Joseph Tsai's latest interview: We shot ourselves in the foot, Alibaba has overlooked user experience in the past

On the afternoon of April 3rd, the Norwegian Sovereign Wealth Fund released a video interview with its Chief Investment Officer Nicolai Tangen and Alibaba's co-founder and Chairman of the Board, Joseph Tsai.

Key points of the interview are as follows:

• In the past few years, Alibaba has fallen behind, and the problem with Taotian Group is the neglect of user experience. The entire group has reorganized for this reason.

• There is a huge imbalance between China's consumption and GDP scale in the global proportion, but Chinese households have high savings rates, ample cash, and only by restoring confidence can consumption be boosted.

• China will not lose its position as the world's factory. In terms of economic size, labor scale, and quality, countries like Mexico and Vietnam cannot be compared with China.

• Currently, China is about 2 years behind the top LLM. The chips hoarded by Chinese companies can still support the training needs of the next 18 months of LLM. In the long run, China has the ability to manufacture high-end GPUs on its own.

• In terms of compliance structure, Alibaba is one of the most compliant companies globally. Alibaba has transported many overseas goods to China. A successful Alibaba is beneficial to the world and global trade.

• Joseph Tsai suggests that young people should strive to develop expertise in a specific field, such as programming, data science, psychology, and becoming part of the top 10% of the population. Becoming an expert is the most effective way to earn respect.

The full interview is translated and proofread by Wall Street News. Reproduction without permission is prohibited.

Nicolai Tangen

Hello, everyone. Today we have a special guest, Joseph Tsai, the co-founder of Alibaba, a giant e-commerce company with over 1 billion consumers, covering digital payments, cloud computing, entertainment, and more. We (Norwegian Sovereign Wealth Fund) hold nearly 2% of the company's shares. Mr. Tsai is also a sports enthusiast and owns the Brooklyn Nets. It's a pleasure to have you with us today, Mr. Tsai.

Joseph Tsai

Thank you for the invitation, Nicole.

Nicolai Tangen

Let's start with your story. You were born in Taiwan and moved to the United States at the age of 13. How did this transition happen?

Joseph Tsai

It was a huge transition. I grew up in a very Chinese environment, attended a Chinese school, so when I arrived in New Jersey at the age of 13, I could hardly speak English. I went to a boarding school and found that participating in sports was the best way to interact with others and make friends.

Nicolai Tangen

Who has had the greatest influence on your life?

Joseph Tsai

My father was one of the smartest and sharpest minds, but he was also very strict. I used to be afraid of him, but he has passed away. His influence still accompanies me.

Nicolai Tangen

But he still influences you like a ghost?

Joseph Tsai

Yes, if he were still alive, I could tell him that I have also achieved some success, although I am still not as smart as him Nicolai Tangen

You studied law at Yale and worked for the Wallenberg family in Sweden before joining Alibaba. What was that experience like?

Joseph Tsai

It was one of my best work experiences. I transitioned from being a lawyer to an investor. In the Hong Kong office, I focused on private equity investments and learned the fundamental principles of investing. I remember they gave us a financial book from McKinsey, where I learned how to do a DCF model. The discipline and professional ethics there were unforgettable, and I enjoyed that environment. I still keep in touch with them.

Nicolai Tangen

How did you join Alibaba?

Joseph Tsai

I met Jack Ma while working for the investor AB. It was my fourth year at the company in 1999 when a friend from Taiwan suggested I go to Hangzhou to meet Jack Ma. He said Jack Ma was special, a bit crazy, but worth meeting. So I went to Hangzhou. At that time, there were only two flights per week between Hong Kong and Hangzhou. I went to Jack Ma's apartment and saw many shoes, with engineers and customer service staff working inside.

Nicolai Tangen

What did you see in them?

Joseph Tsai

Jack Ma created a platform that attracted small and medium-sized companies in China, helping them sell globally. Our first website was in English, targeting Western customers. I remember they had a notebook that recorded every registered user, and at that time, there were 28,000 registered users.

Nicolai Tangen

When did you realize the importance of this company?

Joseph Tsai

It wasn't until around 2005, after 6 or 7 years since our establishment, when Yahoo and eBay expressed interest in investing. We eventually reached an agreement with Yahoo, where they invested $1.25 billion and acquired shares from other venture capital firms in the secondary market, valuing the company at over $4 billion.

At that time, our business was a B2B marketplace. Jack Ma mentioned that with China joining the WTO, all these small and medium-sized companies wanted to expand globally. Alibaba's mission back then and still is to make it easy to do business anywhere. Our DNA, our culture, is to help small businesses go global as much as possible. That was our vision. Clearly, we have evolved into a large consumer and cloud computing company.

Nicolai Tangen

When did you realize this would become very important?

