eBays 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)
eBays 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
Assessing eBays choice of market entry strategy for China
Assess the potential benefits and risks of eBays JV with TOM Online
Is it right strategy for eBay to succeed in China in the second attempt
Agenda:
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
Lack of product differentiation
Lack of appropriate promotional strategy
Strategic
Poor financial management
Vulnerable financial structure
Poor customer support and after sales services
Operational
Internet security concerns
Concerns about being abused by hackers
Issues of reliability and trust
Web server interruption
Poor webpage design
Technical
Lower customer confidence
Disparity between expectations and performance
Additional shipping and handling fees
Hassles of wrong delivery and wait for re-delivery
Behavioral
Growth of eBay
September
1995
Founded by
Pierre
Omidyar in
San Jose
1996
Recruited
Jeff Skoll
June 1997
Benchmark
Capital
invested
$6.7m for
22% stake
1998 Meg
Whitman
appointed
as CEO
24
th

September
1998
Listed on
NASDAQ;
IPO helped
raise $66m
2001
International
markets
accounted for
18%
2002 -
Retreated
from
Japan due
to Yahoo!
2006
Expanded
into 35 global
markets
221.6 million registered users worldwide
$2.2b domestically and $2.1b internationally
14% market share in e-commerce market globally
0
500000000
1000000000
1500000000
2000000000
2500000000
3000000000
3500000000
4000000000
4500000000
Revenue
0
500000000
1000000000
1500000000
2000000000
2500000000
Items
0
50000000
100000000
150000000
200000000
250000000
Number of Registered Users
0
500000000
1000000000
1500000000
2000000000
2500000000
2001 2002 2003 2004 2005 2006
Net Revenue
US Marketplace International Marketplace
Customer Services and Support
Personal Shopper
E-mail alerts to potential buyers
Turbo Lister, eBay Blackthrone
Automation of selling process
Picture Services
Users could post pictures to the listings
Shipping Calculator
Calculation of shipping costs
Shipping Labels
Print certain postage and UPS labels
Shipping Tracking
Track shipped packages
PayPal
Facilitation of secured exchange of funds
online
Feedback Forms
Submitted by both parties
Verified Rights Owner Program
Protection of buyers from purchasing
counterfeit products
SafeHabor Program
Ensure harmonious environment for eBay
users
Efficient, effective and personalised customer support
eBays expansion
strategies
Internal efforts
Acquisitions
Alliances
Joint Ventures
Insertion
Fee ($0.30
to $3.30)
Optional
Features
Fee
Final Value
Fee (1.25%
to 5%)
How eBay
makes
money?
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
Amount spent
on e-commerce
has increased
from $106mn to
$470mn from
2002 to 2004
Internet
penetration rate
doubled to 80
million or 6.2%
in 2003
Chinese C2C Market
Business
Opportunity
Challenges
First e-commerce company to start business in
China in 1999 on the similar marketplace model of
eBay
EachNet modified its business model with some
Chinese characteristics
It allowed client consumer face to face interaction
along with exchange of goods and cash
By Feb, 2000 just in six months it had been doing
20000 auctions every day
By 2002 it was the most significant player in the
market
Profile of the e-commerce
market in China
Profile of EachNet
Numero uno
position of
EachNet in Chinese
market
Diversification and capturing emerging
markets led eBay to come to China
Requirement of market depth and
cultural connect with the country for
EBay
Led to
acquisition of
EachNet
Heavily invested in
online promotions
In 2006 $25mn was
used to advertise
Alliances with three
Chinese portals namely
Sina, Sohu and Netease
was completed
By 2003 the venture was
controlling 85% of market
share
companys valuation from
$90mn to $225mn from
2002 to 2003 alone
4.3mn registered users by
the end of 2003
$30mn invested in
March,2002 to
acquire 33% interest
In June,2003 the
remaining 67% was
acquired for $150mn
Amount
Invested
Impact on
market
share
Promotions
New
alliances
Acquisition of EachNet by eBay
Initial developments after the acquisition
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 TaoBaos 60%
By 2006 TaoBaos become market leader C2Cand B2C in China
Alibaba strong Presence in China helped the cause of TaoBaos becoming leader in
china
Competition in Chinese Online Auction Market
Charging of listing and selling fees after eBays full acquisition of EachNet whereas TaoBaos
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 its 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
eBay EachNet: What went wrong
About TOM Online
Wireless services
SMS, MMS, WAP, news subscription, games,
ring tones, etc.
Provided through mobile telecommunication
operators, alliances with mobile handset
manufacturers & traditional media
Internet Services
Content channels, search & classified
information, online advertising, e-commerce,
etc.
Provided through tom.com & alliances with
other internet portals
TOM Online
Founded in 2000, Became one of the largest wireless service providers & 5
th
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 & Skype
Alliance (November 2004)
Co-develop a customized, simplified Chinese
version of Skype
Attracted more than 3.1 million users making
China one of Skypes top 3 markets

