This weekend, eBay’s CEO John Donahoe shared the stage with Alibaba’s maverick founder Jack Ma at his annual Alifest conference in Hangzhou, China. Gady Epstein, Forbes Beijing bureau chief, has an intriguing blog about how 
Mr. Donahoe wished a happy birthday to Jack Ma who not only defeated eBay in China, but also “encroaches on eBay’s home turf.” Since Epstein referenced my recounting of the eBay-Alibaba battle, I thought it might serve readers well to provide an excerpt here from my book The Chinese Dream:
In 2004, eBay had just entered China and was planning to dominate the China market. Alibaba was a local Chinese company that helped small- and medium-sized enterprises conducting business online. Most people in the West had barely heard about it.
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 Web site 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.
In 2004, I visited Alibaba at its headquarters in Hangzhou. It is located on a campus of three ten-story buildings in the northeastern part of Hangzhou, about a ten-minute taxi drive from West Lake. In the lobby, a flat panel TV was streaming video clips of Jack Ma speaking at various public events where his admirers, most of them in their twenties, were cheering him like a rock star. While visiting Alibaba’s headquarters in Hangzhou, I felt the same “insanely great” energy of entrepreneurship as I felt in Silicon Valley. When I asked a senior manager at Alibaba whether the company was worried that it would be bought by eBay, I was blown away by the answer: “We will buy eBay!”
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.
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. When I was taking a taxi in Shanghai, I noticed the ads of eBay EachNet on the back of the driver’s seat; when I checked into my hotel, I heard the ads for Taobao popping up on TV almost every half hour. Since its name means “digging for treasure” in Chinese, it attracted a lot of attention by a smart play on words. While most people in the West had never heard of Taobao, its name was heard loud and strong in China.
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. Neither Ma nor any members from the management team gave a definite timeline as to how long this “free period” was going to last. “Free is not a business model,” the doubters said. Some thought Ma was crazy and nicknamed him “Crazy Ma.”
No doubt Crazy Ma was changing the game. 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. According to a Morgan Stanley report, 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.
Taobao’s listings appeared to be more customer-centric while eBay EachNet’s listings more product-centric. For example, Taobao’s listings were organized into several categories, such as “Men,” “Women,” and so on, while eBay EachNet stuck to its global platform, grouping users into “Buyers” and “Sellers.” At that time, China had about three hundred million cell phone users versus ninety million Internet users. Taobao offered instant messaging and voice mail to mobile phones for buyers and sellers because Chinese users were cell-phone savvy rather than computer savvy.
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. According to iResearch, a Beijing-based research firm, the user satisfaction level was 77 percent for Taobao versus 62 percent for eBay EachNet. The experience of competing with eBay gave Ma tremendous confidence. He was determined to win: “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose—but if we fight in the river, we win.”
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. “The competition is over,” Ma exclaimed. “It’s time to claim the battlefield.”
On December 20, 2006, Meg Whitman, eBay’s then CEO, flew to Shanghai to take part in a press conference to announce a new joint venture with Beijing-based Internet portal Tom Online, which provides wireless value-added multimedia services. It was, in reality, a formal announcement of eBay’s withdrawal from the online auction market in China. 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.
Jack Ma represents a new generation of savvy Chinese competitors whom should not be underestimated. They study their markets and bring to bear their local knowledge. They learn from their competition and from their own mistakes as they move up the competitive landscape.
The case of Alibaba provides an invaluable lesson for multinationals that want to succeed in China market:
First, eBay failed to recognize that the Chinese market and the business environment are very different from that of the West. EBay sent a German manager to lead the China operation and brought in a chief technology officer from the United States. Neither one spoke Chinese or understood the local market. It was eBay’s biggest mistake. Second, because the top management team didn’t understand the local market, they spent a lot of money doing the wrong things, such as advertising on the Internet in a country where small businesses didn’t use the Internet. The fact that eBay had a strong brand in the United States didn’t mean it would be a strong brand in China. Third, rather than adapt products and services to local customers, eBay stuck to its “global platform,” which again did not fit local customers’ tastes and preferences.
“First, eBay failed to recognize that the Chinese market and the business environment are very different from that of the West. EBay sent a German manager to lead the China operation and brought in a chief technology officer from the United States. Neither one spoke Chinese or understood the local market. It was eBay’s biggest mistake.”