Joseph Tsai

It wasn't until around 2005 when I realized the scale of this. By then, you know, we had been established for 6 or 7 years, and Yahoo proposed to invest. At the same time, eBay was also considering investing. We even considered selling Taobao - China's largest e-commerce platform today. In the end, we negotiated with Yahoo.

They not only invested $1.25 billion but also acquired shares from multiple venture capital firms in secondary transactions, with a total transaction value of $1.25 billion, valuing Alibaba at over $4 billion I still remember it was summer. That summer, I met my parents, and I felt very proud when I told my dad, "I think I have accomplished something."

Nicolai Tangen

When did you see the true potential scale of the business?

Joseph Tsai

That's a good question. It wasn't until Taobao started monetizing that the business scale really took off. We initially faced difficulties in monetization, with several unsuccessful attempts in 2006 and 2007. But later on, we finally found a way. We monetized through search advertising. So, you can imagine making money in an eBay-like market through Google search, which was unique and actually pioneered by Alibaba. I only remember that in 2008, our cash flow started to grow exponentially.

Nicolai Tangen

Now, of course, you are not the only one who sees the opportunity. Alibaba is now facing multiple competitors. Tell me about the most serious competition you are facing.

Joseph Tsai

I think competitors, I can name many competitors, and you also know them, you may even invest in some of them.

In the past few years, as we introspected and reflected internally, we realized that Alibaba was falling behind because we forgot who our real customers were. Our customers are the people who shop using our app, and we were not providing them with the best experience.

So, to some extent, we shot ourselves in the foot by not truly focusing on creating value for users. As part of the restructuring, we brought in a new CEO. I am the chairman, and the CEO is 12 years younger than me. He is very customer-centric, focusing on products, interfaces, and user experience. This is the most important thing for us.

Nicolai Tangen

How did you address this issue? What steps are you taking?

Joseph Tsai

The first thing we did was to admit our mistake: in the past, we may not have focused on user experience.

The second thing was to reorganize our personnel, changing the organizational structure to align with the strategy. I think this is a common problem in large companies. Large companies set something in their organizational structure, and then they don't change it because people don't like change, they don't want to change jobs. They are afraid of being fired.

Then, it's about integrating the company's direction into your organizational structure. It shouldn't be like that, it should be another way, you should define the direction, and then set up the company's organization.

Our group's CEO, who is also the direct CEO of Taobao and Tmall. His direct subordinates today are very different from his direct subordinates three months ago.

Nicolai Tangen

Is there any bureaucratic accumulation or something that prevented you from seeing the market changes?

Joseph Tsai I believe this is human nature, people do not like to admit mistakes. Truly excellent managers have this perception, the ability to self-reflect and say, I may not have done the right thing. I made a mistake, I need to change. But not doing so is also human nature.

I believe part of leadership is humility. You must be able to admit your mistakes and be able to correct them. And you need a new vision, because employees are looking for a new direction. This is very, very important.

Nicolai Tangen

How does this affect morale?

Joseph Tsai

Morale has been low for the past three years. I mean, due to multiple factors. First, we went through the pandemic, then the economy started to recover.

Competition is another issue, as well as regulatory scrutiny. We paid huge fines, although everything is in the past, but all these things combined have been a devastating blow to morale. However, as I said, the most important thing is that employees are looking for a direction, and if you can clearly communicate what that direction is, then they will regain morale.

Nicolai Tangen

Your business relies on strong consumers. How do you view the consumption situation in China?

Joseph Tsai

If you look at the entire Chinese economy, China's GDP accounts for about 31% of global GDP, but consumption only accounts for 14% globally, indicating an imbalance. China is a net exporter, producing many things. But at some point, Chinese consumers should become more important and compete with developed markets in the West. In China, consumption contributes slightly over 50% to GDP, while in developed markets, consumption accounts for over 70% of the total economy.

So there is great potential, but I think there are several factors affecting consumer confidence and willingness to spend today.

First, the sluggish real estate market has brought about a frugal effect. I believe on average, real estate prices have already dropped by 30%. A lot of people's wealth is tied to real estate in their assets, so when property prices fall, they don't feel very wealthy and want to save money, reducing consumption.

Secondly, I think today's young people are still worried about finding jobs. Take Alibaba for example, in the past few quarters, we have stopped hiring. I believe that incentives, signals, and confidence for investment and hiring employees are important for companies, especially private enterprises.

Therefore, when people are uncertain about the future and job prospects, their consumption tendencies will also be affected. However, the ability to consume is there. China's savings rate is very high, and household cash remains very abundant.

Nicolai Tangen

Yes, we originally expected China's recovery to be stronger after the pandemic, do you share the same view?

