WHEN: Today, Tuesday, September 13th
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Joseph Tsai, Alibaba Group Executive Vice Chairman, live from the CNBC Institutional Investor Delivering Alpha conference in New York City on Tuesday, September 13th.
Following is a link to the video of the interview on CNBC.com:http://video.cnbc.com/gallery/?video=3000550794.
Mandatory credit: CNBC Institutional Investor Delivering Alpha conference.
>> Thanks for being here.
>> Thanks for having me and for spending a little time with us. On the stage not very long ago -- and we might as well just get right to it, sort of broaden out from there, Jim Chanos, who, of course, is a noted short-seller.
>> Oh, was he here?
>> Yeah, he was here. And he's been going after Alibaba a bit. And I would love to get your response, because this is a great opportunity to do that. Oftentimes, Joe, we interview you from far away with a long delay. So this is refreshing to have some time to have a conversation.
Specific to the ownership stake that you have in the delivery business, which he calls it, being unconsolidated -- and I'm quoting here -- you own 48 or 49% of it, but that's even deceptive because the actual companies that employ the guys on bicycles that deliver packages in China is unconsolidated from that. It's the Chinese model. You never see everything, and yet what you do see is the cash flowing out the door, not coming in the door, and accelerating going out the door relative to the size of the, quote, even though the business is growing. And that's concerning.
What's the response from Alibaba when you hear something like that from somebody who certainly has a following on Wall Street?
JOSEPH TSAI: Is he still here? Do I see him in the audience?
JIM CRAMER: He's not. He's left the building.
JOSEPH TSAI: So I think when you are in the short-selling business, it's a very tough business. When you're wrong, you're downsize unlimited. So I have a lot of respect for Jim Chanos. All right?
But I think the problem is he doesn't seem to try to understand the business and try to appreciate the power of the digital economy in China. And you can lay a lot of claims, a lot of accusations on our business. The bottom line is, on the logistics business, we made full disclosure on the profits, loss, revenues, assets, liabilities of the business. So investors can do their own math, whether you're consolidated or not consolidated.
When you talk about cash flow -- I mean, we, over the last 12 months, bought back $5 billion of our own stock. And that's cash that we turned into -- real cash we're returning to our shareholders. So I think we have demonstrated that our business is extremely cash flow generative, that we are good stewards of capital.
I would like to invite Jim Chanos to come to Hangzhou and see our campus, see our business, so we can really explain our business to him. I think, you know, the problem with what's going on is since he's been talking down our stock several months ago or last year, yeah, our stock's been up 50%. You got to pay a lot of respect to him.
>> It's never easy to be short. And he did make the correlation to eBay, which is similar to the one that was made in the Barrons store, that you guys fairly strongly rebutted. And I would argue successfully, given what you just pointed out, as the very strong performance of the stock.
Why, though, was that not a correct parallel to make in terms of multiple, in terms of the business getting together buyers and sellers as of course eBay does here?
JOSEPH TSAI: Last quarter, we grew 59% of revenues. What's eBay's growth rate? Single digits? That makes all the difference. We're in a market in a confluence of high growth of the Chinese economy as well as technology. That's very, very exciting for us.
So in China today, what you are seeing is consumers are shifting their purchases online. But there's going to be more growth in consumption because China has a relatively low percentage of GDP; that is, leverage to consumption is about 40%. The more developed economies are 60, 70%. And if you look at the average Chinese consumer, they are in net cash position. There's net 4.6 trillion U.S. dollars of net cash savings on the balance sheet of Chinese households.
To give you a context to that number, the average American household in aggregate has 11 trillion of mortgage debt. So we're leveraged for the consumption economy. And that's very different from the low-growth environment here in the United States.
>> We want to get to broader discussion of China. And I know my partner here has a lot of questions. But on this question of consolidating or not the delivery business, I mean, Amazon obviously is a name that we would immediately think of. It has full control over its distribution. Why not consolidate it? Why not own it outright? What is the strategy there by which you do 48 or 49%?
JOSEPH TSAI: If we owned the whole business outright, we would have managed about 2 million people. And we just don't think that is something that a technology company should do. Okay? So, currently, you have to appreciate the scale of our business. On a daily basis, our platforms generate about 40 million packages per day that need to be delivered. Just to put that number in context, I think Amazon in the United States handles something around 5 to 6 million packages.
