When Meg Whitman signed the agreement with Bo Shao in June, 2003, to acquire Shanghai-based EachNet for US$150 million, after having invested US$30 million into the Chinese online-auction company, she knew EachNet overwhelmingly dominated the market.

She also realized the firm virtually had a monopoly, and she believed no single competitor was ready to challenge EachNet for dominance in China's fast-developing online-auction market.

She could not have foreseen, however, that local competitor Taobao.com, founded on May 10, 2003, was about to pose a serious challenge to eBay, the US-based Internet behemoth headed by Whitman.

One of eBay's strengths, though, was its localization pace which it had accelerated in the Chinese market. And the long-term benefit for the whole industry was awareness of China's Internet users had been elevated, due to tremendous publicity of the concept of online auction.

Chinese eBay

When eBay bought Shanghai-based EachNet, which was renamed eBay EachNet, the Shanghai Internet firm was the only significant player in China's online-auction market.

The global online-auction giant, with its huge success in the United States and many parts of the world, was determined to build another eBay in China. It anticipated huge potential.

"At that time, we had been thinking the best user-acquisition strategy was the Internet, and we spent heavily into leading websites in China," says James Zheng, eBay EachNet's chief operating officer.

In the first six years of operation, eBay never spent one cent on other advertisement means except the Internet.

In 2002 and 2003, EachNet, with the financial and technological backing of eBay, formed alliances with the top three Chinese Internet portals Sina, Sohu and NetEase and leading vertical websites, including China's biggest online game operator, Shanda.

The number of EachNet's registered users rose about five times in the two years, to reach 4.3 million by the end of 2003.

Increasing challenges

When eBay and EachNet were busy with their acquisition deal and future expansion, they had no idea they were about to face some stiff competition.

Alibaba.com, which claims to be the world's biggest business-to-business e-commerce website, launched an online-auction website in May, 2003, when the country was hit by the deadly severe acute respiratory syndrome (SARS) epidemic.

"Entering the online-auction business was an inevitable choice for us, if we wanted to build a universal online marketplace, from business-to-business, business-to-consumer, and customer," says Jack Ma, chairman and CEO of Alibaba and chairman of Taobao.

Taobao, a minor competitor, chose to establish its profile as a challenger to eBay EachNet's leadership with a highly localized approach.

Ma's first move was to announce Taobao would offer free services to traders on its website, which had been proven successful in many industries, as many Chinese were still very price-sensitive.

Alibaba.com invested 100 million yuan (US$12 million) in the two months after Taobao's establishment to support the auction website.

Ma then boosted the investment by 350 million yuan (US$42.2 million) and promised Taobao would offer free lunch to traders for at least three years.

The free lunch seemed to work for online traders, and Ma claimed 70 per cent of eBay EachNet's users were also Taobao's users, because many sellers on eBay EachNet tried to evade paying listing and transaction fees.

Officials of eBay EachNet denied the claims.

However, Taobao faced one major hurdle: Almost every leading website in China signed exclusive advertisement programmes with eBay.

Ma had to partner with some website alliances composed of mainly small websites. He said without Taobao's advertising spending, many of those firms might have gone bankrupt.

Later, Taobao learnt some cheaper, more effective ways to publicize itself: Host online auctions of items of famous stars acting in some hot movies.

That led to extensive media coverage, and caught the attention of many curious people.

Ma also placed ads on China's national TV broadcaster, China Central Television. Those ads reached hundreds of millions of people.

In about 18 months, Taobao saw the number of its registered users grow from zero to more than 4 million.

It also reported, on April 26, the transaction volume of its website exceeded 1 billion yuan (US$120 million), and beat eBay EachNet's 800 million yuan (US$100 million) in the first quarter.

Cultural industry

With its desire to seek faster growth and the threat of competition, eBay EachNet has accelerated its localization pace in China, to expand the gap between competitors.

Whitman directed her China operation team to "grow big, but stay small," which was interpreted by Zheng as increasing the size of the operation quickly, but remaining flexible, nimble and localized.

"The Internet is just a carrier, and it can carry e-commerce, online games, search engine services, but, in essence, it is part of a culture," Zheng says.

EBay EachNet, seeing the huge potential of the Chinese market, decided to quickly localize its business.

EBay EachNet adopted a different move from eBay's operations in other parts of the world. In China, it advertises on TV, posters and on buses.

"In China, if you do not advertise on TV, especially CCTV, people may think this company is not a big and successful business," Zheng says.

Another benefit of advertising on TV is it expands the user population from 94 million netizens to more than 1 billion TV viewers. That can help draw more people to the online auctions.

Zheng says a significant portion of eBay's US$100-million investment, which the US giant pledged in February, will pay for TV and outdoor ads.

Another unusual move by eBay in China was to cut listing fees, which it has not done in other countries before.

On May 1, eBay EachNet cut the listing fees from the previous range of 0.80-8 yuan (1-10 US cents) to 0.05-6 yuan (0.6-7.5 US cents), which is minimal even for Chinese users.

Zheng says charging fees will stop non-serious traders, but a sharp reduction of listing fees will encourage more sellers to traders on the website of eBay EachNet.

"Our goal is to reach a critical mass as quickly as possible, and we are very close to that," Zheng says.

EBay EachNet has also established two funds, for both buyers and sellers, through which sellers can receive refunds and buyers can receive up to 1,000 yuan (US$120) if they are cheated in deals.

With the aggressive and China-specific moves, the firm had 11.6 million registered users by the end of the first quarter, up from 9.8 million by the end of the previous quarter.

(China Daily 05/09/2005 page8)