Joseph Tsai

As I mentioned earlier, due to the drop in property prices and uncertainty about future employment, consumer confidence is currently quite low.

Nicolai Tangen

Is regulatory pressure continuing to increase? Joseph Tsai

No, I think the regulatory framework is now clearer. We know what the boundaries are, how to stay within them without crossing them. Therefore, having this clarity is very beneficial for businesses.

Nicolai Tangen

Now, China has been the world's factory for many years. How do you view the development of this trend?

Joseph Tsai

I still believe that China will continue to be a strong manufacturing country in the world, despite the relative decrease in population. But China still has a large population. There are currently 800 million workers, even if it decreases to 600 million or 650 million, it is still a very considerable scale and productive force. The Chinese people are hardworking, and the education system is very good. So we have a skilled labor force that is well-educated.

Some companies may diversify their supply chains to Vietnam and Mexico, but looking at the population, Vietnam has a population of about 100 million, with a labor force of 60 million. China's area is more than 10 times that of Vietnam, and they can never replace China as the world's manufacturing center.

Nicolai Tangen

We are now in the second year of the AI revolution. How is Alibaba participating in the AI revolution?

Joseph Tsai

Where is one of China's largest cloud computing companies? Therefore, having a well-developed proprietary large language model internally is very important because if we have a great LLM and other developers develop on top of it, using our computing services, it will help our cloud business, right?

So, we believe AI is very suitable for our cloud business. On the other hand, e-commerce is one of the places where you can have the most and richest AI use cases. So, you can develop many cool products on top of our own models or even open-source models. We are working on multiple developments. In these scenarios, for example, you can try using a virtual dressing room, our merchants conduct business on our platform, and we will be able to use AI to generate photos, product descriptions, etc., on our own.

Nicolai Tangen

Is it because there are fewer data protection regulations in China that more data can be collected?

Joseph Tsai

I don't think so. We have a lot of consumer data and a lot of open-source data because the premise of large language models is that you can crawl data to train your model. It's the same in the US. It's the same in China, right?

Moreover, we can further use AI to develop vertical applications, providing our own data - our understanding of consumers and merchants. So, this is an ideal combination to use AI to enhance our user experience.

Nicolai Tangen

Compared to American companies, where do you think China stands in terms of AI development?

Joseph Tsai

I think China is somewhat behind, obviously. American companies like OpenAI have surpassed others, but China is trying to catch up Nicolai Tangen

How far behind do you think it is?

Joseph Tsai

Possibly two years behind top LLM.

Nicolai Tangen

How much does the chip shortage affect you?

Joseph Tsai

Therefore, in October last year, the United States imposed very strict restrictions on companies like NVIDIA exporting high-end chips to China.

We will definitely be affected. We have publicly stated that this has indeed affected our cloud business and our ability to provide high-end computing services to customers. This is a short-term, and possibly medium-term issue. But in the long run, China can manufacture these high-end GPUs on its own.

Nicolai Tangen

And Alibaba is also doing this themselves.

Joseph Tsai

We have made some efforts in this regard, but we are also purchasing chips from other companies. The chip shortage is a big problem. This is a problem that everyone is working hard to solve. In the short term, I think everyone has stocked up, and in the next year or 18 months, considering the current inventory, LLM training can still continue.

Training requires more high computing power, but in terms of reasoning, there are many options. You don't need high-end chips like NVIDIA GPUs.

Nicolai Tangen

How would your business be different if you had unlimited supply of top-notch NVIDIA chips and all the other products you wanted?

Joseph Tsai

I think we would have a stronger cloud computing business.

Nicolai Tangen

When running Alibaba, what geopolitical factors do you need to consider?

Joseph Tsai

I think the first thing is to understand all regulations. We need to ensure that we comply with laws and policies in operation around the world, so you don't clash with regulators and then attract politicians' attention. This is very, very important for us.

I think in terms of compliance structure, we are one of the strongest companies globally, not limited to China but on a global scale. I think this is very, very important.

Alibaba does a lot of business on behalf of American companies. We sell over $60 billion worth of American products to Chinese consumers every year. This trade is two-way.

In Europe, we sell around €14 billion worth of French products to Chinese consumers, and €7 billion worth of German products to Chinese consumers. These are great stories that people are not aware of.

Therefore, Alibaba is beneficial to the world, beneficial to global trade, so in this context, people can better understand Alibaba, rather than saying, oh, you're just a Chinese company trying to flood the market with cheap Chinese products. I think it's very, very important to let the world know that Alibaba does business globally.

Nicolai Tangen Joseph Tsai

I think Westerners tend to hold absolute attitudes towards China, while many truths lie in between. I find the topic of whether China is investable quite absurd, considering it is the world's second-largest economy!

