What do you know about online auctions? What comes to your minds when you hear this? I'm more than sure that you will name eBay. It's essential as it is online auction ?1, but not the only one. There are dozens of other ones. But very soon eBay can yield the palm to another leader that is growing very fast. It is Asian auction Alibaba.com.

The event last November had all the earmarks of a big stock launch: photo ops with the charismatic business leader, a crush of international media, and the unmistakable buzz that comes with being near the center of the financial universe. Only this wasn't a stock listed in New York. It was a Chinese business-to-business Web portal called Alibaba.com that was about to be listed on the Hong Kong Stock Exchange.

The performance didn't disappoint. The opening price, which had struck some analysts as high at $1.75, skyrocketed nearly 200 percent to about $5.10. By the first day's close, Alibaba.com had raised a near-record $1.5 billion -- at the time trailing only the $1.7 billion generated by Google Inc. in 2004 for the largest IPO haul by an Internet company.

These are heady days for Chinese Internet companies -- indeed, for Chinese companies in general, which are emerging from assembly-plant anonymity to fashion their own distinct identities. Brand names like Alibaba, Baidu and Taobao may not be household fixtures in the United States, but they are in China. And they're proving that they can compete against anyone in their home nation, where they have some definite advantages. Baidu is China's most popular search engine, commanding about 60 percent of the market there -- while the mighty Google has only managed to creep up to about 25 percent. Similarly, Taobao, which is another piece of the Alibaba Group -- it's the consumer auction portal that goes along with the newly public business-to-business (B2B) company -- controls upward of 80 percent of the consumer market, with 40 million registered users. And eBay Inc.? Struggling to compete, it purchased an established domestic player -- Tom.com -- yet its market share still dropped to single digits last summer. (The company declined requests for an interview.)

Just this winter China passed the U.S. as the country with the most people online (220 million). Chinese Internet companies are poised for even better days ahead -- often at the expense of established U.S.-based rivals. They're in the perfect position to reap the richest of harvests: the disposable income of China's emergent middle class. Though there are still plenty of impediments that inhibit e-commerce in China (few people use credit cards, for instance), Chinese consumers still spent nearly $8.5 billion in cyberspace last year -- a far cry from the $136.4 billion U.S. retailers racked up, but nearly double the previous year's total, according to the China Internet Research Center.

The Alibaba Group -- the parent of Alibaba.com -- is arguably China's most impressive Internet outfit. Founded in 1999, it comprises six main businesses. In addition to its consumer and B2B portals, it owns China's most popular Internet payment company, Alipay, which solved the credit card problem with a bank transfer workaround. Alisoft, its Internet-based business management software, delivers tools that, among other uses, allow Taobao customers to communicate before making deals. Alibaba acquired its search engine, Yahoo! China, in 2005, when Yahoo invested $1 billion in Alibaba in exchange for a 39 percent stake in the company. (At press time Alibaba's reluctance to find itself partly owned by Microsoft Corp. was complicating the software giant's attempted takeover of Yahoo.) As part of its deal with Alibaba, Yahoo turned over its Chinese business, which was having no greater success cracking the market than the other multinational companies. Stuck at a 10 percent market share, the search engine still lags far behind Baidu and Google. The newest entry, Alimama, allows Web publishers to list their advertising inventory, complete with prices and other pertinent information, and then advertisers can scroll for publications that match their needs and click to complete a deal. Alibaba says it has 4,400 employees working in 30 sales and marketing offices in China, Europe and the United States.

The company even recruited American lawyer Timothy Steinert to be its group general counsel, after hiring his law firm, Freshfields Bruckhaus Deringer, to handle the IPO. Asked what drew him to the job, Steinert says, "The opportunity to be part of senior management and to be involved with a number of leading companies in different parts of the Internet space -- each at different stages of development from a commercial and legal perspective -- was tremendously exciting." (Shortly after Steinert was interviewed for this article, further questions about his job and the company were submitted to corporate communications, which declined to make him or anyone else available to answer them.)

