Final Exam

Option 1: eBay in China

Anurag Chaudhary
Prof. Ashton Hawk
BUSMHR 7415, Corporate Diversification
May 04, 2015

eBay has decided to diversify in the Chinese online auction market. With a Porter 5-force
analysis (Appendix 1), the Chinese online auction market looks attractive. The supply side
economies of scale and the demand side economies of scale increase the entry barriers for any
new market entrant. Network effects play a very crucial role in this for the Chinese online auction
industry. The moderately high capital requirements, incumbency advantages independent of size
and restrictive government policies also increase the entry barriers. The low customer switching
costs and almost equal access to distribution channels decrease the barriers to entry. This makes
the overall entry barriers high making the industry very attractive for the incumbent companies
with 4 out of 5 stars on the attractiveness test. Main suppliers for the industry are online sellers.
Highly fragmented suppliers, low switching costs to change suppliers and absence of the threat
of forward integration from suppliers decrease the supplier power whereas the absence of the
dependence of sellers on the incumbent companies increases the supplier power. Overall, the
supplier power is low and the industry is very attractive getting 4 out of 5 stars on attractiveness
test.
Main buyers in the Chinese online auction industry are the online Chinese buyers. The
fragmented nature of buyers, differentiation amongst services provided by various players in the
industry, absence of threat of backwards integration by the buyer and the less price-sensitiveness
of the buyers decrease the buyer power in this industry. The low switching costs faced by buyers
is the sole factor that tends to increase the buyer power. Thus, overall the buyer power tends to
be low in this industry which makes the industry highly attractive with 5 out of 5 stars on
attractiveness test. Substitute in the Chinese online auction industry is the offline trade of
products. Higher willingness to pay and better performance of the online auction model
decreases the threat of substitutes whereas the low switching costs increase the threat of
substitutes. On the whole, the threat of substitutes is low making the industry substantially
attractive with 3 out of 5 stars on the attractiveness test. Less price competition, absence of
numerous competitors of equal size and power, fast industry growth and low exit barriers tend
to decrease the intensity of rivalry between the incumbents. A strong competition along

dimensions other than price and ego of competitors increase the intensity of rivalry between
competitors. So with overall low intensity of rivalry among competitors, the industry looks
substantially attractive with 3 out of 5 stars on attractiveness test. The conclusion from Porters
Five Forces analysis is that the Chinese online auction industry is very attractive and it passes the
attractiveness test. I recommend that eBay should enter the Chinese online auction market.
Next, I conducted a Resource View Based analysis to assess the expansion decision using
Barneys framework (Appendix 2). eBays core market is the US e-commerce, e-payment and
internet communication services market and the target market is Chinese online auction market.
eBays brand image, ability to survive technology market turbulence like the Dotcom bubble, high
user traffic, first mover advantage and its company culture are inimitable resources and
capabilities in the core market with each having varied barriers to inimitability. These give eBay
a competitive edge in the core market. Global reach, diversified portfolio of products sold on the
website and value added tools (Personal Shopper, Turbo Lister, eBay Blackthrone, ProStones etc.)
are rare resources and capabilities of eBay in the core market. In the target market, eBays brand
image, safeguards against counterfeiting, high user traffic and first mover advantage transfer into
inimitable resources and capabilities. Each of them has its own barriers to imitation out of better
expectation of future resource, path dependence, causal ambiguity and social complexity. These
give eBay a competitive edge in the target market. PayPal, global reach, fulfillment of delivery of
product in time, diversified portfolio of products sold on the website, value added tools, access
to mobile platforms and trust fostering programs (Verified Rights Owner Program and SafeHabor
Program) translate into rare resources and capabilities for the target masrket. There are some
concerns over the transferability of eBays resources to target market. They are discussed in
Appendix 2. There are new inimitable resources that eBay developed especially for the Chinese
market. They are relationship with EachNet and the joint venture relationship with TOM Online
over Skype. eBay also needs to develop some new resources and capabilities like escrow
accounts, resources to promote cash payment system, easier access between buyers and sellers
etc. if it wants to succeed in the Chinese online auction market. Overall, eBay does have resources

and capabilities that give eBay a competitive edge in the target market and increase its
probability of success there but it also needs to develop some new resources.
Now, we move onto the analysis of expansion decision based on Transaction Cost
Economics (TCE) framework of Klein & Williamson where we compare a hierarchy mode of
expansion to a contract mode of expansion (Appendix 3). Factors like threat of opportunism,
uncertainty, frequency of interactions, lemons problem information issues, IP concerns, market
power vulnerability, need for control, need for coordination, incentive problems, threat of
bureaucracy and agency costs favor the hierarchy model. Factors like location specificity, physical
asset specificity, human capital specificity, tacit knowledge problem and information processing
favor the market model. Each factor has been assigned a weight of importance which gives us an
overall weighted result of 63 in the favor of hierarchy again a weighted result of 21 in the favor
of market. There are hold up risks involved. To mitigate the hold ups of the market contracts,
hierarchy mode is even more preferable. Based on TCE, I would recommend eBay to enter the
Chinese online auction industry through one of the modes of hierarchy.
The analysis of various modes of expansion for eBay into the Chinese online auction
market is discussed in Appendix 4. I used the previous modes of expansion of eBay of acquisition
and joint venture and added the pros and cons of alternatives of non-equity alliance and equity
alliance to it. I left out the contract mode as it has already come up as not a desirable mode of
expansion in the TCE analysis. The JV model has the most number of benefits to it closely followed
by the equity alliance model. Both, the non-equity alliance and the acquisition have the highest
number of costs and risks associated with them. Based on these benefits and risks, I estimated
probability of success in Chinese online auction marker for each one of them. JV has highest
probability of success at 83% and is closely flowed by equity alliance with a probability of success
of 75%. The contract mode has the least probability of success at 25%. Acquisition has a
probability of success of 64% but the costs involved with it (acquisition premium and previous
not so good experience with EachNet) are very steep. eBay needs to build more capabilities to
have a much better acquisition experience in Chinese market. Based on this analysis, I would

recommend eBay to enter the Chinese online auction market in joint venture with its previous
partner, TOM Online, which eBay already intends to do in the form on TOM EachNet. Adding to
the above analysis, I analyzed the modes of expansion of acquisitions, non-equity alliances and
equity alliances through the framework of Dyer, Kale & Singh. With reciprocal synergies, high
relative value of soft resources, medium extent of redundant resources, high degree of market
uncertainty and medium level of competition, equity alliance (or JV) came out as a clear winner.
This gives strength to my recommendation of expansion into Chinese online auction market
through a JV.
For the last section, we looked at the corporate governance of the proposed JV, TOM
EachNet (Appendix 6). I analyzed eBays internal governance with EachNet of its diversification
into China and also governance of TOM EachNet using the Jensen & Meckling framework and
suggested adjustments to the current system. Better coordination between eBay and EachNet
employees, better respect between, change in incentive structure and decentralization of
decision rights are some changes that eBay needs to make to have a successful governance
structure in Chinese online auction industry. Charts showing costs of eBays current governance
structure in China, costs of recommended governance structure for eBay and the shift required
in the costs due to poor information are shown in Appendix 7.
In summary, my recommendation to the management is that eBay should enter the
Chinese online auction industry because it an attractive industry and eBay has resources to have
a competitive edge in that industry. It should expand via the mode of hierarch rather than the
mode of market. Even within hierarchy, eBay should adopt a mode of joint venture with TOM
Online. To make sure that the results of expansion are realized, eBay needs to put in place the
right kind of governance structure in China.