China’s Narayana Murthy,  Jack Ma the head of Alibaba – China’s largest e-commerce company which founded its millions connecting the world to China’s buyers is betting big bucks on the Indian market space.

With China losing its edge as the global sourcing hub due to high input costs, appreciation of the yuan and the removal of tax subsidies in SEZ’s  leading to manufacturing moving to cheaper destinations like India, Alibaba.com is eyeing a 50 percent rise in the number of registered SMEs from India to three million by FY 12 end.  That is why, media shy Ma, who started the online marketplace in his apartment in 1999 when most Chinese had not heard of the Internet,  is strategically turning to India’s unknown traders of
laptops, software, stainless steel utensils, silk roses, chess sets, calendars and clothing, to expand his global reach despite the economic slowdown.

Listed on the Hong kong Stock Exchange,  embroiled in a sweet and sour history with Yahoo! China, Alibaba is keen to tap into India’s myriad manufacturing units.  Yet barely aware of e-commerce, India’s Internet users totaled about 81 million last year, just 6.9 percent of the population, offering a huge potential to Alibaba. “India’s e-commerce sophistication is at a similar stage to China’s seven years ago,” says Brian Wong, Alibaba.com’s Global Sales chief. “They are now starting to harness the power of the Internet to do global trade.”

Alibaba.com’s initial goal is the help Indian SMEs learn to use the Internet to export their products and services, as well as to source from overseas. Chinese and Indian companies would seem to be natural trading partners, and Alibaba.com is a major connection for Chinese manufacturers. But there are significant hurdles to overcome. Bilateral trade between the world’s two most populous countries jumped 43% last year, to nearly $62 billion. But this figure is well below potential. China and India together produce nearly a tenth of the world’s economic output, but China-India trade accounts for a mere 0.2 percent of the global total.

India’s policymakers and politicians have started to shake off protectionist, socialist-era trade policies from the last century, but tariffs on imports remain high and cross-border commerce is festooned in bureaucratic red tape. While India has a strong manufacturing base in sectors such as textiles, machinery and jewelry, the country’s SMEs lack an international outlook. Wong noted, however, that there are signs of change. “There’s growing confidence in some of the key industries in India’s ability to compete in the global marketplace, and the government is supporting these efforts,” he said. In addition, as India’s largely agrarian economy continues to modernize, more of the country’s citizens are launching small businesses. “Entrepreneurship is definitely on the rise,” says Sandeep Deshpande, Alibaba.com’s country manager for India.

These trends bode well for Alibaba.com’s India push. But convincing SMEs and start-ups that the Internet is a useful marketing and sales tool is another challenge. Many Indian business owners are uncomfortable with technology and are skeptical of trading via the Web. “When we compare India suppliers and China suppliers, I would say more than 80% of India suppliers don’t have very much knowledge about the Internet,” said Niraj Choksi, the business development manager for DVN Group, a Mumbai-based jewelry manufacturer that uses Alibaba.com. “Even if they are marketing themselves online, they lack the ability to represent themselves properly. The words and language they use makes them look like fraudsters.” This lack of sophistication is reflected in Alibaba.com’s India membership roster. The vast majority of the 1.57 million registered users joined for free. Only about 3,000 have signed up for the enhanced e-commerce services and tools available to paying “Gold Supplier” members.

Alibaba.com entered India in 2008 through a partnership, and in less than three years, the base of Indian suppliers using the Alibaba.com international website has grown into the company’s largest outside China. During the first half of 2010, an average of more than 30,000 Indian businesses signed up to use the site every month. Registered India users totaled 1.57 million on Sept. 30. That’s about 11% of all registered users of Alibaba.com’s international website.

To position itself for continued rapid growth, Alibaba.com on Nov. 1 took over sole responsibility for India operations, establishing its own direct sales force and in-country customer service team. With more than 75 employees in four offices across India (Mumbai, Delhi, Chennai and Ahemadabad) and a fifth planned, Alibaba.com is ramping up sales as well as customer training and support.