So when you look at 2 million people that are in our ecosystem, that are managing the warehouses and also delivering packages on the streets, if you combine the entire workforce of the FedEx and UPS, that's 600,000 people. So do you want to go out and buy FedEx and UPS? I don't think so. We are a technology company; we're not a labor-intensive company.
DAVID FABER: Let me go into more than just Chanos. Again, thank you for coming here. Most people would not want to answer the questions if they felt that they were going to incriminate themselves, so to speak.
First Jim said, do you think -- I asked him, do you think free cash flow is positive when you consider the so-called minority investments? We don't know, and that's the problem. With the minority investments, it's usually negative. It's enormously negative.
Herb Greenberg, of Pacific Square Research, whose work is -- again, I've known Herb since '90. He does some pretty good work. He believes that you are buying your growth with these, and that if you actually disclosed all the equity investments -- which he says you do not -- you would have no idea what this company is really earning, other than the fact that the -- most of the costs, like what you described, 2 million people, are off balance sheet, so you can't really figure out how well the company is actually doing.
JOSEPH TSAI: They're wrong. They never read our annual report. They never read our disclosures. We've made very clear disclosures about our equity investees, our affiliated companies. So that's just not right. And I hope that these guys will spend time and go to China and see what's going on, the power of consumption, the power of people -- young people today in China are accessing the Internet through the mobile device.
We have a platform that has over 430 million active shoppers on our platform. And that's very, very powerful. I think these guys -- I would invite these guys to come to China and see it for themselves. You can't just sit in the back room and read some balance sheet and draw conclusions about the business. It's just not right.
DAVID FABER: One of the things our panelists earlier -- different panelists -- you don't have to worry about it, Mr. Bishop -- was saying that there's a real turn in China, that a lot of the turn is fiscal stimulus, company monetary stimulus. You're seeing electricity use pick up. You're seeing a lot of metals pick up. But these are ultimately designed for a consumer economy to do better. Are you seeing that? He thinks January and February, March are not the bottom in Chinese lack of growth.
JOSEPH TSAI: I don't look at cyclical trends. We look at the long term, five, ten years out. Quarter to quarter, there's going to be cyclical fluctuations. But what we're seeing is the consumers that are buying and shopping on our platform, every year, they are buying more items, they are ordering more, they're spending more, and they're buying more across more categories, broadening out their consumption on our platform. That's what I see.
DAVID FABER: Do you have to worry about concerns that we've read recently about demographicship, where there could be fewer and fewer households and smaller households?
JOSEPH TSAI: I'm not concerned about that. We are all about young people. And so if you look at our -- right now, about 75% of our transaction volume happens through the mobile device. On the mobile phone, 75% of our users are below age 35. And that's tremendous. That makes me very, very excited. It's the power of the new generation.
This new generation, they are not going to save up all their money. They are going to consume. They have good earnings. Wage growth has been very good in China over the last ten years, year-on-year wage growth in double digits. So I'm quite positive in the long run. Again, I just don't look at short-term cyclicalities.
DAVID FABER: I've gotten to know your company since -- actually, before the IPO, you, to a certain extent, and Jack Ma as well. But you guys have been very aggressive in trying to educate, it would seem, the U.S.-based investor. It takes up a lot of your shareholder base.
Do you think you've been successful in that? Do they still have a long way to go in terms of understanding this company and perhaps also viewing it a bit cynically? And, if so, what is the thing that they're missing?
JOSEPH TSAI: Yeah. You know, if -- guys sitting here, right? If you are investing in Facebook or Amazon or Google, your users, you're their customers. You've used the service.
I think the biggest challenge of sort of telling our story is that our investor base are not our average users. They are sitting here; they are not living in China. Chinese language is not accessible. Most of our services are in Chinese. And that's been sort of the biggest challenge. But I think, over time, we have slowly but surely made a lot of progress in explaining to people how Chinese consumption patterns are different.
So to give you an example, on our mobile app, it's a shopping app. The engagement level is very, very high. People on average spend about 25 minutes a day on the app. That is higher than seven times -- seven times a day, you launch the app. You open up the app seven times a day. And 25 minutes is higher than the clients spend on Twitter, Snapchat, Instagram, and Pinterest.
So young people in China today are very, very engaged on the mobile platform, even in the shopping context.
>> They're not all completing transactions either, right? I mean, are they on it for other reasons? Is it social engagement?