As I mentioned before, we have a very hardworking labor force, with 800 million people working very hard. I believe discussing whether to exit China or whether to invest in China is not constructive. Westerners must realize that China is an economy that will exist for a long time and is beneficial to the world.

Nicolai Tangen

What do you think constitutes a strong corporate culture?

Joseph Tsai

A strong corporate culture means that you identify with the company's mission, you clearly see the company's direction, and you enjoy working with your colleagues. Alibaba has a slogan: "Happy work, serious life."

People always talk about work-life balance, but at Alibaba, I ask, why do we need a dialectical relationship between work and life? When you come to work, you should be happy because you are working among friends.

Nicolai Tangen

What is your work rhythm like?

Joseph Tsai

I apply some things I learned in sports, like training, doing a few minutes of high-intensity training, and then you rest, right?

So, on a given day, I don't want to spend 10 hours working very, very hard all day long. I will work for two to three hours, work very intensively, and efficiently complete some tasks.

Then I will take a break, read the newspaper, or take a nap, or go out for some exercise. So, interval training is a concept I gained from sports and applied it to work.

Nicolai Tangen

What does the high-intensity work you do in the office look like?

Joseph Tsai

People are very afraid of me. I make a lot of phone calls, ask some tricky questions, but I have received legal training, so I like doing that. And the training at the investment firm taught me how to use spreadsheets. If I am handling a transaction, I will personally do a lot of things, such as an investment project, I will write my own term sheet.

I rarely work in the office. I am always on business trips. In hotel rooms, on airplanes, the working hours are always changing, and I need to find those uninterrupted times.

Nicolai Tangen

Do you consider yourself a good boss?

Joseph Tsai

I think, to be a good boss, I believe being friendly is not about being too nice to others but rather not misleading them.

I think the most important thing for a good boss is to provide timely feedback. Feedback should not be a quarterly or annual review thing. Feedback must be immediate. They need to know if they have done something not quite right or if they have not given their all. They need to know right away What are your other leadership principles?

Joseph Tsai

Humility. You must be able to admit your mistakes. You can't always pretend to be the smartest person in the room. Sometimes you want that kind of leadership, you want to put forward a good idea or something else, but you must empower your employees to voice their own thoughts. Otherwise, you stifle innovation.

Nicolai Tangen

You mentioned sports, tell me about your passion for sports and why you bought a basketball team.

Joseph Tsai

Sports not only teach you discipline and hard work, but they also teach you how to get back up after a failure. If you lose a game, you have to get back up. I think that's really important. Many of these principles are applicable to business.

So why did I buy a basketball team? It was actually an accident. When the Brooklyn Nets were put up for sale in 2017, I really didn't know what it felt like to invest and become a sports team owner.

But later on, I studied the characteristics of the league, how the league shares this economics. One big advantage of the NBA is that they have a very good collective bargaining agreement that separates the economic issues between the teams, owners, and players. Players really provide value, right? So they should fairly share the economics. All of this is stipulated in the collective bargaining agreement.

In addition, the NBA's 30 teams can fairly share revenue regardless of success in games. For example, TV rights. Today, the NBA's national TV revenue is about $2.7 billion annually, evenly distributed among the 30 teams. This is very different from the English Premier League (EPL). So I think these characteristics are almost a bit like socialism, ensuring that everyone investing in the NBA doesn't lose a lot of money. And the Brooklyn Nets playing in New York is a very valuable asset.

Nicolai Tangen

Do you have any other ways to relax?

Joseph Tsai

I spend time with my children. One of the most meaningful things is watching my 17-year-old son play basketball, just a high school game. He is the starting point guard for the basketball team, and seeing him perform well on the court makes me very happy.

Nicolai Tangen

Do you read books?

Joseph Tsai

I enjoy reading spy novels. I'm a huge fan of John Le Carré, so all of that. I think Le Carré has successfully transformed his real life into writing. Besides that, I like reading current affairs. I enjoy The Economist.

Nicolai Tangen

Any advice for young people?

Joseph Tsai

My advice is to learn one or two very basic skills that will place you in the top 10% of the crowd, such as learning how to code, mastering a specific subject area, you must develop some expertise.

My actual profession is tax law. I worked as a tax attorney for three years, and I can walk into a room and talk about tax structures until today, which is very helpful. We are considering some international matters, and building the right corporate entity, tax structure, and licensing structure are very important So I am very involved in it. You must be able to tell others that you are an expert in something, that's how you earn respect.

Also, young people should strive to learn, as data science is important for the future. You should study data science, which used to be called statistics, but data science is a fancier name, and you should also study psychology. I think there are some fascinating things in the way human thinking and brains work.

If you have programming skills, like many young people do now, they all learn how to program in Python or Java or other languages, understand data science and know a little psychology. You have all the tools you need to succeed in life.