SV006: WHAT REALLY HAPPENED WHEN EBAY WENT TO CHINA

W/ ALAN TIEN

17 September 2019

On today’s show, we talk to Alan Tien, an experienced senior executive in Internet, e-commerce, Online Payments, Emerging Markets (APAC), and Strategy. He has deep experience in Product Management, rooted in a strong understanding of technology. He has led teams including PayPal into China with eBay in the early 2000s.

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IN THIS EPISODE, YOU’LL LEARN:

  • What is the real story behind what happened when eBay went to China
  • What is the most common business model that is being utilized in China
  • What companies such as Stripe and Facebook face when going into Asian markets
  • What are some of the Financial Technology that China has adopted that the West has not
  • Who are some of the real disruptors in Financial Technology

I would like to make a special thanks to Wendy Xue. Without her, I would never have met Alan. And without him, much of what has happened with Silicon Valley could not have happened.

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TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Shawn Flynn  00:02

On this week’s episode we interview Alan Tien, who I got the pleasure of meeting over a year ago in Huainan, China at the Big Data Conference where he was representing a company he’s an advisor of. I asked Alan not too long ago if he knew anyone that might want to be interviewed on a podcast. He said, “Give me a moment.” Eighteen minutes later in my inbox were responses from the CEO of Upwork, the founder of Rotten Tomatoes, and several other people that I couldn’t believe anyone could get a hold of, let alone in under 20 minutes on a Saturday afternoon, and personally responded saying, “Yes, Alan, anything for you. I’d love to help.” This man is amazingly connected and has done so many things that once you hear about it, you’re going to be impressed.

Intro  00:47

You are listening to Silicon Valley by The Investor’s Podcast where your host, Shawn Flynn, interviews famous entrepreneurs and business leaders in tech. Discover how money is made in Silicon Valley and where tech is going before it gets there.

Shawn Flynn  01:10

Alan, thank you for taking the time to be with us today on Silicon Valley.

Alan Tien  01:14

Hi, Shawn. Thanks for inviting me.

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Shawn Flynn  01:16

So Alan, before we go into PayPal and eBay, you had a 10-year career consulting in Silicon Valley. Can you kind of tell us what you were doing there and the ecosystem at that time?

Alan Tien  01:26

Sure, for a little bit of historical context, eBay had purchased PayPal, right when I joined in 2002. This was right after the bottom of the bubble. Silicon Valley was a deserted area. 101 was wide open, with no traffic or anything. So pretty scary times in Silicon Valley, but eBay was still going great and PayPal was just getting integrated into eBay. It was riding on the coattails of eBay’s growth. So I actually joined to help them on their “merchant services” side and it was funny. Shawn, back then, we didn’t even know it was called “merchant services.” We were so, I would say naive and we called it off eBay. Anyway, I built the first set of APIs, but then things really got interesting that we got into China. eBay bought the company in China, the number one auction site in China called EachNet at 90 plus market share. And about six months later, they were pulling PayPal in and I was leading the product management team to build the domestic product for PayPal.

Shawn Flynn  02:27

So with that, entering the Asian market, what did you learn from that experience? And what struggles did you face at that time?

Alan Tien  02:33

It’s all the classic struggles you would expect. Just launching the product was a gigantic problem. Literally, the largest project PayPal had ever started at the time…. 40 full-time employees were hired for the project. All sorts of crazy stuff happened. eBay had an outage and our misses in first stock earnings, and PayPal had an outage. 

So just getting it out the door, you know, translating a million characters, changing our database to UTF-8 to set double-byte. I mean, it was insane, as you can imagine, but we ended up launching in June 2005. And for my troubles, they shipped me out to China to be the China Product Manager on the ground. So it was super thrilling times. You know, eBay was just about to launch their domestic product. They migrated EachNet to the core system of eBay, the core engine. And you know, we were getting ready for the full-on fight, and we thought we had open-field, open-territory. So it’s just could be localizing and that was it. And we were so wrong.

Alan Tien  03:32

At the time, Alibaba was purely a B2B company. And unbeknownst to us, they launched a secret. Jack Ma didn’t even tell his own employees. They took some crack team and put it back into his house where he launched Alibaba in with his core team, and basically hive them off from Alibaba headquarters. They worked on this Taobao product, which started off as a defensive measure to block eBay. And really, it became our primary competitor within a year. eBay’s launch in China was not successful. The migration and massive problems on localization issues are too many for me to explain. And then PayPal basically was struggling because eBay was struggling. They were the front of the house, and we were the cashiers and we couldn’t grow if eBay was getting crushed by Taobao, which was just doing everything good. It was a scrappy startup that thought like crazy and ended up defeating the world player in auctions.

