Why does E-Bay have problems in its Asian Markets?

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 analysts 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.

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 a sparse 20% in 2006 as it lost ground to competitors Alibaba’s Taobao and Tencent’s Paipai. Former Eachnet executives left eBay in droves after the acquisition.

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 have shown their willingness to make online purchases and pay for Internet services. According to the China Internet Development Research Center 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, 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 a priority. 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. In contrast, using Paypal made the whole process “nerve-wracking”, according to one online consumer. 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 many respondents to a survey. EBay initially did not allow buyers and sellers to communicate directly, while Taobao allows for direct instant messaging between the two parties. One 18-year-old male buyer who switched from using eBay to Taobao noted that he likes to be able to haggle directly with the seller when making purchases online. He further stated that building relationships with sellers makes the process go more smoothly.

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.

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.
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. 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. According to one Chinese blogger, their lack of a customer service telephone number also irked Chinese consumers.

References:
Mylene Mangalindan (2006, October 12). China May Be eBay’s Latest Challenge As Local Rivals Eat Into Market Share. Wall Street Journal (Eastern Edition), p. C.1. Retrieved July 22, 2007, from ABI/INFORM Global database. (Document ID: 1144136091).

Moon Ihlwan and Rob Hof (2006, July). Out-eBaying eBay In Korea. Business Week,(3993), 74. Retrieved July 22, 2007, from ABI/INFORM Global database. (Document ID: 1076220531).

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