JOSEPH TSAI: They're on it to browse for products to buy, to learn about new products. China today is still relatively a developing economy. So products that you would seem to take for granted, people want to learn more about.
For example, I was talking to Colgate the other day. They sell toothpaste, right? And they say, look, we are launching this new product called dental floss. And we want to use your platform to explain to users, to Chinese consumers, the benefits of dental floss. Something that people take for granted here, there's a lot of knowledge to be shared by these product -- by the brands.
So our platform is the most powerful platform for brands to reach their consumers.
JIM CRAMER: Just quoting research, Mr. Zhang said at one point, we do see people come in more often over time as we add more and more features to the mobile app. But having said that, in mobile phone, people come more frequently. But every visit, they spend less time. That's a quote. Why would they, if they're buying more, spend less time?
JOSEPH TSAI: If they are coming to your mobile app seven times a day, the use pace there is fragments of time. In the PC era, you are sitting at home or in your office and you are looking at a computer screen. When you are engaging with a platform on a mobile device, you are in transit. You are sitting in a taxi. You are waiting in line during lunchtime. You are sitting there having dinner with your friends, and you happen to whip out your phone to check messages, and you happen to -- so these fragments of time is very valuable to us because they're high frequency.
People are coming to our app all the time. So when you add all those minutes together, it's a longer time.
JIM CRAMER: But went you talk to Amazon, what they would tell you is is that part of what makes the company great is if you like this and you want to buy that, then you sample it. I spend more and more time because of what they -- the artificial intelligence they have that tells me what I would like. I would presume that people would spend more and more time. (David?)
JOSEPH TSAI: Yes, we have recognition engines too, and people are spending more time in aggregate. But here's the thing: Your user behavior on a mobile device is very, very different from a PC. So I think Amazon is still living in the PC era. If you ever tried buying something on a mobile phone, it's really fragments of time. You're sitting in a taxi, you're on the move all the time. So you aren't going to have -- have the luxury of sitting there for 20 minutes. I think that's what Daniel was referring to.
JIM CRAMER: You mentioned Daniel, of course the company's CEO. You're its executive -- Jack Ma is its chairman. Who runs this company?
JOSEPH TSAI: This is something that people don't understand about Alibaba. We are run as a partnership.
Daniel is the CEO. So he has the primary responsibility to map out the strategy and also to execute that strategy.
Jack and my job is to help Daniel to do his job. Specifically, what I do is I'm overseeing the M&A and investments of the company.
Jack takes care of the overall strategy. He's a great visionary. He oversees the overall direction. And he points us to the right direction.
But as a whole, there are 32 partners in our business. And we -- every single business unit in our business is run by a partner. And that's how we run the business.
DAVID FABER: I think that some of the controversy, and -- but there was controversy and the stock went down -- is a belief that we are supposed to have blind trust. Now, candidly, I don't recommend a lot of Chinese stocks on "Mad Money," because my viewership has been burned, not by Alibaba, but been burned. But, for instance, when you were coming public, your CFO at that time, Maggie Wu at that time, was saying that I want to make it very clear that we manage the business to promote, in quotes, merchandise value and active buyers.
Then Jack Ma said at a recent investors day, GMV is not what we want. GMV has never been the standard of e-commerce, but investors at that time said they needed it; we give it to them.
Now, I do understand that maybe the key metric changed. But you did make a very big deal about GMV, which, to me, is eBay. And I totally get that. And then you decided, instead of disclosing it once a quarter, to disclose it once a year. But you're still using a 2020 long-term goal -- as you indicated, you like long-term -- 2020 goal of GMV again. And you compare your GMV to Wal-Mart.
So is GMV important? Is GMV unimportant? Why did you stress its importance and why do you deemphasize it now?
JOSEPH TSAI: GMV is one of the metrics that you measure our business by. What it is is that a seller selling on the platform generates transaction volume, right? That's GMV. But what we're doing, if you look at the Alibaba platform today, we are delivering so much more value to brands and product owners in terms of their customer acquisition, in terms of brand building, in terms of their engagement with consumers. These are not -- these are long-term metrics. You're talking about helping a customer -- helping a seller to manage their customer lifetime value.
So GMV is just sort of a measurement of what you sell that day as opposed to building long-term brands. So all of that value proposition with delivering to brands is not captured in GMV. And that's why we say GMV -- although GMV is important, let's set the GMV as a long-term target, let's report it once a year instead of quarter-to-quarter fluctuations.
