How eBay lost the China market
- Source: Global Times
- [11:36 August 10 2009]
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By Sherman So and J. Christopher Westland
Editor's note:
This article has been adapted from Red Wired: China's Internet Revolution co-authored by Sherman So and J. Christopher Westland. The to-be-published book is aimed at helping readers gain a firsthand understanding of how the Chinese combined successful components from their Western counterparts with innovation, to accommodate the unique characteristics of the Chinese market.
Many believe Taobao beat global online auction king eBay in China by being free, but not EachNet founder Bo Shao who sold the company to eBay in July 2003. A key catalyst was "migration", the decision to terminate EachNet's homegrown technology platform and move all EachNet users to the eBay US platform, said Shao.
On the day of the migration, traffic to eBay China dropped by half. Despite the serious customer losses, Meg Whitman, then CEO of eBay, only learned about it a month after it occurred, on a visit to Shanghai.
Whitman was shocked and very upset. Apparently, even the head of eBay International at the time, who was one of the most ardent proponents of migration, did not tell Whitman about it.
By 2003, eBay's global expansion plan had reached China. It completed its acquisition of the country's dominant auction player, EachNet, for $180 million in July 2003. EachNet at the time had more than 2 million users and about 85 percent of the market.
EachNet's market dominance was so strong that Shao started charging listing and transaction fees in 2001, despite the existence of free competing sites. He believed that as long as the site had the most buyers and made money for sellers, the sellers would be willing to pay. According to Shao, fees did not affect user loyalty; in fact, EachNet's dominance increased after it started charging.
After the acquisition, Shao retired from daily operations of eBay China and moved to the US in late 2003 with his family. eBay sent in a number of expatriates from Germany, the US, Korea, and Taiwan to run the China division and hired a number of senior executives from other multinational corporations in China.
The company thought everything would be fine. After all, EachNet, now eBay China had an overwhelmingly dominant position and it planned to spend an extra $100 million to improve its technology platform and promote eBay's brand in China. Any new competitors would be easy to crush.
However, nothing went according to plan. A new rival came out of nowhere and eBay retreated from China four years later.
Rise of Taobao
After Alibaba started making profits on its main B2B site, its founder Jack Ma took aim at the potentially much bigger C2C (consumer-to-consumer) market. Ma gathered a small team working in secret. By May 2003, the website Taobao, which means "looking for treasure" in Chinese, was launched.
While eBay was busy consolidating EachNet into its global operation, Alibaba was plugging Taobao as a new online shopping destination. And unlike its American-owned competitor, Taobao was free!
But levying listing fees and transaction fees was not the only reason eBay lost its dominance to Taobao, said EachNet co-founder Shao, who, after selling the company to eBay in July 2003, stayed on as a consultant for over a year.
"At first, even with Taobao making a lot of noise, our users and traffic did not change much," said Shao.
Despite having to pay fees, the larger user base of eBay China was more than enough to keep sellers coming. Similarly, most buyers stayed on, as there were more sellers and products offered.
In fact, latecomers seldom posed a serious threat to the dominant online auction player. They might capture some market share, but rarely a big chunk. Latecomer Yahoo's free auction service in the US had scarcely any effect on eBay's market dominance.
What really caused eBay to lose its dominance in China was its decision to move its technology platform from China to the US, said Shao.
Internally, it was called "migration", which was the project to terminate EachNet's homegrown technology platform and move all EachNet users to the eBay US platform in October 2004.
Whitman, then CEO of eBay, had a vision – she wanted all eBay users, wherever they were, to be able to trade with each other. For example, users in the US could be able to see products offered by users in China and bid for them.
To implement her global vision, eBay's technology platforms in different countries had to be moved to the headquarters, consolidated and put under the control of the company’s chief technology officer.
The former EachNet management supported the vision, according to Shao, but felt that it was premature to migrate EachNet users to the US platform, which was not yet flexible enough to accommodate the China-specific features that EachNet needed to compete in China. EachNet's technology team was also concerned about transmission speed issues across the Pacific. Such concerns, however, were downplayed during the eBay technology team's presentation to Whitman.