Shawn Flynn  04:31

Now if Taobao wasn’t there, do you think eBay and PayPal, at that time, after a little bit of adjustment and localization would have eventually attained that market?

Alan Tien  04:40

That’s an interesting alternative history thought process. I think someone else would have stepped in. I mean, the market in China is incredibly competitive. I think someone would have seen the opportunity. However, one of the big things I wanted to point out here was, you know, if you read a Harvard Business School case study, which you know, this eBay entering and losing in China was one, they’re written by MBAs, and they usually get all the business points right. So if you read it,  it’s just kind of a laundry list of why American companies fail when they enter China, whether it’s the 5000 miles distance from headquarters and not understanding the local culture, not hiring the local team, government intervention, always a popular one. A lot of these internet services that are essentially SAS, “software as a service.” They are operating 24/7/365 in many countries around the world, with typically US or Western countries as the bulk of the revenue.

Alan Tien  05:35

So you get soon after the hype of the lodge, which is all exciting and “Yay! We launched in China.” But what happens afterward, when there’s a P1 bug, you know, a bug that is a significant problem, versus a P2 or P3 bug in the United States. And if they do a revenue ROI comparison, that P3 bug in the US could save or generate a million dollars, whereas the one in China, since we’re free anyway, we’re not making any money. So the prioritization of global features on a global technology platform becomes the primary problem. And that’s why I think many, many, and I’m going to generalize, eBay and PayPal, many US internet companies that are gone a general system or a centralized system have trouble going international when the culture is quite different. So expanding in Europe is a little easier because it’s very similar to the US. But when you start going to the East and Asia, it’s so different, and yet the East core systems have a very difficult time changing with it.

Shawn Flynn  06:36

You also worked with Facebook, Stripe and many other companies in their infancy to enter the Asian Pacific region. Even though that was just 10 years ago, how have things changed for companies wanting to enter the Asian Pacific market from the US?

Alan Tien  06:49

I don’t think things have changed. In fact, they might have gotten harder. In the past, back then, there was no real competitor. So Bo Shao graduated from HBS, went back to China, and built EachNet, which is the company we have eventually bought. America was leading on all these great ideas. Today, Alibaba, Tencent, and Baidu are the big three. So BAT. They control almost the entire internet and they snap up startups as soon as they started getting good traction in China. So the competition in China is fierce, the business models are fierce. So I actually think it’s perhaps even harder for companies to enter China today.

Shawn Flynn  07:26

With your background, your entire career, including now, is focused on the FinTech area. Can you tell us about the kind of the evolution of FinTech over the last 10 or so years? And what are you seeing now?

Alan Tien  07:37

We didn’t even know it was called FinTech. When we were at PayPal, literally, it is a FinTech. So the words financial plus technology, applying it. Now it’s one of the largest spots of VC funding globally. Much of the money coming from Alibaba, actually. It’s kind of skewed, if you look at China reports. The opportunity is, frankly, the banks have let people down and have not kept up with a consumer experience that consumers demand now, because they’re seeing it from other apps, whether it’s Amazon or other industries that are leading the charge on what consumers are expecting. And so, technology firms are finding this opportunity in the financial space because the banks have trouble innovating due to their anchor systems. Many are running on AS/400 or mainframes, old legacy systems that’s very, very hard to change and keep up with the times. They’re cutting up the suite of services and products that banks offer and just picking off small pieces of it. So like SoFi will go and say, “Oh, we’ll start off with student loans” or something like that— incredible opportunities. And they have 100 engineers focusing on making, what you know *inaudible* called best practice re-engineering, is basically what’s the best way you could do this, if you could do anything you wanted.

Shawn Flynn  08:47

So where are the best startups in the world that are doing this? Are they here in the US? Are they in Israel? Are they all over? Where would you say they’re mostly located?

Alan Tien  08:57

I think Silicon Valley is coming up with a lot very creative, original ideas. I think where it’s really hitting scale is China, where maybe it’s not the brand new idea, but they take an idea that they see from Silicon Valley, and quickly iterate way faster than the US. They throw tons of engineers at it. And I think what China really is iterating on different from US is in the business models. So Americans and VCs tend to try to push towards profitability and making revenue, whereas China is very much a value added service. So if they give the base way, and then try to figure out how to monetize on top of it, expecting the volume to really make up for it. So they’re not expecting profitably but heavy, high profit margins per transaction. They make it up on the volume. I know that sounds kind of trite.

