eBay’s Strategy in China:

Alliance or Acquisition
Group 3
MANSI GARG (PGP/17/092)
RAVI KUMAR (PGP/17/108)
ANKITA AGGARWAL (PGP/17/132)
SAMYA RAY (PGP/17/164)
K PARVATHY (PGP/17/213)
BIRANCHI PRASAD SAHOO (PGP/17/075)
 eBay’s History in China
eBay entered China in 2002 by acquiring 33% stake in EachNet

Fully acquired EachNet in 2003

In 2005, eBay acquired Skype, operated in China JV with TOM Online

In 2006, announced JV with TOM, with eBay retaining 49% ownership

Agenda:
Assessing eBay’s choice of market entry strategy for China

Assess the potential benefits and risks of eBay’s JV with TOM Online

Is it right strategy for eBay to succeed in China in the second attempt

 The Dotcom Bubble
Mid to late 1990s – Dotcom hype

Eager to make quick profits, companies heavily invested in the internet

Huge venture capital funds made available to entrepreneurs

Internet valuation soared up

NASDAQ Composite peaked 5048.62 on March 10, 2000 followed by setting in of bear market

By May 2000, NASDAQ dropped 30% and by October 2003, it had fallen down 78% from its peak

End of Dotcom era

 Causes of Dotcom Crash
• No previous business experience
Strategic • Lack of product differentiation
• Lack of appropriate promotional strategy

• Poor financial management

Operational • Vulnerable financial structure
• Poor customer support and after sales services

• Internet security concerns

• Concerns about being abused by hackers
Technical • Issues of reliability and trust
• Web server interruption
• Poor webpage design

• Lower customer confidence

Behavioral
• Disparity between expectations and performance
• Additional shipping and handling fees
• Hassles of wrong delivery and wait for re-delivery
 Growth of eBay
24th
September June 1997 – September
1995 – Benchmark 1998 – 2002 -
Founded by Capital Listed on Retreated
Pierre invested NASDAQ; from
Omidyar in $6.7m for IPO helped Japan due
San Jose 22% stake raise $66m to Yahoo!

1996 – 1998 – Meg 2001 – 2006 –

Recruited Whitman International Expanded
Jeff Skoll appointed markets into 35 global
as CEO accounted for markets
18%

• 221.6 million registered users worldwide

• $2.2b domestically and $2.1b internationally
• 14% market share in e-commerce market globally
 Revenue Items
4500000000 2500000000
4000000000

3500000000 2000000000

3000000000
1500000000
2500000000

2000000000
1000000000
1500000000

1000000000 500000000
500000000

0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Number of Registered Users Net Revenue

250000000 2500000000

200000000 2000000000

1500000000
150000000

1000000000
100000000

500000000
50000000
0
2001 2002 2003 2004 2005 2006
0
199519961997199819992000200120022003200420052006 US Marketpl ace Internationa l Marketpl ace
 Customer Services and Support

Personal Shopper Shipping Tracking

• E-mail alerts to potential buyers • Track shipped packages

Turbo Lister, eBay Blackthrone PayPal

• Facilitation of secured exchange of funds
• Automation of selling process
online
Picture Services Feedback Forms
• Users could post pictures to the listings • Submitted by both parties

Shipping Calculator Verified Rights Owner Program

• Protection of buyers from purchasing
• Calculation of shipping costs
counterfeit products
Shipping Labels SafeHabor Program
• Print certain postage and UPS labels • Ensure harmonious environment for eBay
users

“Efficient, effective and personalised customer support”

eBay’s expansion strategies
Insertion
Fee ($0.30
to $3.30)

Internal efforts
How eBay
Acquisitions Optional
Features
Fee
makes
money?
Alliances

