Dec. 20 (Bloomberg) -- EBay Inc. will close its unprofitable China Web auction unit and form a venture with billionaire Li Ka- shing's Tom Online Inc. to run the business in the world's second- biggest Internet market.

EBay, based in San Jose, California, will pay $40 million for a 49 percent stake in the venture, both companies said in a statement today. Li's Hutchison Whampoa Ltd. controls the parent of Beijing-based Tom Online, an Internet company that sells services such as ring tones for mobile phones.

The China closure comes after EBay shut a Web site in Taiwan in June and one in Japan in March 2002 as it battled to adapt to local conditions. The U.S. company says it will work with Tom Online to boost its business in China, where EBay's market share has declined by half since it entered the Asian nation five years ago, according to data from research companies.

``Their initial approach to go it alone hasn't worked for them,'' said Timothy Boyd, an analyst at New York-based Caris & Co., who has an ``above average'' rating on EBay's shares. ``It hasn't been pretty.''

Tom Online's stock rose as much as 5.8 percent in Hong Kong today before falling 2.9 percent to HK$1.67 at the 4 p.m. end of trading. The company's American depositary shares gained 2.7 percent to $17.74 in U.S. after-hours trading after rising 12 percent in Nasdaq Stock Market composite trading yesterday to $17.28.

Shares Rise

EBay's shares rose 0.2 percent to $32.20 in U.S. after-hours trading, after declining 0.9 percent to $32.13 yesterday on the Nasdaq. Shares of Tom Group Ltd., parent of Tom Online, were unchanged at HK$1.14 as the end of trading in Hong Kong.

The venture's results will be incorporated in EBay's earnings and not in Tom Online's, EBay Chief Executive Officer Meg Whitman said at a press conference in Shanghai.

EBay follows fellow U.S. company Google Inc. in losing market share in China to local operators. Beijing-based Baidu.com Inc. may raise its share of the Chinese search market to 56 percent next year, nearly triple Google's 19 percent, according to a Sept. 28 Credit Suisse Group report.

Yahoo! Inc. agreed in August last year to swap $1 billion in cash and its local unit for 40 percent of Alibaba.com Corp., China's biggest online retailer.

``Global companies have a sense of arrogance about their business models when they come to China that leaves them unprepared for doing business here,'' William Bao Bean, an analyst at Deutsche Securities Ltd. in Hong Kong, said. ``Motivating employees, building relationships with customers, and marketing in China are all very different than the U.S.''

Contribute Equally

Tom Online will supply management services to the venture, which will operate an Internet trading Web site under the Tom Eachnet brand in China, the statement said. Tom Online will provide a $20 million loan to the venture, it said.

The two companies may also each invest as much as $10 million in the venture after the initial funding has been used, EBay's Whitman said today.

Wang Lei Lei, Tom Online's chief executive officer, will serve as the chief executive of the venture with EBay, the companies said. Each venture partner has the right to nominate three directors to the new company's board, they said.

The post of chairman will be alternated annually between a Tom Online-nominated director and one selected by EBay. Tom Online will choose the first chairman, the Chinese company said in a statement to the Hong Kong Stock Exchange. The venture is expected to be formed by Jan. 2, 2007, the companies said.

``We think China will be a very big part of EBay's business in five to 10 years,'' Whitman said. ``That investment will pay off for us.''

Financial Guidance

EBay said it doesn't expect the venture to have a material impact on its financial guidance issued on Oct. 18. The company's EBay Eachnet unit in China had a loss of 68.2 million yuan ($8.7 million) in 2005, compared with 30.6 million yuan in 2004, Tom Group said.

EBay closed its Japan site after two years of operation. The Web site, which opened in February 2000 in partnership with NEC Corp., was the fourth-biggest online auction site in Japan, trailing market leader Yahoo! Japan Corp.

EBay bought a 33 percent stake in EachNet.com Network Information Service Co., then China's biggest online auction site, for $30 million in March 2002. The U.S. company bought the balance of EachNet shares in June 2003, paying $150 million.

At the time of the acquisition, EachNet had an 80 percent share of the Chinese online auction market, according to Shanghai- based research company IResearch Inc. EBay's market share had fallen to 36 percent at the end of 2005, the researcher said.

EBay in June formed a Web auction venture with PC Home Online in Taiwan. The U.S. company had entered the Taiwanese market in February 2002 when it agreed to buy NeoCom Technology Co., the island's biggest auction site, for at least $9.5 million in cash.

China was home to 123 million Internet users at the end of June, second only to the U.S., according to government data. The value of online auctions in China may rise to 46 billion yuan ($5.9 billion) in 2010 from 5.6 billion yuan last year, according to IResearch.

To contact the reporter on this story: John Liu in Shanghai at jliu42@bloomberg.net

Last Updated: December 20, 2006 03:59 EST