a variation of Jane Jiang's expletive, says Tsai. "He was single-mindedly focused on building the core foundation of the market, which was a lot of listings, a lot of sellers and in the end a lot of buyers."
Finally, with money running out in 2002, Ma says, he caved to pressure from venture capitalists who had helped him raise a total of $25 million to monetize the site. Among them were Goldman Sachs, Fidelity Investments and Softbank. "I agreed, 'Okay, let's make some money,'" Ma recalls. Still, to this day he believes charging sellers at that stage to list on the site limited Alibaba's growth: "To me it's a big pity."
Taobao, Ma insisted, would follow a different path. Created in 2003 to counter eBay's entry into the Chinese market with a company it acquired called EachNet, Ma refused to charge anything for listings or transactions. While eBay sneered that "free is not a business model," Ma made "free" his rallying cry to draw customers. And draw it did. But Tsai, a Yale-educated lawyer and onetime private equity executive, approached Ma again in 2004, repeating his line from years before: I get your drift, but let's stop losing money. "Jack's response was, 'Look, Taobao is going to become a monster, and we have no idea today what Taobao will look like three or five years from now, so there's no way we should think about restricting the growth by charging anybody.'"
Tsai says that conversation came back to him when he watched The Social Network in New York with his wife last year. The actor who plays Mark Zuckerberg tells his partner Eduardo Saverin to forget about making money, that he doesn't even know what he's created yet or what it will become. "When that line came up, I literally jumped out of my seat: 'Oh my God, it's exactly what Jack told me in 2004!'" Tsai says. "This is the difference between people in the Internet business and normal businesspeople. Normal people think you are not creating value unless you are creating revenue. Internet people think you are creating huge value if huge numbers of people are coming to your site to use it and they are very loyal to your site."
Vindication: Today Taobao has 110 million unique visitors per month. And EachNet? It has 6.1 million monthly uniques; its market share has plummeted (see chart). Approaching 400 million registered users, Taobao saw its transactions double in value last year, and they are expected to double again to $120 billion by 2012. Taobao virtually owns the consumer-to-consumer business with a 90% share; its Taobao Mall for branded stores competes strongly in a crowded online retail market with 360buy, a popular electronics e-seller; Amazon.cn; and E-Commerce China Dangdang, which recently went public.
Taobao still doesn't charge for listings or transactions for almost all of its 8 million online merchants. Ma insists it is "very profitable." How? By collecting fees for ads that come with search results, as well as ubiquitous display advertising on the home page and product category pages. Goldman Sachs projects that by 2013 the company will earn $716 million pretax on revenue of $2.9 billion and be worth $14.3 billion. Turns out that free is a business model of sorts.
Goldman Sachs may wish it had Ma's fortitude and foresight. In 2004 the firm cashed out its $4 million investment in Alibaba Group for $25 million, a healthy return over five years. That stake would likely amount to 10% of the group today, or $2 billion. (Japan's Softbank, another early investor, has held on to its 31% share, now worth $6 billion or so.)
Ma was able to cash out some revenue-chasing investors and still take on eBay, thanks to a $1 billion infusion from Yahoo in 2005. The deal was cut when Jerry Yang was still in charge. It gave Yahoo a 40% stake on a diluted basis and handed control of Yahoo China to Ma. It also sealed a friendship that continues, though it may not be what it once was. A picture of a smiling Yang with Ma and his wife at the Great Wall hangs in Ma's office, and Yang remains one of the four members of Alibaba Group's board, along with Ma, Tsai and Softbank Chairman Masayoshi Son.
Yahoo's shot in the arm also catapulted Ma into the pantheon of Chinese entrepreneurs. That stamp of legitimacy matters in a proud nation that has long revered heroes; now models of capitalism seem to be supplanting even cherished soldiers and astronauts. In 2007 Alibaba.com pulled off the second-largest initial public offering for any Internet company (the largest, by a sliver, was Google ( GOOG - news - people )). It raised $1.7 billion on the Hong Kong Stock Exchange and achieved a pre-financial-crisis valuation of $26 billion.
Ma's rise has been the subject of dozens of biographies and business books. His slender frame and distinctive face--tapering jaw, intense eyes jutting out from a prominent forehead, ragged haircut--is instantly recognizable to most Chinese people.