The picture isn't all solid-gold hyperlinks. On Nov. 6, the very day Alibaba.com was listed in Hong Kong, the danger of running an Internet business in China was drilled home to Alibaba's U.S. partners. Yahoo founder Jerry Yang and general counsel Michael Callahan were hauled before a hearing of the House Committee on Foreign Affairs, where then-chairman Tom Lantos (since deceased) branded them "moral pygmies." Their offense? When confronted by the Chinese government, which sought the identity of a Chinese journalist who had used his Yahoo account to anonymously e-mail a government document to an international human rights group, Yahoo complied, and journalist Shi Tao received a 10-year prison sentence.

Alibaba had its own share of legal embarrassments last year. Yahoo China was successfully sued in a Beijing court by the music industry for failing to prevent consumers from downloading copyrighted music from links on its site. Taobao and Alibaba.com were also criticized by brand owners who claim that vast quantities of counterfeit products are sold on their sites.

Then there's the bubble question. The stock prices of Alibaba.com and Baidu.com Inc. (listed on Nasdaq) look great, critics say, because the companies are way overvalued. (On the day of the IPO, Alibaba.com had a market cap of a staggering $25.7 billion, and a price/projected earnings ratio of more than 300. The stock price soon dropped from those stratospheric heights, but at press time the market cap was still around $9 billion.) "There's a bit of a China bubble phenomenon," says Patrick Horgan, a managing director at the large consulting firm APCO Worldwide Inc. in Beijing. Given their revenues, investing in Chinese Internet companies "is a bet on China and on the management team," he says. Is it a good bet? "It depends on how much spare cash you've got."

As promising as companies like Alibaba may be, they're still learning to turn market share into earnings. Most of the company's businesses don't yet make money or charge for services. Most of its revenue comes from advertising (which is also true for many other Internet companies) and subscriptions. Though the vast majority of Alibaba.com's reported 28 million "registered users" pay nothing, about 300,000 do pay annual membership fees to maintain "storefront" Web sites listing their products. Most members pay just a few hundred dollars, but more than 10 percent pay as much as $8,000. Yet a competitor like Global Sources Ltd. charges top sellers $7,000 a month for its services and recently introduced innovations designed to offer buyers protection from fraud.

There are signs, however, that Alibaba is making real progress. The public company's profits quadrupled in 2007, to $137 million, beating analysts' expectations. Consultant Trapp Lewis says Alibaba is particularly well-positioned to ride the e-commerce wave. Lewis worked at the company from 2004 to 2006 as senior director of Internet marketing and business development (and remains a shareholder of the Alibaba Group). Alibaba could use more revenue streams, acknowledges Lewis, who now heads his own firm, Bangkok-based Palmetto Ventures, and blogs on the B2B market. But reviewing the company's lineup, he adds, "Every one of these businesses is in such a sweet spot. And they're just getting started."

It started with Jack Ma, the charismatic and diminutive founder and public face of the company. His story is the stuff of myths and fairy tales, and it's been passed from business magazines to podcasts and back. There wasn't a garage in Palo Alto, Calif., involved, but there was a second-floor apartment in Hangzhou.

Ma, 43, grew up in Hangzhou, about 100 miles southwest of Shanghai. He learned English as a teenager by hanging around tourist hotels and providing free tours to visitors. Maybe that's where he learned the value of free services. A few years later he was teaching English to engineering students, and in 1995 he was hired as an interpreter by a trade delegation traveling to the U.S. Friends in Seattle introduced him to the Internet, and by all accounts it was a life-changing experience. Shortly after his return he created one of China's first Web sites: a directory of local businesses seeking overseas orders.

It was a few more years before he got the idea for Alibaba. In 1999 he convened a gathering of friends in that second-floor apartment -- from which the business was first run -- and asked them to invest. He started the company with the $60,000 they pooled that night. A year later he raised $25 million from Softbank Corp., Goldman Sachs & Co., Fidelity and other investors. Alibaba.com was the flagship business. Taobao was launched in 2003, Alipay the following year; Yahoo China was acquired in 2005, and Alisoft and Alimama were founded just last year.

The company's name? Ma liked the sound, he said. He asked someone what she thought when she heard it. "Open Sesame," she replied. "Perfect," he thought. (He didn't say what he would have done if she'd said, "Forty thieves.")

But Alibaba and the other Chinese companies have more than magic on their side. First and foremost is the law, which says that foreign companies that seek to provide Internet services in China must create joint ventures with domestic partners that own at least a 50 percent stake. That's proved a tremendous barrier to entry by foreigners, says APCO's Horgan. When he advises multinational clients about this, 60 percent immediately lose interest, Horgan explains.