DAVID FABER: But as someone who analyzes stocks, I was able to tell people to sell eBay because their GMV dropped quarter to quarter. It was a great opportunity to sell until they broke the company up.
I think that metric is something that you should share, just the way eBay did, even though perhaps they had a longer-term view. It enabled us to make a better decision.
JOSEPH TSAI: It depends on if you want a long-term investor base or a short-term investor base. We want long-term shareholders. We want our investors to look at the long-term trajectory of the business as opposed to paying a lot of attention to these short-term quarterly fluctuations which may not reflect the true strength of the business.
DAVID FABER: Why did you say they were so important before you came public, then?
JOSEPH TSAI: We didn't say it was so important; we said this is one of our metrics.
DAVID FABER: You said, "I want to make it very clear that we manage the business to promote growth in GMV to the SEC." That's what you said. Look, I didn't say it; you said it.
JOSEPH TSAI: We manage our business also to grow the user base. We also manage our business to grow revenues. Our revenue growth has been outpacing GMV. We manage the business ultimately to deliver profits and cash flow to the shareholders, like buying back our own stock.
So we manage our business according to a bunch of metrics. I don't think GMV is the only thing, even though it's -- I know some investors want to track us quarter to quarter. But what we are saying is you shouldn't do that. You don't want to do that. And if there are investors that really want to track the quarterly fluctuations in GMV, we say we would rather not have that investor base. We'd rather have the long-term investor base.
JIM CRAMER: Well, something over the long term of course is the integrity of the company itself. And counterfeiting has been a constant question. I am going to read most recently -- actually, August 10th -- from, I believe, the gentlemen who runs state administration for industry and commerce. It's a quote -- and, again, I'm quoting from "Wall Street Journal."
"I have repeatedly told Jack Ma that he's not in the land of outlaws, and he should take the primary responsibility. This being, of course, again, another rallying cry that there are still too many counterfeits on the platform."
You are in a position where you have to please your brand, please users, and keep your consumers happy. And some say you can't do it all, because, if you did, one of those constituencies is not going to be happy.
JOSEPH TSAI: Let me put this issue in context. All right? We are the largest e-commerce company in the world. And there are 10 million sellers that are selling on our business. So if 1% are bad people, that's a lot of bad sellers. And so we take a very draconian approach to counterfeits. We don't condone counterfeits. But what we want to do is to engage on a collaborative approach with the brands to ask the brands to help us to identify what's real products and what's fake.
To give you an example, luxury bags, handbags, 2,000 luxury handbags. Right? When we see a listing that lists the same item for $20, we know it's fake. We take it down. But what about $450? What's that? Is that last year's inventory? Is it the outlet mall version of the bag? How are we supposed to know?
So that's why we need to have the brands tell us if they're fake or not. And we want to work with them.
But here's the thing: We have on our platform over 100,000 brands that are doing business with us. And today there are a lot of American brands: Apple, PNG, Starbucks. So we're helping these companies to open up the China market. And we work with them very, very closely.
DAVID FABER: I think that's a great opportunity to ask, because I know you don't manage just short term and don't want to pin you down to today, but I'm going to try to pin you down to the last three days.
Samsung, orders down big because of the explosion. Yes. Apple orders up big because of the --
JOSEPH TSAI: Because of -- well, we --
DAVID FABER: We can't get it out of Apple and Samsung, but we're going to the source. You don't have to manage it short term, but you can tell us short term.
JOSEPH TSAI: Look, again, I'm not going to say Samsung is selling well, Apple is not selling well, or vice versa. I think it's important to note that foreign companies, or non-Chinese companies, are doing actually quite well, those that are targeting Chinese consumers.
I mean, talk about Apple. They shipped 53 million iPhones last year in China. That's a lot. KFC. There are more KFC stores in China than in the United States. So I think these companies are, in a secular way, not in a cyclical way, really tapping into the power of the consumption, the Chinese consumers and middle class in China. And they are going to do very well.
DAVID FABER: And if Donald Trump is elected president, that would be a party field out there?
JOSEPH TSAI: I don't speak for the party, so I don't know.
DAVID FABER: Well, I think you could hazard a guess as to how the party feels about a trade war.