Alan Tien  09:48

WeChat, you know, the launch with Tencent, and says we’re the largest internet companies in the world. And WeChat was really just a chat app. Think of it like a WhatsApp. And then they just kept on adding features and functionality, the site expanding the capability of it to the point where now it’s like a Swiss Army knife. WeChat is really just a container on which they can launch a lot of mini-apps within it to access tons and tons of features— whether it’s library, book, or paying your utility bills or doing the equivalent of Uber in it, or Airbnb, that’s all within the WeChat app. And Alibaba has a similar strategy. So they expand horizontally, whereas American companies tend to focus vertically on their one small area. That’s a very different mentality in business model. We will seek to see which one wins. But I think it’s a fascinating way where they can get massive scale quickly, because a lot of these startups that Tencent buys or Alibaba buys can get access to the hundreds of millions of users on the platform.

Shawn Flynn  10:50

So with that availability for these early stage companies once they are acquired to rapidly expand, what’s kind of stopping them or just containing them to China? Why haven’t we seen much influence here in the West?

Alan Tien  11:03

I think it’s because there’s one, so much fierce competition in China. They’re primarily focused on keeping their turf in China. So Alibaba and Tencent are behemoths that I would say, kind of like Google and Facebook fighting each other. It takes so much energy and China has so much room to grow. You know, we’re in China, we go to a small quote, third-tier city, and I would ask the taxi driver, “How many people are there?” And they would say, “A million.” That’d be like a small city. That’s one and two is I always thought it was interesting that, you know, the problem was that eBay and PayPal entering in China is literally the mirror image of Chinese companies leaving China. Their cultural issues and language barriers and not knowing how to work internationally are an equivalent barrier for them to exit China as it is for American companies to enter China.

Shawn Flynn  11:51

Now, at my last visit to China, I noticed everyone using QR codes, and food and restaurants, even people on the street when they’re begging for money. Instead of giving them physical money, you could just scan their QR code and transfer it. What was your experience with QR code technology? And how come we haven’t adopted it over here in the US?

Alan Tien  12:12

I know many of your listeners are from the US. If you haven’t been to China, well *inaudible* you do a little bit of hyperbole. In reality, it is what you said, it’s the adoption of QR codes as a payment method has essentially become ubiquitous. Everyone, including the beggar on the street, will have a sign with a QR code on it. And if you try to give them cash, they don’t even want it. They want you to scan their QR code and transfer it. So this is fascinating. I was with Visa in Singapore at the time, and we’re looking at our China strategy. And Visa, as you can imagine, just really did not believe in the QR code. Americans in the US and headquarters were saying, “Oh, it’s so confusing, you know, do you scan me or do I scan you? And how does it work? And blah, blah, blah.”

Alan Tien  12:54

Well, in China, WeChat, which, as we said was you know, has hundreds of millions or closing in on a billion users. And the way they would exchange information is like, instead of me telling you my Twitter handle or using my email, is that they would show a QR code. So I would show you my QR code on my phone. And you would scan me, Shawn, if we met at a meeting and we wanted to exchange contact information. So through the social method, they trained all their users on how to use QR codes. Then they attached bank accounts to allow payments. And then they got massive adoption of people to use the big accounts through their Chinese New Year, which is the equivalent Christmas in China. 

And a huge tradition is to share hong bao or red envelopes with each other. So small amounts of money. And now you could do it over your social network. And then they gamified that. Though there was a chance that if you are watching the show, you know the equivalent of the New Year’s ball drop, if you watch it on Chinese New Year… Both Alibaba and Tencent got into this war where they would offer prizes, so people then all signed up for the small, small chance to win a puny amount of money. So once you got people who knew how to use QR codes, they attach their bank accounts and they were willing to trade on it.

 Alan Tien  14:09

Then, in China, the adoption was huge. When we did a survey in 2013, 2014, we literally interviewed people in five cities. It was about a 7-8% penetration rate growing quickly, but we didn’t know where it was going to go. Within four or five years, it’s completely dominated to the point where stores actually prefer QR codes. And if you’re in places where Chinese tourists visit, you can actually start experiencing, you probably don’t even recognize it. 

