eBay’s Strategy in China:Alliance or Acquisition

Group 3MANSI GARG (PGP/17/092)RAVI KUMAR (PGP/17/108)

ANKITA AGGARWAL (PGP/17/132)SAMYA RAY (PGP/17/164)K PARVATHY (PGP/17/213)

BIRANCHI PRASAD SAHOO (PGP/17/075)

eBay’s History in China

eBay entered China in 2002 by acquiring 33% stake in EachNet

Fully acquired EachNet in 2003

In 2005, eBay acquired Skype, operated in China JV with TOM Online

In 2006, announced JV with TOM, with eBay retaining 49% ownership

Assessing eBay’s choice of market entry strategy for China

Assess the potential benefits and risks of eBay’s JV with TOM Online

Is it right strategy for eBay to succeed in China in the second attempt

Agenda:

The Dotcom BubbleMid to late 1990s – Dotcom hype

Eager to make quick profits, companies heavily invested in the internet

Huge venture capital funds made available to entrepreneurs

Internet valuation soared up

NASDAQ Composite peaked 5048.62 on March 10, 2000 followed by setting in of bear market

By May 2000, NASDAQ dropped 30% and by October 2003, it had fallen down 78% from its peak

End of Dotcom era

Causes of Dotcom Crash

• No previous business experience• Lack of product differentiation• Lack of appropriate promotional strategy

Strategic

• Poor financial management• Vulnerable financial structure• Poor customer support and after sales services

Operational

• Internet security concerns• Concerns about being abused by hackers • Issues of reliability and trust• Web server interruption• Poor webpage design

Technical

• Lower customer confidence• Disparity between expectations and performance• Additional shipping and handling fees• Hassles of wrong delivery and wait for re-delivery

Behavioral

Growth of eBay

September 1995 –

Founded by Pierre

Omidyar in San Jose

1996 – Recruited Jeff Skoll

June 1997 – Benchmark

Capital invested

$6.7m for 22% stake

1998 – Meg Whitman appointed

as CEO

24th September

1998 – Listed on NASDAQ;

IPO helped raise $66m

2001 – International

markets accounted for

18%

2002 - Retreated

from Japan due to Yahoo!

2006 – Expanded

into 35 global markets

• 221.6 million registered users worldwide• $2.2b domestically and $2.1b internationally• 14% market share in e-commerce market globally

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Number of Registered Users

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Net Revenue

US Marketplace International Marketplace

Customer Services and Support

Personal Shopper• E-mail alerts to potential buyers

Turbo Lister, eBay Blackthrone• Automation of selling process

Picture Services• Users could post pictures to the listings

Shipping Calculator• Calculation of shipping costs

Shipping Labels• Print certain postage and UPS labels

Shipping Tracking• Track shipped packages

PayPal• Facilitation of secured exchange of funds

online

Feedback Forms• Submitted by both parties

Verified Rights Owner Program• Protection of buyers from purchasing

counterfeit products

SafeHabor Program• Ensure harmonious environment for eBay

users

“Efficient, effective and personalised customer support”

eBay’s expansion strategies

Internal efforts

Acquisitions

Alliances

Joint Ventures

Insertion Fee ($0.30 to $3.30)

Optional Features

Fee

Final Value Fee (1.25%

to 5%)

How eBay makes

money?

Chinese e-commerce industry has reached

transactions of $2.9bnOther models of C2C and

B2C & B2B will be integrated to serve

43.1mn existing customers in 2006

Amount spent on e-commerce has increased

from $106mn to $470mn from 2002 to 2004

Internet penetration rate

doubled to 80 million or 6.2%

in 2003

Chinese C2C Market

Business Opportunity Challenges

Corruption and absence of reliable credit system

Imbalanced economic and technological development in different regions

Lack of government regulations

Slow internet speeds and High internet access costs

Internet penetration and e-commerce business staging nearly doubling its growth since 2002 to 2006

250 million strong middle class

First e-commerce company to start business in China in 1999 on the similar marketplace model of eBay

EachNet modified it’s business model with some Chinese characteristics

It allowed client consumer face to face interaction along with exchange of goods and cash

By Feb, 2000 just in six months it had been doing 20000 auctions every dayBy 2002 it was the most significant player in the market

Profile of the e-commerce market in China

Profile of EachNet

Numero uno position of

EachNet in Chinese market

Diversification and capturing emerging markets led eBay to come to ChinaRequirement of market depth and

cultural connect with the country for EBay

Led to acquisition of

EachNet

• Heavily invested in online promotions

• In 2006 $25mn was used to advertise

• Alliances with three Chinese portals namely Sina, Sohu and Netease was completed