Joint Ventures Final Value

Fee (1.25%
to 5%)
Chinese C2C Market

Amount spent
on e-commerce
has increased
from $106mn to
$470mn from
2002 to 2004 Chinese e-commerce
industry has reached
transactions of $2.9bn
Other models of C2C and
B2C & B2B will be
integrated to serve
43.1mn existing
customers in 2006
Profile of the e-commerce Profile of EachNet
market in China
First e-commerce company to start business in
China in 1999 on the similar marketplace model
of eBay
Business
Challenges
Opportunity
EachNet modified it’s business model with some
Slow internet spee
ds
Chinese characteristics
and High internet
access
costs

Lack of governmen
t
regulations It allowed client consumer face to face
250 million strong
middle class
interaction along with exchange of goods and
Imbalanced econom cash
technological deve ic and
Internet penetratio lopment in
n
commerce busines and e- different regions
nearly doubling its s staging
growth since Corruption and ab By Feb, 2000 just in six months it had been doing
2002 to 2006 sence
of reliable credit sy
stem 20000 auctions every day
By 2002 it was the most significant player in the
market
 Acquisition of EachNet by eBay
Diversification and capturing emerging
Numero uno markets led eBay to come to China Led to
position of
Requirement of market depth and acquisition of
EachNet in Chinese
cultural connect with the country for EachNet
market
EBay

Initial developments after the

acquisition • By 2003 the venture was
• $30mn invested in March,2002
to acquire 33% interest controlling 85% of market
• In June,2003 the remaining 67% share
was acquired for $150mn • company’s valuation
from $90mn to $225mn
Impact on from 2002 to 2003 alone
Amount
market • 4.3mn registered users by
Invested the end of 2003
share

New
Promotions
alliances
• Alliances with three Chinese portals • Heavily invested in
namely Sina, Sohu and Netease was online promotions
completed • In 2006 $25mn was
used to advertise
Competition in Chinese Online Auction Market

Stiff competition from local market Rivals

Strongest Rival was TaoBao (Wholly Owned Subsidiary of Alibaba)

By 2006 eBay Eachnet market share was 29% as compared to TaoBao’s 60%

By 2006 TaoBao’s become market leader C2Cand B2C in China

Alibaba strong Presence in China helped the cause of TaoBao’s becoming leader in
china
 eBay EachNet: What went wrong
Charging of listing and selling fees after eBay’s full acquisition of EachNet whereas TaoBao’s
offered free services to attract customers

Local Consumers preferred to buy from domestic player than from foreign

Less Efforts to build Trust both towards the company itself and between buyers and sellers

ebay Failed to provide feel of security to customers at each and every step

Initially, ebay did not incorporate Escrow into it’s online payment system

Poor Customer Service as there was no customer service hotline

 eBay EachNet: What went wrong
Decision making was centralized which led to the few major local leaders to leave the
company

Due to centralised decision making there was inflexibility and lag in response to ever
changing Chinese market

Grave mistake of making assumption that they can leverage the Brand Image in China as
they enjoy in US

No consistent and correct representation of its brand attributes across its target market

ebay applied its American model in china in terms of simple interface which was
considered too empty by Chinese consumers

Lack of Real time handling of customer grievances

 About TOM Online
Founded in 2000, Became one of the largest wireless service providers & 5th largest internet
portal in China

Listed in March 2004 in the US (NASDAQ) & Hong Kong

Shareholders: Tom Group, Hutchison, both led by Li Ka-Shing – one of the Top 10 Richest men
in the world (Forbes)
Provided value-added multimedia products & services primarily to young & trendy
consumers in China through wireless & internet services

TOM Online

Wireless services Internet Services

SMS, MMS, WAP, news subscription, games,
ring tones, etc.
Provided through mobile telecommunication
operators, alliances with mobile handset
manufacturers & traditional media
Content channels, search & classified
information, online advertising, e-commerce,
etc.
Provided through tom.com & alliances with
other internet portals
 TOM Online & Skype
Alliance (November 2004) Joint Venture (September 2005)
Co-develop a customized, simplified Chinese For expansion into the internet communication
version of Skype sector
Attracted more than 3.1 million users making Develop mobile internet platform with TOM’s
China one of Skype’s top 3 markets expertise in mobile technology & Skype’s
expertise in internet communication

