After struggling to establish a standalone presence in China, eBay announced on December 20, 2006, that it will set up a joint venture with politically well-connected Tom Online, a wireless Internet company with value-added multimedia services in China.


Despite eBay’s attempts to put a positive spin on the report, most pundits view eBay’s deal with Tom Online as yet another failure of a foreign Internet company coming to China and losing ground to local rivals, much as Google has done to Baidu in the past year and as Yahoo did before it folded its Chinese operations into Alibaba.


When eBay came to China in 2003 through its acquisition of Eachnet, many analysts thought that eBay’s China operation would be a slam-dunk. After all, even though eBay had failed in Japan, it had completely dominated the online auction market in the United States and should have learned from its mistakes in applying its American model to an Asian country. The Eachnet management team had staked out a commanding lead in the online auction sector, controlling nearly 80% of the market.  They had strong international and domestic experience and were close to their customers. 


By the end of 2006, however, eBay had invested $300 million into its China operations and had little to show for the effort. Its market share had declined steadily each year until it reached an anemic 20% in 2006 as it lost ground to competitors Alibaba’s Taobao and Tencent’s Paipai. Former Eachnet executives, including CEO Shao Yibo, had left eBay in droves after the acquisition.


EBay’s frustration in China can teach lessons to managers of global online magnates trying to sell to the 250 million members of China’s emerging middle class. Many of the largest mistakes were not the typical problems that businessmen often point to as the reasons why MNCs fail in China — such as corruption, lack of transparency or currency problems.  China Knowledge at Wharton looks at the reasons behind the retreat of eBay in China, where there is an increasingly mature Chinese market for global online companies.


eBay or Taobao?


Unlike competitor Taobao, which offers free basic services to sellers, eBay initially charged listing fees, as it does in the United States and Europe. Many critics argue that high prices are the main reason for eBay’s failure. These critics believe that Chinese consumers will always choose the free or low cost option unless a product is tangible.


However, some statistics suggest that Chinese consumers are willing to pay for Internet services that they deem worthwhile. For example, Chinese consumers purchased several hundred million dollars worth of virtual currency last year from companies such as Tencent to upgrade online game personas and buy custom ring tones for their mobile phones. 


Chinese youth especially, who average 18 hours a week online versus only 12 hours for their American counterparts, have shown their willingness to make online purchases and pay for Internet services. According to the China Internet Development Research Center (CIDRC) under the Chinese Academy of Social Sciences, e-commerce sales grew 58%, to almost $70 billion, over the last two years, with almost $3 billion of that in consumer-to-consumer sales. E-commerce growth has remained steady, as the number of Internet users in China has grown from 90 million to 130 million since 2004.


Yet according to surveys and interviews conducted by the China Market Research Group (CMR), a market research firm in Shanghai, eBay’s listings fees were not one of the top five reasons why consumers used Taobao over eBay. In fact, even after eBay offered free listings in early 2006, they still lost customers to Taobao.


The survey shows that Chinese consumers like to buy from brands and people that they “trust” and where customer service was “over the top.” Many consumers dislike eBay because of bad service and because it did not focus on building up trust. 


Dwight Perkins, professor of economics at Harvard University and former director of Harvard’s Asia Center, notes that “Trust is important in China as elsewhere, but it is particularly important in China because of the weakness of the legal system and other more formal means of settling disputes. The way you build trust is by demonstrating over time that you are trustworthy.” To be successful in China, Perkins believes that companies need to provide security every step of the way during a sales transaction to ensure that consumers feel comfortable making their purchases. eBay failed to do this when they first entered China.


When eBay entered China, their Paypal payment method did not seamlessly integrate escrow into the sales process. Taobao’s popular Alipay made escrow an important component of the online buying experience, because consumers felt confident paying money to Alipay and then only releasing the money after they had their purchase in-hand, according to one 22-year old Shanghaiese girl named Shan Shan, who regularly buys books via Taobao. In contrast, using Paypal made the whole process “nerve-wracking”, according to Shan Shan. Later attempts by eBay to incorporate escrow into the transaction process were too late to help it regain lost market share.


Chinese consumers also like to make transactions personal because it helps to build trust between the buyer and seller, according to Shan Shan and other respondents to the survey. eBay initially did not allow buyers and sellers to communicate directly, while Taobao allows for direct instant messaging between the two parties. As one 18-year-old male buyer who switched from using eBay to Taobao noted: “I like to be able to haggle directly with the seller when I buy DVDs. It makes the process go more smoothly as I build up relationships with the sellers.”


With more than 30 million registered users, Taobao supports more than $1.2 billion in transactions a year and claims that it controls 70% of the consumer-to-consumer market in terms of users. In 2005, eBay had a transaction volume closer to $600 million.


While many Chinese trust big companies that have an established presence in China, like Unilever or Procter & Gamble, there is a lack of trust for new entries. “Given the considerable amount of consumer fraud in China, developing a relatively foolproof system that does not ultimately depend on external enforcement by police, regulators, or credit agencies, is important,” says Perkins.