• By 2003 the venture was controlling 85% of market share

• company’s valuation from $90mn to $225mn from 2002 to 2003 alone

• 4.3mn registered users by the end of 2003

• $30mn invested in March,2002 to acquire 33% interest

• In June,2003 the remaining 67% was acquired for $150mn

Amount Invested

Impact on market share

PromotionsNew alliances

Acquisition of EachNet by eBay

Initial developments after the acquisition

Stiff competition from local market Rivals

Strongest Rival was TaoBao (Wholly Owned Subsidiary of Alibaba)

By 2006 eBay Eachnet market share was 29% as compared to TaoBao’s 60%

By 2006 TaoBao’s become market leader C2Cand B2C in China

Alibaba strong Presence in China helped the cause of TaoBao’s becoming leader in china

Competition in Chinese Online Auction Market

Charging of listing and selling fees after eBay’s full acquisition of EachNet whereas TaoBao’s offered free services to attract customers

Local Consumers preferred to buy from domestic player than from foreign

Less Efforts to build Trust both towards the company itself and between buyers and sellers

ebay Failed to provide feel of security to customers at each and every step

Initially, ebay did not incorporate Escrow into it’s online payment system

Poor Customer Service as there was no customer service hotline

eBay EachNet: What went wrong

Decision making was centralized which led to the few major local leaders to leave the company

Due to centralised decision making there was inflexibility and lag in response to ever changing Chinese market

Grave mistake of making assumption that they can leverage the Brand Image in China as they enjoy in US

No consistent and correct representation of its brand attributes across its target market

ebay applied its American model in china in terms of simple interface which was considered too empty by Chinese consumers

Lack of Real time handling of customer grievances

eBay EachNet: What went wrong

About TOM Online

Wireless servicesSMS, MMS, WAP, news subscription, games, ring tones, etc. Provided through mobile telecommunication operators, alliances with mobile handset manufacturers & traditional media

Internet ServicesContent channels, search & classified information, online advertising, e-commerce, etc. Provided through tom.com & alliances with other internet portals

TOM Online

Founded in 2000, Became one of the largest wireless service providers & 5th largest internet portal in China

Listed in March 2004 in the US (NASDAQ) & Hong Kong

Shareholders: Tom Group, Hutchison, both led by Li Ka-Shing – one of the Top 10 Richest men in the world (Forbes)

Provided value-added multimedia products & services primarily to young & trendy consumers in China through wireless & internet services

TOM Online & SkypeAlliance (November 2004)

Co-develop a customized, simplified Chinese version of SkypeAttracted more than 3.1 million users making China one of Skype’s top 3 markets

Joint Venture (September 2005)For expansion into the internet communication sectorDevelop mobile internet platform with TOM’s expertise in mobile technology & Skype’s expertise in internet communication

Situation in 2006

89% revenues from value added mobile-phone services

Heavy dependence when its not a mobile telecommunications provider

Providers- China Mobile & China Unicom- ordered by Chinese Government to contact all customers & ascertain if they wished to have these services

Profits in 3rd quarted plunged 59% (US$ 5.28 million) & revenues fell by 15.2% (US$ 38.95 million)

Joint Venture: TOM Eachnet

eBay (49%)

TOM Online(51%)

Contribution

$40 million cash

$20 millionlocal knowledge,

technology, brand value

Benefits

Diversification into m-commerceLocal knowledgePolitical connections

Diversification into online auctionReduce dependence on mobile value added services for revenues

Li Ka-Shing – biggest shareholder of TOM Online, known for his connections with high ranking officials in China & Hong KongWang Leilei (CEO) grandson of a Chinese General*‘Guanxi’ would help businesses become more efficient

eBay’s Future in China

Abandoning the eBay brand- thought as a partial retreat from China

Whitman: Renaming due to stronger recognition of domestic Chinese brands (TOM & Eachnet), than foreign brands like eBay, which was fairly new.

Expected Chinese market to become a significant part of eBay’s business by 2010-15

Competitors: Major rival TaoBao would continue to invest in capital & manpower to boost business

Also, Alibaba could raise upto US$1.5 billion through its IPO in Hong Kong, will spend on affiliates, including TaoBao

Questions to be Addressed

1) eBay first entered Chinese market in 2002 by acquiring 33 % stake in Eachnet, followed by a full acquisition a year later in 2003. Critically assess eBay’s choice of market entry strategy for China.

2) Assess the potential benefits and risks of eBay’s JV with Tom Online. Is it right strategy to succeed in China in the second attempt for eBay? Critically comment.

Market Attractiveness: eBay's market entry to China was inline with it’s

strategy to build a truly global marketplace 250 million strong emerging Chinese middle class

offer great potential E-commerce revenue in China was expected to

grow nearly 12 fold to more than US$16 billion over the next three to four years.