Situation in 2006
89% revenues from value added mobile-phone services

Heavy dependence when its not a mobile telecommunications provider

Providers- China Mobile & China Unicom- ordered by Chinese Government to contact all customers &
ascertain if they wished to have these services

Profits in 3rd quarted plunged 59% (US$ 5.28 million) & revenues fell by 15.2% (US$ 38.95 million)
 Joint Venture: TOM Eachnet

Contribution Benefits

Diversification into m-commerce

eBay
$40 million cash Local knowledge
(49%)
Political connections

$20 million
Diversification into online auction
TOM Online local knowledge,
Reduce dependence on mobile value
(51%) technology, brand
added services for revenues
value

Li Ka-Shing – biggest shareholder of TOM Online, known for his connections

with high ranking officials in China & Hong Kong
Wang Leilei (CEO) grandson of a Chinese General
*‘Guanxi’ would help businesses become more efficient
 eBay’s Future in China

Abandoning the eBay brand- thought as a partial retreat from China

Whitman: Renaming due to stronger recognition of domestic Chinese brands (TOM &
Eachnet), than foreign brands like eBay, which was fairly new.

Expected Chinese market to become a significant part of eBay’s business by 2010-15

Competitors: Major rival TaoBao would continue to invest in capital & manpower to
boost business

Also, Alibaba could raise upto US$1.5 billion through its IPO in Hong Kong, will spend on
affiliates, including TaoBao
 Questions to be Addressed

1) eBay first entered Chinese market in 2002 by acquiring 33 % stake in

Eachnet, followed by a full acquisition a year later in 2003. Critically
assess eBay’s choice of market entry strategy for China.

2) Assess the potential benefits and risks of eBay’s JV with Tom Online.
Is it right strategy to succeed in China in the second attempt for
eBay? Critically comment.
 Chinese Market Study

Market Attractiveness: Distance Factors (Cultural, Admin, Economic):

 eBay's market entry to China was inline with it’s
strategy to build a truly global marketplace
 Lesser knowledge of local Chinese culture,
 250 million strong emerging Chinese middle class
Consumer behavior & preferences, Distribution
offer great potential
 E-commerce revenue in China was expected to system
 Lesser knowledge of corporate practices
grow nearly 12 fold to more than US$16 billion
 Slow internet speed, High internet access cost
over the next three to four years.
 Imbalanced economic & technological
 China's Internet users had topped 33.7 million by
development in different regions
the end of last year, up 49.8 per cent over the
 Absence of reliable credit systems for online
same period last year
 Important driver of ebay’s International growth payment

Institutional Context:
 Government regulations & restrictive policies against overseas players
 Difficulties in establishing business relationships with state-owned
companies
 Lack of transparency, Corruption & Currency problems
 Inadequate legal systems to protect the interests of both company and
customers

Conclusion: Reason for eBay to expand in to Chinese Market – Market Attractiveness

 Modes of Entry

Entry Modes Positives Negatives

Exporting Not possible, since it’s an e-commerce venture.
Licensing Not possible, as it’s an e-commerce venture.
Strategic  Facilitating market entry  Conflict over asymmetric new
Alliances  Risk & reward sharing investments & information sharing
 Technology & knowledge sharing  Mistrust over proprietary knowledge
 Conforming to local government regulations  Performance ambiguity i.e. how to
 Access to political connection & local distribution share the pie
channels  Cultural Clashes