Joint Venture (September 2005)
For expansion into the internet communication
sector
Develop mobile internet platform with TOMs
expertise in mobile technology & Skypes
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 3
rd
quarted plunged 59% (US$ 5.28 million) & revenues fell by 15.2% (US$ 38.95 million)
Joint Venture: TOM Eachnet
eBay
(49%)
TOM Online
(51%)
Contribution
$40 million cash
$20 million
local knowledge,
technology, brand
value
Benefits
Diversification into m-commerce
Local knowledge
Political connections
Diversification into online auction
Reduce dependence on mobile value
added services for revenues







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
eBays 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 eBays 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 eBays choice of market entry strategy for China.



2) Assess the potential benefits and risks of eBays JV with Tom Online.
Is it right strategy to succeed in China in the second attempt for
eBay? Critically comment.
Market Attractiveness:
eBay's market entry to China was inline with its
strategy to build a truly global marketplace
250 million strong emerging Chinese middle
class offer great potential
E-commerce revenue in China was expected to
grow nearly 12 fold to more than US$16 billion
over the next three to four years.
China's Internet users had topped 33.7 million by
the end of last year, up 49.8 per cent over the
same period last year
Important driver of ebays International growth
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


Distance Factors (Cultural, Admin, Economic):

Lesser knowledge of local Chinese culture,
Consumer behavior & preferences, Distribution
system
Lesser knowledge of corporate practices
Slow internet speed, High internet access cost
Imbalanced economic & technological
development in different regions
Absence of reliable credit systems for online
payment


Chinese Market Study
Conclusion: Reason for eBay to expand in to Chinese Market Market Attractiveness
Modes of Entry
Entry Modes Positives Negatives
Exporting Not possible, since its an e-commerce venture.
Licensing Not possible, as its an e-commerce venture.
Strategic
Alliances
Facilitating market entry
Risk & reward sharing
Technology & knowledge sharing
Conforming to local government regulations
Access to political connection & local distribution
channels
Conflict over asymmetric new
investments & information sharing
Mistrust over proprietary knowledge
Performance ambiguity i.e. how to
share the pie
Cultural Clashes
Acquisitions Executed in a two stage process- minority stake
followed by acquisition would be a good strategy
while testing waters in a new market
Founders of Eachnet were Meg Whitman, alums
at Harvard - Good personal relationships
EachNet operations as Chinese equivalent of eBay
EachNet had good business knowledge & its
adaption to accommodate certain aspects unique
to Chinese Market ex payment system,
demographics, CB

Complex negotiation process
High Costs
Cultural Clashes
Problem of integration & merging with
domestic operations

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

SWOT Analysis eBay in Chinese Market
Analysis of the eBay - EachNet and TOM Online Alliance
Factors Strategy Type of
Alliance
Reason
Types of
Synergy
Modular Non-equity
alliance
EBay's technology and TOM online local
knowledge & mobile services required integral
coordination
Nature of
resources
Medium Acquisition Both the personnel and technological resources
will be integrated into the operations
Extent of
redundant
resources
Medium Equity
alliance
EBay-EachNet as well as TOM had considerable IT-
based operations which were bound to overlap
Degree of
Market
uncertainty
High Equity
alliance
Business incentives were basically diversification
which didnt have specific targets
Level of
competition
High Acquisition Many regional players have started operations
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 others resources to excel in their own
competencies which makes equity alliance sensible
Positives
Higher Chinese
control will be
effective in
homogenizing the
business culture
Ebays economic
muscle will help to
thwart small local
competitors
Lesser chances of
EBay's competitive
advantage to be
replicated by TOM
Online
Access m-
commerce could
become an early
mover advantage
Negatives
Integration to
Ebays best
technological
practices may take
time to implement
Business interests if
at all diverged for
the companies can
lead to disputes
Analyzing the Pros & Cons of the Joint venture
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