China's Internet users had topped 33.7 million by the end of last year, up 49.8 per cent over the same period last year

Important driver of ebay’s International growth

Institutional Context: Government regulations & restrictive policies against overseas players Difficulties in establishing business relationships with state-owned

companies Lack of transparency, Corruption & Currency problems Inadequate legal systems to protect the interests of both company and

customers

Distance Factors (Cultural, Admin, Economic):

Lesser knowledge of local Chinese culture, Consumer behavior & preferences, Distribution system

Lesser knowledge of corporate practices Slow internet speed, High internet access cost Imbalanced economic & technological

development in different regions Absence of reliable credit systems for online

payment

Chinese Market Study

Conclusion: Reason for eBay to expand in to Chinese Market – Market Attractiveness

Modes of Entry

Entry Modes Positives Negatives

Exporting Not possible, since it’s an e-commerce venture.

Licensing Not possible, as it’s an e-commerce venture.

Strategic Alliances

Facilitating market entry Risk & reward sharing Technology & knowledge sharing Conforming to local government regulations Access to political connection & local distribution

channels

Conflict over asymmetric new investments & information sharing

Mistrust over proprietary knowledge Performance ambiguity i.e. how to

share the pie Cultural Clashes

Acquisitions Executed in a two stage process- minority stake followed by acquisition would be a good strategy while testing waters in a new market

Founders of Eachnet were Meg Whitman, alums at Harvard - Good personal relationships

EachNet operations as Chinese equivalent of eBay EachNet had good business knowledge & it’s

adaption to accommodate certain aspects unique to Chinese Market ex payment system, demographics, CB

Complex negotiation process High Costs Cultural Clashes Problem of integration & merging with

domestic operations

Analysis of the eBay & EachNet Alliance

Factors Strategy Type of Alliance

Reason

Types of Synergy

Reciprocal Acquisition Ebay’s technology and EachNet’s local knowledge required integral coordination

Nature of resources

Medium Acquisition Both the personnel and technological resources will be integrated into the operations

Extent of redundant resources

Low Non-equity alliance

EBay was just starting its operations in China

Degree of Market uncertainty

Low Non-equity alliance

Growing internet penetration and increasing user base was certainly increasing the scope of online auctions

Level of competition

High Acquisition Many regional players have started operations

Being in technology sector and partnering with a very small firm in a completely new market in China complete control over operations through acquisitions makes sense

Level of competition was certainly going to increase with several international firms also eyeing China’s market potential

Strength: Strong brand image globally & technological leader 14% market share in global e-commerce Unlimited transaction capacity Successful international presence - 221.6M registered

users enabling it to manage large customer base Unique user feedback system No inventory costs Embedded cross-selling opportunities Reputation for non-counterfeit products

Opportunity: China economy growing in leaps Chinese internet users ballooned to greater than

200M Number of online shoppers at 55M and growing

rapidly Transaction value of C2C ecommerce in China 23.1B &

growing Chinese governmental regulations are reducing Opportunity for merger with TOM Online

Weakness: Perception of poor customer service Lack of buyer and seller interaction prior to sale Bidding process unfamiliar in Chinese culture Lack of “trust” as non-local company with short

history Centralized decision-making and lack of local

insight Web-site “too empty” for Chinese taste

Threat: Fierce competition from local rivals Competitive pricing strategies Need for more capital investment Company philosophy and management team

would need to be synergized with eBay Eachnet Dynamic marketplace Chinese government interference/regulations

SWOT Analysis eBay in Chinese Market

Analysis of the eBay - EachNet and TOM Online Alliance

Factors Strategy Type of Alliance

Reason

Types of Synergy

Modular Non-equity alliance

EBay's technology and TOM online local knowledge & mobile services required integral coordination

Nature of resources

Medium Acquisition Both the personnel and technological resources will be integrated into the operations

Extent of redundant resources

Medium Equity alliance

EBay-EachNet as well as TOM had considerable IT-based operations which were bound to overlap

Degree of Market uncertainty

High Equity alliance

Business incentives were basically diversification which didn’t have specific targets

Level of competition

High Acquisition Many regional players have started operations

TOM Online has a huge presence in China and as a established brand could properly support higher penetration of EBay in Chinese market

Secondly both the companies needed each other’s resources to excel in their own competencies which makes equity alliance sensible

Positives

Higher Chinese control will be

effective in homogenizing the business culture

Ebay’s economic muscle will help to thwart small local

competitors

Lesser chances of EBay's competitive

advantage to be replicated by TOM

Online

Access m-commerce could become an early

mover advantage

Negatives

Integration to Ebay’s best

technological practices may take time to implement

Business interests if at all diverged for

the companies can lead to disputes

Analyzing the Pros & Cons of the Joint venture

Recommendation

Make an alliance with Tom Online Provide the dynamic and strong visually oriented graphical interface that

appeals to the Chinese marketplace Institute an escrow system to satisfy the safety concerns of Chinese users and

build trust Provide significantly improved and hands-on customer service Take advantage of Tom Online to make the first move in to m-commerce Eliminate seller listing fees Leverage Tom Online political connections

THANK YOU