Comparing eBay and Taobao Internet Auctions in China - Essay Example

A Comparison of Internet Auction through EBay (China) and Taobao (China 0 Introduction It has been observed that there was a very low penetration of the Consumers of ecommerce in China. This is evident from the fact that while there are more than 100 million internet users (as of March 2005), according to an independent report on the online auction market of China just about 12 percent of them are being attracted to the online shopping sites. This percentage in the United States for the corresponding period stood at almost more than 30 percent. The estimation on the Gross Merchandise Volume of the consumer online auction business for the year 2004 was placed at US $ 400 to 450 million only against the Gross Domestic Product of China of more than $ 1.5 Trillion. Though E-commerce is thus still in infant stage in China there has been a continuous growth in the business. "Already, some 6 million people a day shop on the internet in China. The vast majority are young people living in large cities. There are now 43 million registered online shoppers, and their purchases may total US$6.4 billion in 2007, a year-on-year leap of more than 60 percent" (Daniel 2007) Though there are new entrants to the E commerce business in China the three important and major players in the consumer auction market of China are EBayEachnet - a wholly owned subsidiary company of EBay Taobao - a joint venture operation between Alibaba and SOFTBANK and 1Pai - a joint venture operation between Yahoo! and SINA a Chinese Portal China Center for Information Industry Development Consulting (CCID Consulting) has presented a report which estimates the total online transactions of China at US $ 14 billion amounting to a growth of 51 percent over the 2005 year volume of business. The report also indicates that about 99 percent of the business undertakings of China belong to Small and Medium sector and out of these only 3 percent deal through internet. This is the kind of volume of business and market EBay and Taobao are contesting to share. With this background this paper envisages presenting a detailed report on the functionalities of EBay and Taobao being the major competitors in the ecommerce business in China. The paper also analyses the differences between such functions and the qualities of services being provided by both the contenders. When alternative choices exist the customers would obviously prefer one over the other. In this case also the paper analyses the reasons for the preference of Taobao than the EBay. 2.0 Evolution of Online Business in China: Although online business is in existence in China even from the year 1998, its growth was rather sluggish. This was mainly due to the lack of trust among the purchasers and sellers and the absence of an effective payment settlement system. It has been the tradition of China that the buyer before completing the online transaction would like to meet the seller, check the quality of the product, pay the money in hard cash and take delivery of the products. Ironically enough the outbreak of SARS in China had discouraged people going out of their homes and meet strangers. This has reduced the chances of the buyers meeting the sellers and thus SARS had removed the Trust barrier in the online business. Normally eBay was handling the US and European markets which were highly developed and were nearing the saturation point. EBay even persuaded corporate customers to off load their excess inventories in their website. However the situation in China when EBay entered was totally unregulated with the buyers and sellers consisting of individuals with lack of trust on each other. With the passage of time the online business developed very well with the sellers finding it interesting to offer their products to the foreign buyers as they see it as an opportunity to increase their profitability. The modus operandi is to buy the cheaper products from large local factories, use marketing techniques like AdWords Google or other search engines and get the products listed in the EBay to sell them off. This way there is a group of small retail segment which have developed a lucrative business for them. "Many people who used to hold white collar jobs, and sold items on eBay part-time, are now finding themselves quitting their day jobs and strictly selling products to westerners online." (Wayne Mulligan 2006) The development of the online business in China can be traced with the following figures: The total Chinese online auction market volume was in the order of US $ 561 million for the year 2004 The auction market volume rose to US $ 1.7 billion for the year 2005 recording an increase of 200 percent. There were roughly 15 million online auction users in China during the year 2004 The number of online users increased twofold to almost 30 million for the year 2005 The total Ecommerce business in the country was approximately US $ 43 billion for the year 2004. The Ecommerce business for the year 2005 registered a growth of 60 percent and reached a figure of US $ 70 billion. 