Headquarter Problems


One of eBay’s biggest problems comes from how it handled decision-making between its headquarters in San Jose and its China operations. Exit interviews with former Eachnet and eBay executives in China indicate that senior management in China felt that headquarters “did not listen to them” at critical junctures. Instead, these former executives believe that San Jose directed from afar rather than trusting its China management to know what would work in China. This sentiment was especially true for executives from the original Eachnet team who felt belittled by the American team after the acquisition.


Although eBay CEO Meg Whitman has spent some time in China, the Chinese executives had more experience in dealing with the specific needs of Chinese consumers shopping online. Google’s slow hiring practices, for example, were one of the reasons why it lost critical market share to Baidu in China’s browser market over the past two years, according to a senior executive in Google’s China operations.


Juan Fernandez, a management professor at CEIBS (China-Europe International Business School) and co-author of the best selling book, China CEO: Voices of Experience from Twenty International Business Leaders, highlights the divide that often exists between headquarters and China teams: “One problem is that some executives at headquarters do not know [much about]what is going on in China. They only have experience in mature markets where a rule of law exists, so when they see management in China localizing and modifying corporate practices, they get upset.” 


Fernandez believes that headquarters are too often faced with pressure from outside shareholders and board members, and then become too numbers driven; they want results as fast as they get them in the United States. They often do not understand that, in China, things take longer because of the need to work with the government, settle copyright issues and find local managerial talent.


Fernandez offers advice on how to help solve the divide between headquarters and local teams: “To get people in HQ to understand China, bring them here. But instead of giving them the Disneyworld view, the so-called airport abduction syndrome — where they see the nice airports, get an interpreter who takes care of them, stay in five star hotels and eat at western restaurants — bring them to see the genuine China.”


Many successful MNCs bring senior execs from headquarters and have them spend three to six months working in China. These executives can act as a bridge or a China champion when they are rotated back to headquarters. Most important, Fernandez says, is that “the China Country Head should be someone who has the credibility and trust with headquarters to make decisions that are needed but go sometimes against typical practices in the United States.”


Global Brand Image vs. Localization


Another critical mistake that eBay made in China was thinking that its leading brand image in the United States would apply to China. This is an error made by many foreign entrants, which means that many Global number one online brands — such as Google and eBay — have struggled coming into China. “China is a new playing field.  Brands that carry cache abroad have no guarantee of a sterling image in China, and brands that are less known or disparaged abroad can find new life,” states Shaun Rein, managing director of CMR. “General Motors is a company that has used China to its advantage in resuscitating a brand’s image. The Buick brand is passé in the U.S., but in China, General Motors has successfully marketed the Buick to appeal to business executives. It is on par with an Audi in terms of prestige.”


Understanding how to localize a brand can do wonders for a company. Rein points out Yum Brands, owners of Kentucky Fried Chicken and Pizza Hut, as a prime example. “In China, Pizza Hut has customers lining up for 45 minutes to get in the door. Yum turned Pizza Hut into a destination where the affluent and upwardly mobile eat with their families or on dates. It is a completely different experience than in the United States, where Pizza Hut is the home of cheap, quick eats.”


EBay sought to promote its auction portal with a similar layout and similar features to those found in its American version, which Chinese consumers found far too empty. Their lack of a customer service telephone number also irked Chinese consumers, according to a Chinese blogger.


It has been suggested by many analysts that eBay’s joint venture, which places Tom Online in charge of its China operations, is a ploy to take advantage of Tom Online’s good political connections. Hong Kong billionaire Li-Kai Shing is a major investor in Tom Online, and the CEO of Tom Online, Wang Lei Lei, is reputed to be the grandson of a Chinese general. Having good connections can be useful in China, and in the near term those connections can be useful for cutting through red tape. However, it is questionable whether political connections alone will guarantee success. According to Perkins, “For a foreign company with no experience to speak of in China, someone with guanxi who knows the relevant people and can get in the door can be helpful. Yet once a company has been in China for a while, that is likely to be much less important. The company by then will have established its own relationships and its own reputation with those they are working with.”


Taobao or Paipai will not slow down because eBay has found connections. Jack Ma, CEO of Alibaba, the parent company of Taobao, once said to the press that he will continue to invest the capital and manpower necessary to shore up Taobao’s businesses and gain market share. Connecting with consumers and addressing their needs in an online marketplace will decide the winners and losers in China, Jack Ma believes.


What’s Next for eBay in China?


Meanwhile, the eBay-Tom deal is full of questions. According to the Online announcement on December 20, “eBay will have a 49% stake in the joint venture, and TOM Online will have a 51% stake. Both companies will make financial contributions to the venture, including a $40 million cash contribution from eBay and $20 million in financing from Tom Online…. In addition, eBay will contribute its Eachnet subsidiary, while TOM Online will contribute local management expertise, technology and brand.”


“I don’t understand the whole deal,” Jack Ma of Taobao said to a Chinese press. “It sets apart Paypal. But Paypal has to be combined with e-commerce if it is to be successful.”


The potential of mobile business sounds like a bet on the future. Wang Leilei, CEO of TOM Online, was quoted as saying that “…the joint venture will provide an enhanced user experience, tailored for the China market, and will capitalize on our companies’ strengths in the emerging e-commerce sector.”

<SPAN lang=EN-US style