How eBay Found a Secret Way into China

There's always been one sure way to make executives at the online marketplace eBay (EBAY) cringe: ask them about China. In 2003, eBay paid $150 million to buy EachNet, at the time China's top e-commerce site. Chief Executive Officer Meg Whitman invested $100 million more in the operation, but a combination of management mistakes—not giving enough power to local executives, for example—and tough competition from local rival Taobao crippled the business. By 2006, eBay gave up and folded eBay EachNet into a joint venture with Tom Online. Taobao, which unlike eBay doesn't charge commissions, has never lost the lead. "It's very hard to compete with free," says Jay Lee, eBay's senior vice-president and managing director for Asia Pacific.

While eBay doesn't aim to challenge Taobao anymore, it does have a Plan B for China: linking Chinese entrepreneurs and exporters to eBay consumers elsewhere. The strategy is centered on sellers such as Tang Fengyan, 35, who goes by the English name Maggie. Four years ago, Tang decided to start her own dress business. She has found eBay an ideal way to sell her $50 cocktail and rockabilly swing dresses and did $700,000 in sales last year. Although eBay has minimal presence inside China, Tang doesn't mind, since she's chasing global customers. To reach them, eBay makes the most sense. "It's the most famous," she says.

Thanks to exporters like Tang, eBay has a China business again. Transactions from China and Hong Kong on eBay and its PayPal unit amounted to $4 billion in 2010, making China the company's fifth-largest market behind the U.S., Germany, Britain, and South Korea. "We learned a lot," Lee says. "China is very important, but we needed a different way to approach the market."

To get there, eBay looked for segments of the Chinese e-commerce market not dominated by Taobao's boss, Jack Ma, and his Alibaba Group. Taobao is dominant in China but has little consumer reach outside the country., a site connecting small and midsize importers and exporters worldwide, doesn't cater much to consumers. EBay saw an opening and now has 150 service agents catering to Chinese sellers. Last year it launched a service, together with China Post and the U.S. Postal Service, to provide a way for foreign buyers to track their China purchases and allow sellers on the mainland to offer free shipping. The cross-border model "is an opportunity that plays to our strength, which is the export business," says Lee. "We connect buyers and sellers—that's what we do."

EBay is one of many foreign Net companies facing a China challenge. Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO), (AMZN), Myspace (NWS), and AOL (AOL) all stumbled there, in part because Chinese officials are determined to censor the Internet and are suspicious of the role that foreigners might play in the politically sensitive medium. (Censors have banned YouTube and Twitter, for instance, creating opportunities for local copycats.) Slow-moving American companies also haven't adapted well to the needs of the quickly changing Chinese market, says Mark Natkin, managing director of Marbridge Consulting in Beijing. Foreign companies "are at a distinct disadvantage," he says. "There are so many case studies on which to draw, and yet there's a certain almost-hubris" from the foreigners.

China is too big for them to ignore. The number of Chinese online grew 19 percent last year, to 457 million. In 2005 e-commerce in China amounted to just $2 billion; by last year that surged to $76 billion. Online sales in China will continue to grow faster than anywhere else, says Yuval Atsmon, a principal with McKinsey in Shanghai. "The size of the opportunity is amazing," he says.

That's leading a new wave of foreign Internet companies to China. Groupon in February announced the launch of a Chinese version of its group buying service, teaming up with Tencent Holdings, an instant messaging operator that is China's largest Net company. Russia's Digital Sky Technologies, which owns stakes in Facebook, Groupon, and Zynga, invested $500 million in, the Chinese online retailer said on Apr. 1.

Facebook has held talks with potential Chinese partners, says one person familiar with the company's plans, and Mark Zuckerberg in December traveled to China, where he met with executives from Chinese search leader Baidu (BIDU), portal Sina (SINA), and cellular operator China Mobile (CHL). (Zuckerberg says it was a vacation.) In an Apr. 8 statement, Facebook said: "We are currently studying and learning about China." Spokesmen from Facebook and Baidu would not comment on an Apr. 11 report in the Chinese media that the two companies had signed an agreement to launch a social networking site. A person familiar with Facebook's plans says no agreement has been signed.

Unlike Facebook, eBay probably has little reason to fear a government backlash, since its business promoting Chinese exports fits with Beijing's economic goals. The U.S. company may need to worry, though, about its old rival, Alibaba. Last year, Alibaba launched a service called AliExpress that makes it easier for Chinese-based companies to sell to consumers outside China. Because the U.S. company needs to be concerned about lower-priced Chinese merchants undermining its core base of American sellers, "eBay will never be fully committed to the cross-border business," says Alibaba spokesman John Spelich.

An Alibaba scandal may help eBay gain ground. On Feb. 21,'s CEO quit after an internal probe revealed employees had allowed sellers to create bogus storefronts. Both Alibaba and eBay say they are determined to combat fraud. "We don't want to make a quick buck on counterfeits, fakes, and lookalikes," says Lee, who adds that eBay has imposed restrictions on 10 to 15 percent of China-based sellers for not meeting company standards. "We choke [them] to the point where they don't die—but they feel the need to provide the right level of service," he says.

The bottom line: Online auction site eBay has finally found success in China by connecting small exporters to global consumers.

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