And to world leaders as well. Bill Clinton, Kobe Bryant and Arnold Schwarzenegger have spoken at his annual AliFest, a business forum and trade show in Hangzhou. Zuckerberg, a friend whom Ma met four or five years ago in Davos, stopped over for a day in December during his China trip. Ma has met President Hu Jintao many times, he says, mostly because of his involvement in an Asian business leadership group that meets annually with heads of state. He considers the presumed next president of China, current Vice President Xi Jinping, a friend from Xi's 2002-07 tenure as party secretary of Zhejiang Province, where Alibaba is situated. When Xi served briefly as Shanghai party secretary in 2007, he took a delegation to visit Alibaba, holding it up as a model for business development.
Deft management of these connections is critical for Alibaba. Just two years ago there were questions about whether Alipay--in essence, the PayPal of China, with a 50% market share--might run afoul of the state-controlled banking system, which frowns on transactions outside its control. Chinese consumers were at first slow to warm to buying stuff online, especially since most didn't yet have credit cards, and Alipay's escrow system reassured buyers on the Web. Instead of challenging the government, Ma made a deeply humble if disingenuous offer: If Beijing ever asked for Alipay, he would hand it to them. He is in no real danger of losing a service that is expected to process more than $100 billion in transactions this year, though, in classic Ma fashion, does not make money. Still, his seemingly impetuous offer was just another move in his careful dance with authorities who can seize a business with impunity. Ma is fond of saying that he "dates government officials" but is not looking for wedlock. (He is married and has two children, the older a high school senior.)
Trickier still is that Yahoo investment. While most Chinese Internet companies have substantial foreign ownership, the government does not look happily on so large a stake. Neither does Ma. Negotiations last year to buy back half the shares fell apart.
The issue of those shares is strategic--and personal. Ma's relationship with Yang's successor at Yahoo, Carol Bartz, began badly at their first meeting at Yahoo headquarters in March 2009. Yang introduced the two CEOs, then left the room. Bartz proceeded to dress down Ma in front of his entire senior management team over Alibaba's handling of Yahoo China, according to people in the room. "I'm going to be blunt because that's my reputation," she supposedly told Ma. "I want you to take our name off that site," she said, referring to Yahoo China, which by that time had withered into irrelevance. Yahoo declines to comment on the episode.
When I ask him about it, Ma doesn't sound like a guy who lost face in that meeting. But he does say that Bartz's failure so far to turn around Yahoo gives her little standing to criticize others. "If you cannot make the business cool, you have no right to be angry with me," he says, laughing. The relationship has never recovered.
Alibaba Group has made no secret of its willingness to buy back the Yahoo stake, which has increased eightfold in value and probably stands as the company's shrewdest business move in the last decade. Yahoo is believed to be in talks to sell its Japan holdings to Softbank, as Bartz seeks to boost Yahoo's stock for disgruntled shareholders; some are betting she will try to disgorge the Alibaba investment next. But Yahoo may be content to let its Alibaba stake appreciate in value. Ma, visibly frustrated, says he does not foresee real negotiations with Yahoo anytime soon. "I just don't trust them," he says, pausing. "I've been working with them for years, and I'm disappointed."
Ma dismisses the idea that friction with Yahoo is getting in the way of taking Taobao public--or that a prospective IPO would make the buyback of Alibaba Group shares that much more expensive. He insists there are no near-term plans to float an offering. Who needs pressure from outsiders to expand at an unreasonable rate or rush to profitability?
Fact is, Alibaba Group is sitting on a swelling trove of data about businesses and consumers. Ma seems in no big hurry to monetize it. Alipay, which takes a small slice of third-party transactions but no cut of Taobao-related business, could be a huge moneymaker at some point. As of December it had 550 million registered users processing a daily average of $377 million in transactions. AliCloud, the data mining unit, is scraping information about international commerce, as well as from Taobao, still mostly domestic transactions, and will someday help sellers with long-tail, consumer-to-business data. All in good time: The money will follow.
His biggest hurdle, Ma believes, is the near breakdown in the values of the company he created, where employees put financial considerations, and themselves, above their customers. Ma partly blames his decision at the height of the financial crisis to hire 5,000 employees that he says the company didn't need and probably didn't adequately train. Critics say Alibaba's decision at the same time to lower prices and bring in many more Gold Suppliers came at the expense of a rigorous process of verification.
Ma says he told David Wei, his former chief, he should have done more sooner to stop the abuses. "I said, 'David, if you guys [had addressed] this thing six months ago, I don't have to do this thing now. But if I don't do this thing now, like this way, six months later, then 23,000 people'"--Alibaba Group's employee base--"'should fire me.'" He grimaces. "Because these are the things we are fighting for."