Domestic companies enjoy other advantages. Chinese companies know the market and are better able to satisfy customers. The absence of credit cards, for example, was precisely the kind of problem that Alibaba embraced as a business opportunity. Creating an escrow account that allows buyers to transfer funds via a bank debit account, clicking to release the money only after inspecting the merchandise, solved both the transfer problem and the trust issue for a notoriously suspicious population.

So far it's a free service, and it's enormously popular in a country that not only lacks credit cards but also checks. Maya Alexandri, a Beijing-based lawyer and writer who has taught American IP law to Chinese judges, prosecutors and bureaucrats at Qinghua University, knows an accountant who uses the service to transfer funds. She lists an item on Taobao that nobody would want to buy. The price, which far exceeds its value, is the amount she's agreed to transfer to a friend. When the friend agrees to the purchase, they use Alipay to complete the transaction. Both services are free, and they obviate the need to drive to a bank and wait in long lines. Alibaba "is very creative," Alexandri says. "They look at the Internet and say, 'Where is a niche where people need to get things done?' And then they come up with a solution."

Multinationals often fail when they presume a model that works in the U.S. and Europe will necessarily succeed in China. Google searches, for example, are widely said to work far better in English than in Chinese. (Google declined to respond for this article.) Howard Wu, a partner at Baker & McKenzie in Shanghai, suggests that Google and eBay may have been guilty of some complacency. "They should have spent more money understanding the local market," he says, "or hiring more people with local expertise."

Success sometimes turns on details that wouldn't apply in another country. China's equivalent of the wildly popular video-sharing site YouTube is Youku, and according to CEO Victor Koo, one of Youku's more important tools is a filter that detects "too much pink." A porn detector is important in a country where disseminating pornography is strictly forbidden.

Other companies have enjoyed a competitive advantage because they seem to be willing to flout the law. Baidu and Yahoo China have drawn traffic to their sites by inviting consumers to illegally download copyrighted music. Baidu, in particular, has acknowledged that the downloads have helped it win market share. Google, on the other hand, has refused to follow suit.

The risks, in material terms, were almost nonexistent. Baidu hasn't even lost in court -- in part because it was sued before China's copyright law was tightened. Yahoo China lost at the trial level and again on appeal, both in Beijing, and was finally forced to pay up in February. But after three years of litigation, the judgment came to only $39,000. Both companies face fresh lawsuits involving music, and Yahoo China was also sued by a broadband portal for alleged broadcasts of a television show.

The lawyers who sued the two companies are happy that they won, but painfully aware of the limits of their victory. Leong Mayseey is regional director of the International Federation of the Phonographic Industry (IFPI), the London-based trade association that represented the music companies. "This little amount," says Leong, referring to the $39,000 judgment, "must be loose change for them." And Yahoo hasn't even taken down all the infringing song files, she adds. Sitting in her Hong Kong office, Leong complains that civil deterrents are simply insufficient. And the biggest losers, she points out, aren't the big multinationals but the Chinese labels, which don't have other markets. "We need criminal prosecution against sites and services that are clearly profiting from the infringement," she argues. "If you have pornography on a Web site," she says, the Chinese government "will shut that down." If the government adopted the same attitude toward downloads, she has no doubt they'd stop them cold.

Brand owners paint an even bleaker picture of trademark infringement. Business and consumer Internet portals are flooded with counterfeits, they say. Ray Tai, IP enforcement chief in Asia for athletic shoe and apparel maker Adidas AG, says the biggest problems are the high-end but badly made knockoffs that consumers buy believing they're genuine. Tai says his biggest headache is eBay, even though the company is acknowledged to have a better security system than those of its competitors. But unlike the Chinese companies, eBay's sales are global, and genuine products are available alongside virtually indistinguishable fakes. (At press time the IP world awaited a U.S. judge's decision in the lawsuit brought by jeweler Tiffany & Co. alleging that eBay hasn't done enough to filter Tiffany knockoffs.) The volume of bogus listings has forced Tai to hire a half-dozen staffers at an outside firm to do nothing but send "thousands" of takedown requests each week to Taobao, along with sites like Paipai.com (a division of Tencent Inc., which also runs China's most popular instant messaging service). The companies do cooperate, Tai notes, "but it's a drop in the bucket."

