eBay’s strategic decision to enter the Chinese market warrants extreme caution. Indeed, although the online commerce firm built a very successful business model facilitating online transactions in the US and other developed markets, it failed to understand potential differences in how consumers purchased goods in the Chinese market. The failure to understand this difference not only compromised eBay’s ability to succeed in China, but also illustrated a fundamental lack of understanding in managing operations abroad.
The Chinese online consumer market has attracted numerous competitors in the online commerce space. According to the China Internet Network Information Network, China has a total of 87 million Internet users, roughly 32.8 million individuals have shopped online. That number was projected to triple by the year 2005. Two main companies have emerged as the main competitors in this space with substantially different business models: Eachnet (eBay) and Taobao.
eBay acquired Eachnet in 2003; the firm boosted $124 million in transactions in 2003, a figure that is projected to increase in $241 million in 2005. Leveraging the purchase of Eachnet, Ebay decided to use its existing business model in China. The main feature of Ebay’s business model (also used by Eachnet before the acquisition) is: a transaction fee placed on users to list products, and a percentage cut of all final sales (a commission of the final sale). This business model was originally developed in a number of developed markets including the United States and the United Kingdom. eBay, by deciding to use a business model developed in developed markets for developed consumers, posited that consumers in a developing market (i.e., China) would prefer a similar commerce platform for transactions. This was in sharp contrast to the business model of locally established Taobao.
Taobao is the online commerce arm of local internet giant Alibaba.com. Alibaba was established as the first business-to-business e-commerce site in 1999. As part of the site’s expansion, it decided to enter the consumer to consumer online space in 2003 through the online company Taobao. Taobao has a different business model than Eachnet: Taobao does not charge a fee to post transactions, nor does it charge a commission fee for completed sales. Rather, Taobao has innovated at the margins in the online marketplace: The firm hopes to increase volume of sales on the site that will eventually lead to a fee-based model. Indeed, Alibaba seemingly conceptualizes Taobao as a mechanism to grow the still nascent online market in China, hoping to charge fees once a critical mass has been achieved.
There were myriad assumptions in eBay’s strategic calculus that may have gone astray in China. First, eBay posited that a “middle man” model between consumers would be welcome in China. Whether this assumption is true or not is still up for debate; however, there is evidence (as referred to in the article) that Chinese may prefer a more personal means of transaction. Indeed, although eBay posited that consumers may be attracted to the convenience of online payment tools such as PayPal, in fact, consumers may prefer meeting in person to exchange cash and goods. Second, eBay also bet that a model based on fees and commissions would grow the market and condition consumers to pay for the service. Although the jury may be still out on this point, eBay’s calculation was based more on its experience in developed consumer markets than in emerging consumer markets. That is, the online consumer to consumer market in developed countries could be an extension of an existing robust consumer market where demand for the service already exists. This assumption, however, may not be the correct one in an emerging country with a growing middle class and consumer base. Indeed, consumers in a country such as China are still developing preferences and mediums to conduct transactions; by essentially “importing” the fee-based structure the company may fail to develop a large enough market to ultimately be successful.
Overall, eBay’s failure was more strategic in nature than operational. eBay made a bet that consumers and their behavior was (somewhat) alike to their existing business model used in developed countries. This may not have been the right analogical conclusion: China, as an emerging country with a burgeoning middle class without a defined consumption history, may not have been ready for the model. eBay should have done extensive market research to understand in what ways the business model was appropriate for the market, and in what potential ways the business model was not appropriate for the market.