A Case Study on how eBay failed in China

I. INTRODUCTION

eBay a world leader in the on-line auction industry entered China in 2002. It faced
severe competition in the Chinese market from a local player – Taobao.com operated by
Alibaba.com, China’s largest business to business operator. eBay also faced restrictions
in the operation of its payment service, PayPal. The Chinese Government imposed
regulations requiring domestic control over financial services companies like PayPal.
After nearly five years of operation in China, eBay was left with only a 29% market share
as against Taobao's 67%. eBay tried to adopt its US model in its Chinese operations,
although with some alterations to suit local needs. In December 2006, eBay announced
a joint venture with TOM Online, China’s popular wireless operator and looked forward
to a revival in its Chinese operations.

After eBay entered China in 2002, it had to customize its operations and services to suit
the Chinese market conditions. It invested heavily in advertising, brand building and
expanding the on-line auction market. Despite such initiatives, eBay is facing tough
competition from a Chinese local e-commerce site, taobao.com, which started its
operation 2003, within a span of two years has overtaken eBay in terms of transaction
volume. The case, while highlighting the on-line auction market in China, offers scope to
discuss the growth strategies and competitive scenario of eBay in China.

eBay is a popular online market place that is utilized by many countries, but why did it
not succeed in penetrating the Chinese Market? What are the possible reasons of
eBay’s failure? In this case study, it aims to examine the reasons behind eBay's failure
to establish a successful presence in the Chinese market. This also aims to analyze
various factors such as cultural differences, consumer behavior, competition, and
regulatory issues that may have contributed to eBay's inability to gain traction in China. It
also aim to provide insights and lessons learned for other businesses looking to expand
into foreign markets, particularly in highly competitive and complex markets like China.
Additionally, the report could explore the strategies and tactics that eBay used in China,
the mistakes that were made, and the possible alternatives that could have been
pursued to improve the company's chances of success.

Despite being a successful e-commerce platform in many countries, eBay's failure in

China can be attributed to its inadequate understanding of the Chinese market, its
inability to adapt to local consumer preferences, and its inability to effectively compete
with local rivals.

II. BACKGROUND
eBay Inc. is an American multinational e-commerce company with headquarters in San
Jose, California (eBay, 2019). eBay Inc. also owns another famous brand, Paypal – one
of eBay’s main payments. By early 2008, eBay expanded worldwide and succeeded in
many countries with millions of users. The company is an online auction and sales
website where buyers and sellers can buy and sell their goods around the world. eBay
has revolutionized the marketplace, bringing together buyers and sellers across the
globe into a huge marketplace where the auction never ends. Millions of tools,
equipment, computers, furniture, and millions of other items are posted, purchased, and
sold every day. EBay’s revenue comes from many aspects. The first is the auction
posting fee collected of the seller whether or not the product is sold. EBay then charges
a fee when the product is successfully traded, plus a number of additional fees. In
addition, eBay benefits from the Paypal payment system whenever a payment is made
through the service. In 2002, eBay acquires EachNet, the leading trading company in
China, in cash for approximately $ 180 million. Then eBay entered in China through
EachNet with the hope that they will success as they did in other countries. However,
eBay had to withdraw from China after operating in this market for a few years.

When eBay entered the China market, Jack Ma, founder and CEO of Alibaba, was
alarmed that “someday, eBay would come in our direction.” He knew too well that there
was no clear distinction between small businesses and individual consumers in China.
As a defensive strategy, Ma decided to launch a competing consumer-to-consumer
(C2C) auction site, not to make money, but to fend off eBay from taking away Alibaba’s
customers. A new website named Taobao—meaning “digging for treasure”—was
launched free of charge for individuals buying and selling virtually any consumer goods,
from cosmetics to electronic parts. EBay, on the other hand, began its most aggressive
campaigns to dominate the market and thwart competitors. Soon after Taobao was
launched, eBay signed exclusive advertising rights with major portals Sina, Sohu, and
Netease with the intention of blocking advertisements from Taobao. In addition, eBay
injected another $100 million to build its China operation, now renamed “eBay EachNet,”
and was spreading its ads on buses, subway platforms, and everywhere else. However
Jack Ma fought back cleverly, knowing that most small business people would rather
watch TV than log on to the Internet, Ma secured advertisements for Taobao on major
TV channels. In 2004, one could easily feel the heat of fierce competition between eBay
EachNet and Taobao. Nevertheless, most industry observers were suspicious about
Taobao’s future, particularly its sustainability. Unlike eBay EachNet, which charged its
sellers for listing and transaction fees, Taobao was free to use. Taobao got a quick start
with its free listings and continued to gain momentum as more and more users switched
from eBay EachNet to Taobao. Taobao was more customer focused and user friendly
than eBay EachNet. With most users not sophisticated about auctions, the majority of
Taobao’s listings were for sales. Only 10 percent of its listings were for auctions, while
eBay EachNet had about 40 percent of its listings for auctions. Taobao had also better
terms for its customers: it offered longer listing periods (fourteen days) and let customers
extend for one more period automatically. EBay EachNet did not have this flexibility. It
was clear that Taobao had an upper hand against its global counterpart because it really
 understood Chinese customers. As a result, Taobao had higher customer satisfaction
than eBay EachNet. By March 2006, Taobao had outpaced eBay EachNet and became
the leader in China’s consumer-to-consumer (C2C) market, with 67 percent market
share in terms of users, while eBay EachNet had only 29 percent market share. EBay
shut down its China site, eBay EachNet, and took a back seat to a company with only
$173 million in revenue and no experience in the online auction business.