But you’ll see popping up at airports and DFS, and if you go to Vegas, Hawaii, New York, LA, San Francisco, you start seeing these WeChat and Alipay, bugs, the logos on physical merchant store windows, just like you see Visa, MasterCard, and Discover. So it’s pushing out, but Americans don’t use it. So your question of why it’s not adopted in the US is, frankly, because of our infrastructure work. Credit cards are… the plastic is pretty well-penetrated. There’s POS or point of sale terminals that work and to the point that it is so effective that even Apple Pay, which is so popular, Apple as a product and the power of Apple’s marketing, push very, very, very few people to Apple Pay, even though all the best experience, you know, just waving your phone at the terminal, and you’re done without having to turn on an app or opening it. So it’s amazing. It’s an example where new technology can leap-frog old technology. You know, the old example of mobile phones, allowing countries to leap-frog landlines without having a drop in landlines down.

Alan Tien  15:45

Well, I think there’s going to be a convergence. So today, I was mentioning that FinTechs were picking off little functions in the overall breadth of products that banks offer. I think there’ll be a convergence, many of these startups can stand up by themselves today. Even today, VC money is starting to tighten up at, you know, the next recession or downturn. Many of these companies can stand alone and the bigger companies can pick them up and glue them back together into a quilt of great products. So I think that could happen to the US. As I mentioned, in China that’s already happening. So I think there’s just that business model piece.

Alan Tien  16:18

But from a technology standpoint, I am pretty excited about blockchain. So I’m not talking about the coins themselves, cryptocurrency coins, I think those are little faddish, so you know, participate at your own risk. But blockchain as technology, I don’t like where the internet was in, let’s call in 1997, or 1998. If you’re old enough, and you can think back to that period, many of us were skeptical where the internet would go, you know, those were still dial up periods where you would hear the modem. And you know, the bottom rates are super low. Security was not figured out yet, there was pretty low trust. So a lot of those issues are kind of where blockchain is, but there’s so much money and so many smart people working on it.

A lot of these base tools will resolve some of the obstacles people say, “blocking blockchain, like it’s too slow, or it uses up too many resources.” There are many people working on a lot of those problems. But the benefits are quite good for certain use cases, many of them where you can’t have the data change, so the usability of blockchain. So titling or supply chain management, tracking all the different pieces of paper today that go through the entire… Just using as example of shipment from China to the stores and Walmart, you know, there’s a ridiculous amount of documentation and tracking that’s done still today by paper or BI, ancient protocols that could be moved to blockchain. So I think those are interesting areas to watch.

Shawn Flynn  17:41

Right now you’re focused on working with early-stage companies in that FinTech area. What else are you working on right now?

Alan Tien  17:48

Well, Shawn, this may sound a little mundane, I’m actually working at a bank, Central Pacific Bank here in Hawaii. And it may seem a little strange to kind of go backwards to the bank. But there are 10,000 community banks in the United States, many of which are in the same state where, as I mentioned before, legacy systems haven’t had to compete at the same level. We’re actually relatively fortunate in Hawaii that we have 3,000 miles of ocean. But that used to help us when competing banks had to drop branches down. And now the digital world is changing a lot of that. So banks on the mainland, which is what Hawaiians call the contiguous 48 states in the US, they don’t have this luxury of distance. And the competition is fierce, especially not only from the FinTechs, but the big national banks… was Wells Fargo City, they have hundreds of millions of dollars to invest in this technology.

Alan Tien  18:39

So really now, it’s how can community banks, which I believe are critical fabric of society, how can they stay alive, keep employing their employees and offer a service to customers that the digital’s guys can’t? 

So we probably don’t want to walk to the branch all the time. But occasionally, we might want to see someone face to face. But we also expect the digital experience to be at the level that FinTechs are offering. So that’s kind of the interesting intersection I’m facing now the “what’s the real-world application in banks, I think that could be generalized to many banks.” So I think that’s an interesting space. You know, Pfizer is a huge bank operating system. They just bought first data for $30 billion. So there’s a lot of opportunity in this space, supporting banks, kind of the B2B space. I think a lot of people focus on the B2C space or C2C, you know, where a FinTech app is going directly after consumers. But many of these neo banks that went straight to consumers are finding some challenges, in that they have difficulty scaling. You can get the first couple million users, how do you get more after that? How do you stay profitable? How do you not implode under your own weight, whereas banks have the licenses, have the assets, they need the technology? So I think the marriage of technology to the banking system is an interesting space. That’s why I’m working on it to learn much more about it.

Shawn Flynn  20:03

When you’re saying the banks have to have licenses, would that be the area of barrier for these new companies that are entering the market? Or what’s stopping someone, just randomly from opening up a bank on their own and trying to compete with these established banks?