This so true! The tally of clients that have either engaged us too late and not taken our professional advice, or brought in the “We know best and locals can’t do it” CTO’s and BA’s from the West….is well… it is a big tally.
One former client of ours is a massive international hotel chain that was buying into a budget franchise chain that was already operating here that needed some serious IT transformation.
The parent company brought in their “expert” from home office. He had never done business here (or business in general – he was a tech hack), didn’t speak Chinese, didn’t understand the labour market and cost structures in China and generally was not much use to anyone outside of his cotton balled role in the states.
Steve (his real name) had utter contempt for how the local practitioners (both Chinese and foreign origin) wanted to do things and went on about operating with his “I know best” attitude. He spurned our advice as self serving, despite the fact that as a tech company ourselves that has managed the problems and exploited the opportunities of China already and are thus in a unique position to advise on things beyond the pure tech.
Needless to say, millions of dollars wasted later on inept infrastructure and no competitive market place edge realised through the technology – they just folded and shelved all plans to modernise the operations of the money leaking local franchise.
It is really sad when you can see exactly how a company is going to fail in China from a million miles out. Like a sailor in a crows nest seeking out ice bergs and the captain below is not listening to your pleas below.
People study pure plays in the west. Why would you use a western pure play and not a Chinese one? Why not heed advice of people and organisations that have already achieved in this local market place?
Can vouch for the energy of entrepreneurship at Alibaba’s campus when I visited in May 2004. Infectious enthusiasm ! It was as if blue sky thinking was seeping out of the cracks in the walls ! Jack Ma and Porter Erisman gave me heaps of time. very open, down-to-earth – very much convinced that they were streets ahead of any foreigners who thought they could march into China and clean-up !
This is fascinating because I have just been spending hours this week doing research on Taobao. I had been afraid of it before, not being a fluent Chinese reader, but necessity prompted me to try as I live in China and international shipping from vendors is frequently cost prohibitive. It is truly easy to use, even for a semi-illiterate ‘laowai’. We foreigners refer to it as the ‘Chinese Ebay’.
Hi Helen, I got this via an email. Wondering whether you mind if I quote some of your words. I am a business&technology journalist in China and have been living and working in Silicon Valley for 2 years between October/2008-August/2010. Hope to getting your response via my email.
Thanks,
-Lynn
Excellent case study
The first and main lesson in my global marketing MBA class (Prof. Zhang) was to get local operating expertise. Apparently ebay didn’t take that class and suffered the demise of many Americans and Europeans when attempting to go abroad. We also learned how KFC and other chains adapt to local China markets, apparently Internet folks think they are different, but China and India are leapfrogging past the desktop top paradigm to go straight to mobile to access the Internet. Some folks are getting it.
Great excerpt, Helen.
Almost exactly the same story as Google vs Baidu. Interesting that both are, essentially, media companies, where cultural sensitivity is paramount. There is no guarantee, however, that Baidu and Alibaba won’t make the same mistakes when they globalise.
Wow Helen, I depend too much on the NY Times and Canada’s Globe and Mail. I really should read your posts.
About the article, it’s just not China it’s all native markets. Many firms bring in foreign executives who don’t understand the market and/or can’t speak the language and try to use their own recipe for success in Europe and North America on India and China. Still, some firms have to be given credit for their early entry into China. Motorola and General Motors come to mind. That’s because they stay in China for the long haul, make friends with the CCP cronies and remember that gaunxi in China takes years. Even though India doesn’t anything exactly like guanxi it’s still the same for example being a Sri Lankan Sinhalese Canadian, we tend to follow Tamil Nadu politics greatly so I think foreign firms have greatly benefited from building links with Jayalalatha Jayaram and Karunanidhi when investing and even opening up the market for sale, it takes time to build the market, make friends in both high and low places, it’s ok to have foreign managers in the local operations but make sure they learn the language and eventually groom local executives or better yet use local executives. These companies even after collapsing or in the case of GM going bankrupt in the US market continues to bring in good profits from their China operations.
The other thing is to use local first or second generation Chinese and Indian Americans or in my case Canadians to go back into their parent’s local markets.
Finally, transfer of senior up to and including CEO from the old HQ to Asia where the growth is should happen, the best example that ofHSBC.
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