FENDING OFF GIANTS. How a local company held ebay at bay. IMD Chemin de Bellerive 23 PO Box 915, CH-1001 Lausanne Switzerland

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1 FENDING OFF GIANTS How a local company held ebay at bay By Professors Katherine Xin, Winter Nie and Vladimir Pucik (October, 2007) IMD Chemin de Bellerive 23 PO Box 915, CH-1001 Lausanne Switzerland Tel: Fax: info@imd.ch

2 Can a local company hold off an aggressive global competitor? Taobao, a subsidiary of the Chinese company Alibaba, took over ebay EachNet s market leadership position within two years, proving that knowledge of one s own local market and the ability to adapt nimbly to its requirements can make all the difference. Meeting the challenge In 2003, ebay had 94.9 million registered users around the world, $2.165 billion in revenues, with margins of 78.4% gross and 20.4% net. Despite having to concede the Japanese market to YahooJapan, ebay had adapted its business model to Taiwan and Korea, and was doing well in Singapore and Hong Kong. The natural next step was to enter China, and to do this, ebay acquired a 33% share in EachNet.com, a local Chinese company. A worried Jack Ma, founder and CEO of Alibaba.com the leading business-to-business (B2B) e-commerce company in China had watched ebay snatch up 90% of the local C2C market roughly one year after entering China. Concerned that ebay would use its C2C power to attack Alibaba in its B2B domain, he decided to set up Taobao a company that would compete against ebay on its own turf. Ma s goal for Taobao was to gain market share from ebay, rather than to make a profit. To do this Taobao created a website with a busy, lively and friendly shopping atmosphere, specifically to meet the expectations of the local customers. It would not only be easier and more fun to use than ebay s EachNet s site, but the site would have a definite Chinese feel when it came to customer experience. The lack of a mature personal credit system made security of online payments a serious concern for Chinese customers so Alibaba launched its third-party online payment platform - Alipay.com, which became the default online payment platform for e-commerce in China. Even many ebay users preferred to use Alipay. In China, personal relationships and trust are important foundations for doing business. To reassure customers about the integrity of those they were doing business with, Taobao launched Wangwang, an instant messenger that enabled the buyer to talk with the seller before making a purchase. To further communication and understanding between Taobao and its customers, the company sponsored various events and activities in the community. IMD - FENDING OFF GIANTS Page 2/5

3 When Taobao tried to advertise on China s major online sites soon after its launch, it found that major portals had already signed exclusive agreements with ebay EachNet. Turning to the Medium and Small Websites Alliance, it ran a pop-up campaign for about a year attracting more than a million registered customers. In 2004 Taobao launched a large-scale advertising campaign in media such as TV and outdoor billboards throughout China s main cities that attracted widespread media and public attention. By the time Taobao had formed a partnership with MSN, two of the major online sites had discontinued their exclusive agreements with ebay. The empire strikes back, but In response to Taobao s moves, ebay poured an extra $100 million in for market development. Their policy was simple: Whatever Taobao did, they would do with more money until Taobao was wiped out. ebay s first move was to upgrade EasyPay and rename it SafePay. When this failed to woo customers away from Alipay, a localized version of PayPal, where the seller would be paid first and the buyer would get a refund if dissatisfied with the delivery, was tried. This had worked well in other countries, but in China it again failed to tempt users back to ebay EachNet. In 2004, in order to improve cost efficiency ebay EachNet consolidated its IT platform in the USA. However, accessing the ebay EachNet site became extremely slow, and product listings plunged from 780,000 to 250,000. In addition, after the migration, all IT engineering decision-making was centralized in the USA and ebay lost its ability to respond rapidly to the needs of the Chinese market. In 2005 ebay EachNet lowered its seeker listing fees by 75%, making it the lowest feecharging site of all ebays globally. In response, Alibaba announced a decision to invest a further $125 million in Taobao and declared that it would not charge a service fees until IMD - FENDING OFF GIANTS Page 3/5

4 By the end of 2006, market research showed that Taobao had reached a 67% market share, while ebay had fallen to 29%.Taobao boasted 30 million registered users and $2.16 billion in transactions, 70% of which were made through Alipay. The Taobao story suggests that while scale and global experience may be important, understanding the local context in China may be the key to long-term competitiveness. Jack Ma put it differently: ebay may be a shark in the ocean, but I am a crocodile in the river. If we fight in the ocean, we lose but if we fight in the river, we win. Katherine Xin teaches on the International Seminar for Top Executives (ISTE) and the Orchestrating Winning Performance program. Winter Nie teaches on the Program for Executive Development (PED), Building On Talent (BOT) and the Orchestrating Winning Performance (OWP) programs. Vladimir Pucik teaches on the Orchestrating Winning Performance program. IMD - FENDING OFF GIANTS Page 4/5

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