3.0 EBay: EBay was founded in the year 1995 in the United States. This ecommerce portal has made millions of collectible, appliances, computers and every other common and special miscellaneous items of interest to every customer. EBay allows the sale and purchase of any item that is legally tradeable and does not violate the EBay Prohibited and Restricted Item Policy. Even global business leaders like IBM market their products via EBay. 3.1 Evolution of EBay in China: The Company established itself in China in the year 2002 after it withdrew from Japan due to massive lead taken by Yahoo! there. EBay bought one third share of Eachnet being China's principal online auction site. Immediately in the following year EBay bought the rest of Eachnet bringing the total investments up to $ 180 million. At the time when EBay acquired Eachnet and started the ecommerce market was so virgin and buoyant. The Chinese customers were willing to support the online auction business with the intention of buying products like computers, cell phones and some times even cars online through the website of Eachnet. That was the time when the middle class population with a high income potential was enlarging. A 48 million (in the year 2003) strong internet users with no website as the one introduced by EBay were there to support the business of Eachnet. Shortly after launch of the website Eachnet had 4 million registered users which gave the company 85 percent of the market share of the online auction business in China. The growth of Eachnet was faster since the site offered a convenient shopping method for the Semi Urban Chinese population. China at that time did not have large shopping malls where the people can buy their needs. Alternatively they were shopping "mostly at the thousands of morn-and-pop stores that line dusty rural streets and Shanghai alleyways rather than in vast shopping malls common to the U.S". There were not many stores offering general products like the one of Walmart. The business philosophy of EBay is not to compete with stores that retail. It would rather encourage buyers and sellers to deal in surplus goods, rare items and used and outdated merchandise. Eachnet followed the same business principle. With the variety of products like clothes, computer, cell phones and other goods Eachnet offered a better and broader product mix on its auction site. 3.2 Functionalities of EBay China: Initially Eachnet offered the services free of charges in the fear of not loosing the cost-conscious Chinese customers. Later on Ecahnet charged a small fee to the sellers to list their items on its website and an additional fee on the completion of the transaction. "Eachnet also has copied eBay's seller feedback program, where buyers rate sellers on product quality, order processing and delivery. Other similar features include the ability to conduct trades at fixed prices, rather than through bids."(Rebecca Fannin 2003) Eachnet had to change many format of ebusiness as they did not work with the environment and business culture present in China. For example the payment could not be handled with the credit card systems as it is the practice with eBay. This was so because most of the Chinese do not trust credit cards as they would be satisfied only with hard currency. The same problem persisted with the registration of sellers as the registrations could not be carried out in the absence of the usage of credit cards. The problem was further accentuated as the Post offices as a channel of payment were not functioning effectively when Eachnet started. The company thus had to pass through several struggles to establish the online auction business in China. However with the launch of Taobao by Alibaba in the year 2003 the business of Eachnet started to have a downward trend. Taobao with its nationalistic touch and product superiority gave a tough time to Eachnet and snatched most of the market share of Eachnet in the online business to the latter's dismay. During the year 2004 Taobao had performed spectacularly that it had a tremendous business growth at the expense of Eachnet. In order to beat the competition from Taobao the company EBay had decided to refrain from charging transaction fees from the sellers on its website. This decision was taken by the company during January 2005. However earlier EBay criticized the move of Taobao its arch competitor for not charging the transaction fee citing that "Free is not a business model". "EBay EachNet has also established two funds, for both buyers and sellers, through which sellers can receive refunds and buyers can receive up to 1,000 yuan (US$120) if they are cheated in deals."(China Daily 2005) Immediately after Taobao announced its exploration of Business - to - Customers market, EachNet also launched its own B2C business. The specialty of the B2C business of EachNet would be that all the sellers in this particular segment of the business which is known as 'Brand Flagship Special Zone' would follow the regulations of the Chinese government with respect to the after sales service, exchange and sales return of the products sold on the B2C segment which was a distinguishing feature as claimed by the company. EBay faced a tough competition from Taobao in China. "Analysys International, a Beijing-based research company, last month reported Taobao accounted for 57.1% of the 8.8 billion renminbi ($1.1 billion) transaction volumes of online auctions in China during the first eight months of 2005. By comparison, eBay represented 34.2% of the total transaction volume during that period" (Summer Lemon 