III. EVALUATION OF THE CASE

Lack of Cultural Understanding

China is a big market and requires a lot of patience. It is also a big and fierce market
with loads of competitors. In order to have a chance in China, American companies must
empower their affiliates so they can be responsive, autonomous, localize their
businesses, and ready to fight. However, because of subjectivity, eBay has adopted their
global strategy in the Chinese market and eBay has failed despite their support from
EachNet. Another mistaken decision was to install EachNet servers in the US. The
image loading speed is slow and the ‘overload’ error appears often, causing many
customers to lose patience. Slow and unstable services make users frustrated and they
will be left eBay EachNet. Not only that, the eBay server is always maintained at
midnight on Thursday in the US time frame, but it is … 9 am in China, making this
website often ‘shut down’ in the middle of the day. After moving, the Chinese eBay
EachNet team lost much of its control over the page and could not make changes to
existing characters or release any new characters. At that time, Taobao became a better
alternative to eBay with a friendly interface, easy access, faster access speed, and
completely free of charge.

Customized features for customers

Chinese users want to talk to sellers, develop relationships, and bargain – similar to the
direct shopping experience. eBay did not meet this need probably because they want
their products to be consistent with products in the US. Alibaba’s founder Jack Ma
created a direct competitor to eBay in China, using market understanding to compete
with eBay’s international standard model. Alibaba, meanwhile, understands the minds of
Chinese consumers and offers the ability to talk on its e-commerce website Taobao.
Unlike eBay, Taobao is not a place for customers to compete to bid for a desired
product, Taobao is a place where countless sellers can compete with each other with
countless products with different service levels. In fact, Taobao also allows buyers and
sellers to call each other, get acquainted, and even meet face-to-face to complete large
orders.
Although there is a competitor who understands the ‘home field’, eBay is confident that
its successful model in the world will surely continue to succeed in China. eBay sellers
will be charged a fee for every purchase. Customers who want to use eBay must
constantly pay many large and small fees, from account registration fees to the sale of
 products, transaction fees. After Taobao received a lot of investment, eBay still did not
believe the Taobao model was a real competitor. Part of its that confidence comes from
a nearly 70% market share in the first year eBay appears in China (compared to 7% of
Taobao). Taobao is still 100% free of charge, causing a series of sellers to come here to
sell products because it does not cost a penny. Step by step, Taobao has become a
‘everything’ paradise in China, and that strength gradually leads to customers wishing to
search and shop. Another advantage of Taobao is that they replace PayPal with AliPay
and link with most domestic banks in the country to help customers with more payment
options. Meanwhile, eBay’s main payment methods are PayPal, credit cards, debit
cards, and checks. Small businesses do not use credit cards and debit cards, and for
PayPal, they will have to pay a fee, so eBay customers and businesses have many
difficulties and inconveniences to make purchase and sale transactions.

Top management did not Understand Local Market

Another mistake of eBay was that eBay did not consider local talent for key positions;
instead, eBay paid a huge sum of money to senior managers from Germany, Korea, and
Taiwan. Loan and the US, who do not even know a Chinese word in half and do not
have the full knowledge and experience of the Chinese market, will operate a market
halfway around the world. On the other hand, Taobao is managed and run by Chinese
managers and employees who understand the Chinese market best and the needs of
their customers. One of the factors that helped Taobao score with customers is its name.
Taobao – which means ‘Digging for treasures’ in Mandarin language – employs local
manpower and focuses on the characteristics of Chinese culture. The company’s
operators also use virtual names to simulate the characters of popular Chinese martial
arts novels. EBay has spent a considerable amount of more than 100 million US dollars
to sign exclusive contracts with the three largest Chinese portals Sina, Soho and
Netease with the purpose of banning Taobao ads on these sites. EBay is also heavily
advertised in China, from train platforms, subway stations to buses. Recognizing the
needs of small and medium-sized businesses that tend to watch TV rather than access
the internet, Jack Ma ran Taobao ads on all TV channels across the country.