Acquisitions  Executed in a two stage process- minority stake  Complex negotiation process
followed by acquisition would be a good strategy  High Costs
while testing waters in a new market  Cultural Clashes
 Founders of Eachnet were Meg Whitman, alums  Problem of integration & merging with
at Harvard - Good personal relationships domestic operations
 EachNet operations as Chinese equivalent of eBay
 EachNet had good business knowledge & it’s
adaption to accommodate certain aspects unique
to Chinese Market ex payment system,
demographics, CB
 Analysis of the eBay & EachNet Alliance

Factors Strategy Type of Reason

Alliance
Types of Reciprocal Acquisition Ebay’s technology and EachNet’s local
Synergy knowledge required integral coordination
Nature of Medium Acquisition Both the personnel and technological
resources resources will be integrated into the
operations
Extent of Low Non-equity EBay was just starting its operations in China
redundant alliance
resources
Degree of Low Non-equity Growing internet penetration and increasing
Market alliance user base was certainly increasing the scope
uncertainty of online auctions
Level of High Acquisition Many regional players have started operations
competition

Being in technology sector and partnering with a very small firm in a completely new market in
China complete control over operations through acquisitions makes sense

Level of competition was certainly going to increase with several international firms also eyeing
China’s market potential
 SWOT Analysis eBay in Chinese Market
Strength:
 Strong brand image globally & technological leader
 14% market share in global e-commerce
 Unlimited transaction capacity
 Successful international presence - 221.6M registered
users enabling it to manage large customer base
 Unique user feedback system
 No inventory costs
 Embedded cross-selling opportunities
 Reputation for non-counterfeit products
Opportunity:
 China economy growing in leaps
 Chinese internet users ballooned to greater than
200M
 Number of online shoppers at 55M and growing
rapidly
 Transaction value of C2C ecommerce in China 23.1B &
growing
 Chinese governmental regulations are reducing
 Opportunity for merger with TOM Online
Weakness:
 Perception of poor customer service
 Lack of buyer and seller interaction prior to sale
 Bidding process unfamiliar in Chinese culture
 Lack of “trust” as non-local company with short
history
 Centralized decision-making and lack of local
insight
 Web-site “too empty” for Chinese taste
Threat:
 Fierce competition from local rivals
 Competitive pricing strategies
 Need for more capital investment
 Company philosophy and management team
would need to be synergized with eBay Eachnet
 Dynamic marketplace
 Chinese government interference/regulations
 Analysis of the eBay - EachNet and TOM Online Alliance

Factors Strategy Type of Reason

Alliance
Types of Modular Non-equity EBay's technology and TOM online local
Synergy alliance knowledge & mobile services required integral
coordination
Nature of Medium Acquisition Both the personnel and technological resources
resources will be integrated into the operations
Extent of Medium Equity EBay-EachNet as well as TOM had considerable IT-
redundant alliance based operations which were bound to overlap
resources
Degree of High Equity Business incentives were basically diversification
Market alliance which didn’t have specific targets
uncertainty
Level of High Acquisition Many regional players have started operations
competition

TOM Online has a huge presence in China and as a established brand could properly support
higher penetration of EBay in Chinese market

Secondly both the companies needed each other’s resources to excel in their own
competencies which makes equity alliance sensible
Analyzing the Pros & Cons of the Joint venture

Negative
Positives
s
Higher Chinese Integration to
control will be Ebay’s best
effective in technological
homogenizing the practices may take
business culture time to implement

Ebay’s economic Business interests if

muscle will help to at all diverged for
thwart small local the companies can
competitors lead to disputes

Lesser chances of
EBay's competitive
advantage to be
replicated by TOM
Online

Access m-
commerce could
become an early
mover advantage
 Recommendation

 Make an alliance with Tom Online

 Provide the dynamic and strong visually oriented graphical interface that
appeals to the Chinese marketplace
 Institute an escrow system to satisfy the safety concerns of Chinese users and
build trust
 Provide significantly improved and hands-on customer service
 Take advantage of Tom Online to make the first move in to m-commerce
 Eliminate seller listing fees
 Leverage Tom Online political connections
THANK YOU