JOSEPH TSAI: Well, I think Chinese leadership look at things -- look at relationships in the long run. I think the average leader in China is in their leadership position for ten years. And American leaders are four or eight years. Right? So I think you have a leadership that is very, very long-term oriented.
Whoever becomes president, I think the key thing is the long-term relationship between the two countries. These are the two major powers of the world, military powers as well as economic powers. And I think it's important that U.S.-China relations are good, that we don't see each other as adversaries, because world prosperity and world peace depends on having a good relationship.
And in the case of Alibaba, we hope to play our small role by opening China up to American companies so that they can do business on our platform through the Internet and access our over 430 million consumers. So, in a way, I kind of see our role as a helping U.S.-China relations. So whoever is president, I hope that we will continue to do what we do.
JIM CRAMER: Who would you rather see as president?
JOSEPH TSAI: I don't know. I'm not American, so that's for you to decide.
JIM CRAMER: When it comes to China, we struggle -- I think a lot of us do -- to have an understanding of the country, particularly from an economic standpoint. There are a lot of data points you can look at, but it's never clear exactly what you can believe or what really is the salient point versus something that's going to take you down a road that leads to nowhere.
What do you think are the bigger misunderstandings, if not the largest misunderstanding, on the part of both American investors and those who are simply trying to understand what's really going on there when it comes to the Chinese economy?
JOSEPH TSAI: I think this obsession with GDP growth rate is really misfocused, if that's a word. China's economy is an $11 trillion economy. So if you grow 8% or 6%, it's a, if you think about it, 600 to $800 billion of net growth every year. That's a lot. The U.S. economy grows at 1.2% on an $18 trillion economy. And that's about $200 billion growth every year.
So I just don't understand what the obsession is with this Chinese growth rate, because if you look at the absolute dollar amount of growth, there's a lot of growth.
So what I see is really two parts of China. There's sort of the old rustbelt part of China that needs to reform. Then there's the new economy that we are a part of. There's two important shifts in the Chinese economy.
One is shifting from an export and investment-led economy to a consumption-driven economy. The other one is going from manufacturing to services. Last year, the manufacturing sector lost 5 million jobs in China, but the service sector created 18 million jobs. So we have net new growth of 13 million jobs. The Chinese government is very happy about that.
The reason the Chinese government is kind of focused on this GDP growth rate is every year China needs to create about 10 million jobs in order to absorb the people coming into the workforce for stability reasons. And so the service sector is propelling the economy. And we're very much a part of the service sector, because when you order something online, someone needs to deliver the package. So logistics, retail, restaurants, entertainment, these are the sectors that you want to invest in instead of the manufacturing economy.
JIM CRAMER: I have to ask one final one here, a very stock-specific question that came up in our last interview a few weeks back.
The what will become of Yahoo, which is essentially going to be a 15% holding of Alibaba and will become an investment company.
I asked you, would you consider buying that company. And you indicated no, that you couldn't really -- I don't want to put words in your mouth -- but the tax consequences of it would not be positive and that you couldn't retire the shares.
Now, you're an old tax attorney, I think, from S&C. So I certainly won't dispute that, but can you explain why that's the case? Because a number of investors heard that, and they came to me, and they said, well, I don't get it. Why wouldn't they be able to actually buy back the stock in a tax-efficient manner and retire the shares?
JOSEPH TSAI: Yahoo, Inc., is a U.S. corporate entity. So there's corporate taxes in the U.S., right? So if they sell any assets, including the Alibaba shares, it will trigger a 35% federal income tax. So buying RemainCo doesn't solve our tax problem, because you still have an asset with a built-in gain, with a potential tax liability trapped in this glass box. And if we own the RemainCo, we have to figure out how to break the glass box to get our shares back. Those shares are legally outstanding; they are not retired. Okay? Which means that it restricts our flexibility. If we want to pay a dividend, if we want to spin off companies from our business, it is going to create a lot of problems because we have to pay with respect to those shares and those payments will be taxable.
So there are a lot -- look, the bottom line is if there's a tax -- easy tax solution, people would have figured it out already. The fact that the Alibaba stake still sits within the RemainCo, people haven't figured out how to solve that tax problem. So that asset should trade at a discount because you have this big built-in tax liability.
JIM CRAMER: Not the last time we'll probably entertain that question. But so many other questions that we appreciate your entertainments this afternoon. Thank you.
JOSEPH TSAI: Thanks.
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