Emma Wu, an IP lawyer in Tencent's Shenzhen headquarters, acknowledges that counterfeits on Paipai are a problem: "It's a legal challenge for us and for most e-commerce companies, not only in China but also in other countries." They'd all like to find an easy way to solve it, she says, but solutions are elusive. She should know -- she herself has bought fake hair products on Taobao and Paipai. "Even I couldn't tell that they were fake before I bought the product," she says, "so how can the service provider tell?"

Some companies have found themselves on both sides of the battle lines. Tencent, under fire for fakes on its Paipai site, has itself sued Taobao. Tencent's biggest business is its QQ portal, which features instant messaging and interactive games. One popular game invites players to enter a virtual world in which they create avatars to represent themselves (like Second Life). Players can then purchase "Q-coins" with which they buy everything from clothing for their avatars to plants for their "Q-zones." Q-coins can't be used to purchase real objects. But recently, says lawyer Wu, the coins and even entire QQ accounts have been offered for sale on Taobao. Tencent sued, says Wu, but she isn't sure of their legal footing: "In China, we don't treat virtual things as real property."

Though the legal infrastructure continues to lag behind advances in technology, change is coming. In March, Paipai and Taobao both announced new policies aimed at protecting consumers from defective products. According to a report on the financial Web site JLM Pacific Epoch, Paipai's deal would allow buyers to return products without explanation within seven days. Though the policy is voluntary for sellers, consumers who find sellers unresponsive may return defective products directly to Paipai.com within 14 days for reimbursement. Taobao's policy is also voluntary for sellers, with no guarantees by the company. But for consumers who buy from sellers that have opted in, sellers may be charged three times the sales price if the product they ship does not match its online description.

More significant was an announcement by Global Sources, Alibaba.com's toughest competitor, which says it has improved its quality control. Founded in Hong Kong in 1971 and listed on Nasdaq, Global Sources virtually invented B2B in China, according to Trapp Lewis, who worked for the company for seven years before he moved to Alibaba. Though the younger company is much bigger (Global Sources's market cap is about $700 million), Lewis says that Alibaba.com needs to "diversify the business -- they need more revenue streams." They don't have the magazines, trade shows and private sourcing events of Global Sources, which has also been online since 1995.

Now Global Sources, which has long conducted careful evaluations of sellers before accepting them on its site, has added a new feature. It teams with independent third parties that provide credit reports and quality assessments of sellers (on a voluntary basis) that prospective buyers can access on the Web site. Alibaba has a "Gold Supplier" program that companies apply (and pay) for, but the standards are very different. Jason Brueschke, who heads Asia Internet and media research for Citi Investment Research in Hong Kong, covers both companies. "The level of verification that Global Sources does is magnitudes more stringent than what goes into the Alibaba verification," he says. Alibaba's Gold Suppliers gain visibility on the site, but essentially it's a designation for paying members on a site where few pay anything. "I think it's mostly just a revenue producer," says Brueschke.

In the near term Brueschke doesn't think Global Sources' initiative will take business from Alibaba. One firm, he says, is a high-end niche for medium-size companies. The latter is mass-market and less obsessive about quality. "The one thing they want," he says of Alibaba, "is revenues. There's much more of a caveat emptor attitude." There's room for both companies, he adds, and he's bullish on both -- rating each a "buy."

Still, danger may lie ahead for Alibaba.com. After eight years, Brueschke points out, the company now has about 300,000 paying members, but fewer than 40,000 are the top clients that constitute 75 percent of the revenues and even more of the profits. And, he adds, the company's retention rate of those clients is far from stellar. The company doesn't give out numbers, but he believes "Alibaba's churn rate is more than twice as high as Global Sources'" -- despite Alibaba's far-lower membership fees.

"The Alibaba Group may be the most formidable Internet company in China," Brueschke declares. They have synergies and cash and patience that are virtually unrivaled. "But an unverified site is basically just a search engine," he says. And that may be the key to the churn.

The biggest challenge for Jack Ma and his management team, as they show the way to China 2.0, may be demonstrating that they -- unlike the many U.S. companies that popped with the Internet bubble -- possess real staying power.