(This story is part of a series of profiles on innovative e-commerce entrepreneurs who are candidates for Alibaba Group’s Global Top 10 Netrepreneurs awards contest. The results will be announced at this year’s AliFest e-commerce summit scheduled to be held Sept. 9-10 in Hangzhou, China.)

For Sunbay Hats, a small company located near Ningbo, the “straw hat capital of China,” going online seemed a low-cost way to expand its business. As it turned out, the path to success–turning straw into gold–wasn’t so straightforward.

The maker of hats and handbags started selling directly to Chinese customers online in 2005 via Taobao. Although the venture saw some early success, it shut down in 2008 when the employee overseeing online sales went on maternity leave.

Online sales weren’t much of a priority, explains Richard Zhou, Sunbay’s founder. “Most of our energy was spent focusing on the exports business. We were experimenting, we weren’t trying to imitate [others who had success online] or trying to create more business,” he says.

Then the global financial crisis hit and orders to overseas customers became smaller, less frequent and with fewer high margin products. At the same time, the domestic market became increasingly important. The online store reopened in 2010 but by then, the company discovered that it had missed out on two years of rapid online development. Sunbay now had difficulty attracting traffic and standing out amid the suddenly busy, crowded marketplace. A month could go by without a single sale.

Things started looking up in late 2010 when Sunbay got word that Taobao, along with Alibaba, was setting up a new platform for small- and medium-sized businesses marketingemerging Chinese brands. Sunbay relaunched the store on this new platform in May 2011 and within a few months, online sales were contributing 5% of total sales. The company expects online sales could easily double to make up 10% of total sales next year.

Sunbay is taking it slow for now, learning the market and regulations. “We’re still learning how to build own brand,”says Monica Zou, who oversees online sales and the Sunbay’s domestic Lalami brand. Retooling for the Chinese domestic market, for instance, required some adjustments to hat design to account for local tastes, which varied from their traditional overseas buyers. Chinese customers, they learned, want different styles, often preferring more flowers or lace.

Zhou started the company in 1995 after working another area hat factory that specialized in exporting to the U.S. and Europe. Sunbay, which started with mostly local hires, today employs about 150 from all around China. Besides straw hats, the company has branched into wool hats, feathery fascinators, cowboy hats, knit caps, handbags and accessories. The factory churns out some 30,000 hats a month, mostly via machines but with some handwork thrown in on more intricate designs.

OEM manufacturing continues to be an important part of the business. Sunbay exports to large customers such as Wal-Mart and J.C. Penney in the U.S., K-Mart and Target in Australia and Esprit in Europe. But with the economic outlook in developed markets still gloomy, the Chinese domestic market seems more promising.

Zou hopes China’s increasing domestic wealth will help revive the art of making hats by hand. Ningbo has a long tradition of weaving straw hats; certain handmade hats require weaving skills that are now only known by a handful of people aged 50 and up. Zou hopes the online platform will help introduce these high-quality items back into the marketplace. “Now that the standard of living in China is higher, people are looking at hats as more of a fashion statement,” says Zou.”Before, hats were just for shielding farmers from the sun. So we are expanding and see opportunity.”