How eBay Failed in China

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Jul 13, 2018 · 6 min read

I was walking through a store in Palo Alto last week when I saw this menu holder at the
checkout counter:

That’s Alipay in a US retail store.

In the past, China tech firms have focused on winning the domestic market. For the first
time ever, China’s tech leaders are looking towards international expansion. This is the

new “growth” story for Chinese tech firms. With Chinese tech companies breaking into the

US, I wonder if they will fare better than their US counterparts who have attempted to
break into China. I studied three US tech companies who have failed to break into the

China market and came up with five common practices that US tech firms must adapt in

order to make Chinese operations a profitable venture.

These practices are:

1. Partnering with a local Chinese brand with a strong name as method of entry.
2. Adapting a meaningful, easily recognizable Chinese name.

3. Hiring local leadership.

4. Launching a separate service based locally in China.

5. Giving local Chinese operations autonomy to build their own business model and

operate independent of US based headquarters.

You’ll see the importance of these practices come into play as we analyze eBay and study

the mistakes they made when entering the China market. If there’s interest in this topic, I

will blog about Amazon and Groupon’s international expansion story in a future blog.

A Case Study on International Expansion: eBay

eBay was founded in September 1995 by Pierre Omidyar to create an open marketplace

for everyone in the world to trade with one another. Three years later, eBay listed on

NASDAQ. Expected to trade for $18, eBay’s shares shattered expectations and reach
$53.50 in just one day. It is estimated that eBay held roughly 70% of the online auction

market in the US in 2002.

In July 2003, eBay acquired EachNet, China’s most dominant auction player for $180M.

At the time, they had over 2M users and 85% market share in China. eBay China was

rebranded eBay EachNet and eBay’s stock prices rose as analysts expected eBay to see
success in China similar to in the United States. But two short years after entering China,

then CEO Meg Whitman announced the company’s exit from China’s online auction

market. Most people assume that eBay EachNet was simply outcompeted by Jack Ma’s
Alibaba and TaoBao. This tells only half the story. eBay was wholly unprepared to

operate in China.

“Doing Business As” — The Name

When eBay entered China, as a defensive strategy, Jack Ma decided to launch a

competing C2C (consumer to consumer) auction site, not to make money, but to fend off

eBay from taking away Alibaba’s customers. Unlike eBay, TaoBao, which means, “digging

for treasure”, was free of charges for individuals buying and selling virtually any consumer
good. It turns out that people tuned in for TaoBao’s advertisements based on their name.

As one Shanghai resident says, “Since its name means ‘digging for treasure’ in Chinese,

it attracted a lot of attention by a smart play on words. While most people in the West had
never heard of TaoBao, its name was heard loud and strong in China”.

Understanding the Local Culture

Following the acquisition, Bo Shao, EachNet’s founder retired from daily operations. eBay

China then sent a number of expatriates from Germany, Korea, Taiwan and the United
States to run the China division. The general manager of eBay China’s operations was

German, while the chief technology officer was American. Neither one spoke Chinese.

Soon after, eBay EachNet announced plans to spend an additional $100M to improve its
technology platform and promote eBay’s brand in China.
In response to the launching of TaoBao, eBay signed exclusive advertising rights with

major online portals Sina, Sohu and NetEase with the intention of blocking advertisements

from TaoBao. eBay then spent $100M on advertisements on busses, subway platforms
and taxis. This, however, proved to be eBay’s first mistake. Jack Ma, knowing that most

small business people would rather watch TV than log on to the Internet, secured

advertisements for TaoBao on major TV channels. At the time, China only had ~90M
Internet users at the time, as opposed to the vast majority of households owning a TV.

Customized Features for Your Customers

As TaoBao began to gain traction in China, they quickly pivoted their business model. To

begin with, eBay’s auctions typically consist of selling second hand goods. Chinese
consumers, however, do not like to buy second hand goods as it is typically associated

with lack of wealth. Secondly, Chinese locals didn’t understand the idea of auctions. They

were more familiar with the traditional marketplace of haggling for a good and buying it for
an agreed price. As such, TaoBao became both a B2C (business to consumer) and C2C

marketplace, where small businesses and individuals alike posted listings for sales.

Auctions amounted to only 10% of all transactions on TaoBao.

Also, TaoBao implemented AliPay, the online payment solution, whereas eBay continued

to struggle trying to implement the payment solutions they used elsewhere in the world in
China. eBay acquired PayPal in 2002, and most transactions on eBay went through

cheques, postal orders, credit cards or PayPal. Unfortunately for eBay, cheques and postal

orders were both uncommon in China, as were credit cards as it was impossible for small
businesses to process card payments. The Chinese alternative to PayPal, AliPay, was

quickly implemented for TaoBao, and eBay did not adjust.

Importance of having Local Operations

In October 2004, eBay EachNet decided to move its tech platform from China to the US.
What was called the ‘migration’ at the time, was the project to terminate EachNet’s

homegrown technology platform and move all EachNet users to the eBay U.S. platform.

This ‘migration’ would have allowed consumers in the US to freely trade with consumers
in China.

According to Bo Shao, “on the day of the move, traffic (to eBay EachNet) dropped by half.”
What had formerly been information flow within China now became traffic across borders

and across the Pacific Ocean. However, the Internet infrastructure between China and the

US at the time wasn’t as good. The loading page of eBay China’s webpage, one of the
most important user issues, slowed dramatically. What’s more, because of the firewall in

place blocking traffic that the Chinese government disapproved of, anytime any listing

came up looking vaguely suspicious, the foreign computer server that processed the
problematic information would be blocked for anywhere between 24 hours to several days.

The slow and unstable services frustrated users and caused them to leave eBay EachNet

in droves. The presence of TaoBao as a better alternative further sped up its popularity.

Moreover, the move of the technology platform brought the development of eBay China to

a screeching halt. As Shao recalls, ‘In order for the eBay US platform to catch up to
EachNet’s China-specific features, development on the site was frozen for a year before

the platform was moved.’ For an entire year beginning in October 2003, EachNet could

not develop any new features or make significant changes to existing features. After the
migration, the local eBay EachNet team lost most of its control over the site. “It took nine

months to implement any major changes and nine weeks to change a word on the website
as everything had to go through the headquarters technology development team. This is

unthinkable. Fast reaction to user demands is crucial in this market”, said Shao.

How the Story Ends

At that point, eBay had slower and more unstable service, a lack of updates and was far
less user friendly compared to TaoBao. In addition, eBay EachNet was still charging users

per listing. Six months after the migration, TaoBao had captured 60% market share while

eBay EachNet held onto 30%. In late 2005, eBay stopped charging users, but was unable
to reclaim market share. In late 2006, eBay sold their China operations to Tom Online. By

mid 2007, EachNet’s market share had shrunk to 7%. By the time of their exit, eBay had

invested nearly $300M in their China operations in additional to their year-to-year

operations being unprofitable.

I did a similar analysis on Amazon and Groupon that I’ll share in a future blog. If you have
any thoughts or questions, please comment. And if you are working on anything in the

mobility space, send me a note at alex.lee@alliance-rnm.com — I’d love to connect.

VC @ Alliance Ventures and Angel Investor.

Investor. Writing about my musings
on business, markets and technology