IV. PROPOSED SOLUTION/CHANGES

Partnering with a local Chinese brand with a strong name as method of entry.
In order to successfully enter a new market and establish partnerships, it is advisable for
a business to select an established company with a reputable brand in the target market.
This will enable the business to easily penetrate the market and benefit from the positive
publicity generated by the established company, which can attract potential customers.

Adapting a meaningful, easily recognizable Chinese name.

It is important for a business to consider the culture of the location where their target
market is situated. In particular, the Chinese culture has a significant impact on business
 practices. Chinese individuals place great importance on the details of their interactions
and transactions. When entering the Chinese business world, it is essential to carefully
choose a name that holds significance and is easily understandable to the Chinese
audience in order to pique their interest.

Hiring local leadership.

The effective running of a business greatly depends on the management and the
workforce. It is crucial for a business to have managers who possess an understanding
and knowledge of the industry, culture, and market trends within which the organization
operates. Managers must be skilled in communication and fostering positive
relationships with both the staff and customers, to establish and maintain their loyalty.

Launching a separate service based locally in China.

For a business, having a user-friendly and inclusive service is crucial. eBay, for instance,
should consider launching a service that is widely recognized and used by Chinese
consumers. It would be a wise move to establish the service locally in China, making it
more convenient and accessible for the Chinese population.

Giving local Chinese operations autonomy to build their own business model and
operate independent of US based headquarters.
When establishing a business, it's important to take into account the surroundings and
customs of the location where it will be situated. If a business operates in multiple
countries, it's not mandatory to use the same business model. Instead, the company
should evaluate its particular strengths and weaknesses in each location to determine
what aspects need improvement to ensure the business's long-term success.

V. RECOMMENDATIONS

Upon analysis of the problem, it is recommended to implement one of the proposed

solutions which is hiring local leadership. According to Andrew H. – managing director of
ChinaSolved (Susie, 2014), the most important step for succeeding in China is planning
and researching into small print of distribution and employment contract. To be able to
do that, eBay needs to investigate the Chinese market carefully from the top to the roots
including regulations, rules, environments, customers, how to do business and define its
market niche (Helen, H.W., 2012). There is a growing body of research that suggests
that hiring local leaders is important for organizations and businesses. Some of the
evidence supporting this argument includes knowledge of the community, local leaders
have a deep understanding of the community they serve. They are familiar with the local
culture, customs, and traditions. This knowledge can be invaluable when it comes to
making decisions that affect the community. Another evidence is the trust and credibility;
local leaders are often well-respected in their communities. They have established
relationships with members of the community, which can help to build trust and
credibility for the organization or business. Evidence also includes language and
 communication, local leaders are typically fluent in the local language and understand
local communication styles. This can be critical for effective communication with the
community, particularly when it comes to sensitive or complex issues. Furthermore,
evidence includes knowledge of local regulations, local leaders are familiar with local
regulations and legal requirements. They can help the organization or business navigate
local laws and regulations more effectively. Moreover, it is also cost savings, hiring local
leaders can often be more cost-effective than bringing in outside talent. Local leaders
are often more familiar with local resources and suppliers, which can help to reduce
costs. Overall, hiring local leaders can provide organizations and businesses with a
range of benefits, from improved community relations to cost savings. It is important to
consider the unique needs of the organization or business, as well as the local
community, when making hiring decisions.

VI. REFERENCES

eBay in China: Strategies and Challenges. [Online] Available at:

https://www.thecasecentre.org/products/view?id=76688

Helen, H.W., (2017) How EBay Failed in China. Forbes. [Online] Available at:
https://www.forbes.com/sites/china/2010/09/12/how-ebay-failed-in-china

Intercultural Business Competencies: Case Study of eBay. [Online] Available at:

https://edubirdie.com/examples/intercultural-business-competencies-case-study-of-ebay

A Case Study on International Expansion: How eBay failed in China. [Online] Available
at: https://medium.com/@alexlee611/a-case-study-on-international-expansion-how-
ebay-failed-in-china-d762d94b9f4b