A Behemoth Kept At Bay

By Frederik Balfour

When Gary Wang wanted to buy a microphone for his iPod, he didn't bother with eBay EachNet, the Chinese arm of eBay Inc. (EBAY ) Instead, he went to rival site TaoBao, quickly found what he wanted, and paid for the gadget with TaoBao's electronic payment system. He got the machine by courier the same day. "TaoBao is naturally the first place I go" when shopping online, says the 32-year-old Wang, an eBay user during his studies in the U.S. and now CEO of Toodou, a podcasting company in Shanghai.

That kind of enthusiasm has made TaoBao China's No. 1 auction site, leaving eBay in the dust. TaoBao last year was home to 72% of China's $1.7 billion in online auctions, measured by the value of goods sold, compared with eBay's 27%, according to the China Internet Development Research Center. That spells trouble for eBay's international ambitions, especially in the world's No. 2 Internet market, with 110 million Netizens and Web auction transactions that grew 235% last year.

TaoBao stole the lead by offering its services for free. And TaoBao's founder, Jack Ma, has been better at creating tools users like, including an electronic payment system and an instant messaging service for traders. "Jack Ma believes in building community first" and will worry about profits later, says Morgan Stanley (MS ) analyst Richard Ji.

But eBay is determined not to repeat its experience in Japan, where it beat a humbling retreat in 2002. So in January it scrapped transaction fees and now charges sellers as little as 1 cents per item for listings. Then in February, eBay added a feature allowing traders to talk via Internet phone links. Important steps, and vital if eBay wants to stay in the game in China.

Balfour is Asia correspondent for BusinessWeek based in Hong Kong

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