Alan Tien  20:17

The banking industry is incredibly regulated, just like insurance. And that’s why it’s been difficult for companies to enter. So startups are often either in the gray area and hoping that regulators give them some room or just don’t even see them, they’re not on the horizon, or they partner with the bank to borrow the license. So that requires a pretty progressive bank to be supporting them. Or they kind of get a simpler license, like PayPal has money transmitter license, or being the *inaudible* with entering China as 50 money transmitter licenses, which is a much lower bar than banking license. Your job is to move the money, but you don’t have to hold the asset and keep it secure. So many of them will choose a kind of a simpler license to work with, and then very carefully worked out what they can do, go into the gray zone.

Shawn Flynn  21:07

I’ll ask again about the licenses. This is something that is actually helping out the established companies who fend off new competition.

Alan Tien  21:15

Yeah, the licenses take a very long time, if you can even get them. So many of them, they’re kind of like these chicken-egg problems, like your executive staff needs to have five years of experience in the banking in the risk area and the asset area, blah, blah, blah. So all these things are sometimes very difficult to get even if you check all the checkboxes. So it’s quite amazing. For example, a startup like Veem was able to get them. However, their senior staff came from Western Union, knew the regulators, and knew what they wanted. So it was possible. In general, it’s not that easy to get licenses. So if you have deep pockets, and you have grand aspirations, getting a license may help because it’s a competitive barrier than everyone else. However, generally, it’s very, very hard. But generally, the licensing area is fraught with issues. Regulators are loath to give a license. So they might say, “Well, try it for a little bit and we’ll see.” So then, you’re working in the gray area for a long time. So it depends on the risk appetite, and how much money you have to run with it. Our large companies, you know, can try it. And I think often many of FinTech society, it’s just better to partner with a progressive bank that’s willing to take on some of these risks.

Shawn Flynn  22:27

Alan, what technology out there you think our viewers are going to see or will impact their life or possibly companies that they know about, when they come in two or three years?

Alan Tien  22:37

I mentioned blockchain earlier. I’m not sure two to three years, and it might be invisible. Again, I’ll use Veem as an example where blockchain is used to move the money across the oceans. But the end, it comes back to the fiat currency. So as a user, you wouldn’t even know that blockchains being or when it’s used and when it’s not being used.

 So I think we’ll see at some examples of that if blockchain goes into home title insurance or something like that. You may not even know if a title is being stored on blockchain, or that it’s ensuring the safety of the title through blockchain. Your code is definitely in Asia. So it’s not even a new thing in Asia that William Gibson, I think, has this famous quote of “The future is here, it’s just not evenly distributed.” So the future of payments is already in China. It’s just that we don’t see it here in the US. So I think Facebook teams and such that have center teams to Asia. And the first thing the Asia team out of Singapore will take that product management team of 10-20 people with their designers and show them how the QR code is working, and how the apps have fully integrated all the different apps of the breath of apps available. And I think Facebook has those type opportunities where it can expand beyond just being a chat or social media, you know, there’s a big push for their own cryptocurrency to enter into payments.

Shawn Flynn  23:59

And Alan, you’ve spent time here in Silicon Valley, in Asia, and now you’re in Hawaii, I’m just wondering… why the move to Hawaii versus all these other places?

Alan Tien  24:11

As you can imagine, I think it’s wonderful here in Hawaii. It’s a little more difficult to find a tech job. You know, this concept of Human Centered Design, there’s a book called “Design Your Life.” And these are Stanford professors from the D school, it’s the most popular class, originally for graduates and down undergraduates. And they’re essentially applying Human Centered Design Principles, which is what many startups, you know, following the lean and agile approaches, realized that it’s better to figure out what customers want and then quickly iterate and test those insights early on before… instead of just building a product, launching it. Well, they figured out that that methodology could apply to your own life. And that’s what I did. You know, a couple of years ago, when I was finishing my role in Singapore, I said, “Where do I want to live? So it took three years to make that dream come true. And now I’m living here. I’m looking out at the gorgeous Pacific Ocean.

Shawn Flynn  25:04

Wow, Alan, thank you for all your time today on Silicon Valley. If people want to hear or get in touch with you, what is the best way to go about it?

Alan Tien  25:12

My LinkedIn is up to date. I have my contact information there. So I love to chat with anyone who wants to talk more.

Shawn Flynn  25:17

All right, we will have that information in the show notes. And Alan, once again, I want to thank you for all your time today. And I look forward to having you on the show in the future.

Alan Tien  25:26

Thanks, Shawn. Really appreciate it.

Outro  25:28

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