2006) The company spent an additional $ 100 million in marketing during the year 2005. Such an investment of additional $ 100 million was criticized by the analysts on the ground that China is unlikely to become a mainstream e commerce market for many years to come. It was commented that the auction market in China would never grow big enough to make the company get back the money invested. However China had not been an easy territory for EBay. All along they have been struggling to advance with the stiff competition from Taobao the subsidiary of Alibaba, China's largest E-commerce company. According to the report from Analysys International in the year 2005 EBay was holding 31.5 percent market share in the Chinese online market as against 57.7 percent of Taobao. The resignation of Martin Wu the Chief Executive of Eachnet in September 2005 just after one year of service triggered rumours in the market that the company would quit the Chinese market. It was also expected that with the introduction of additional $ 100 million the competition between the rivals EBay and Taobao would be fierce with the aggressive marketing efforts of EBay focusing on increased listings and the number of registered users along with the efforts to enhance the Gross Merchandise Volume. However the strategy of Taobao was bent upon the superiority of the products and the company strongly believed that adding users without the right product, will not in any way lead to success and this strategy had been proved correct. Despite putting extra money and marketing efforts EBay could not beat the competition from Taobao since it really lacked on something which Taobao had; i.e. the superiority of the products with the local touch. 3.3 Reasons for EBay to Leave China: In spite of the best efforts being put by EBay, the company was not able to be successful in China. There are two factors which were principally responsible for the failure of EBay in China. The first factor is the loss of a sizeable market share of its customer - to - Customer business to its competitor Taobao. Once EBay had 90 percent market share of C2C business and it had been reduced to a mere 30 percent. This is so even after the company eliminated the transaction fees in China. "The second factor that possibly would have made EBay to rethink continuing its operations in China is the regulatory problems that the company may have to face due the Chinese government's ideas of making new regulations restricting the foreign ownership of the companies operating in online payment system. The company tried to find out a strong local partner for its paypal system but could not find one immediately" (Michael Arrington 2006) 3.4 Re-entry of EBay in China: Having met a failure in China unable to withstand the competition from Taobao, EBay has retreated from its venture EBay Eachnet. The company has formed a new alliance with Tom online and the new venture would be re-launched with the support of the local partner Tom omline. "Tom Online, with 75 million subscribers, allows users access to television, music stations and online stores through its Web portal and over wireless networks. In September 2005, it formed a joint venture with eBay in China to distribute the popular Internet telephone service Skype, which eBay owns." (Katie Hafner 2006) This is the first time EBay is entering the Chinese market with a local partner. "In order to win shoppers' trust, the new venture, Tom eBay, has decided to use an escrow service, where payments will be parked before buyers are satisfied with their purchases. The venture will also do more to assure the reliability of those holding the auctions and will institute restrictions on the number of luxury goods any individual can sell."(Victoria Shannon 2007) EBay is hopeful that with 51 percent share of Tom online the local partner the company would be able to attack the strange Chinese market with more vigour. Under the new arrangement EBay will invest US $ 40 million for a 49 percent stake and for its 51 percent share Tom online would be contributing US $ 20 million. Under the joint venture terms the profits of the new venture will be shared by both EBay and Tom online on the basis of their respective stakes. "The venture, headed by Tom Online chief executive Wang Lei Lei, will be built up into an entirely new auction website that will be launched in 2007" reports BBC News. 4.0 Taobao: "Taobao, based in Hangzhou, capital of eastern Zhejiang Province, was founded in 2003 by Alibaba.com Corp, the nation's largest e-commerce company that helps match Chinese suppliers with overseas buyers on its platform. The site beat eBay Inc's China business, eBay EachNet, by charging no fees for traders, and forced eBay to handle control of its Chinese operation to a local partner in December last year." (Nicholas Ning 2007) 4.1 Evolution of Taobao in China: Alibaba.com the largest business - to - business ecommerce website launched an online auction website in May 2003 when the entire China was hit by the effect of SARS disease. Jack Ma the Chairman and CEO of Alibaba also took charge as Chairman of the newly launched website 'Taobao'. At the time the portal was launched the only other player existed in the market was EBay. "Taobao, a minor competitor, chose to establish its profile as a challenger to eBay EachNet's leadership with a highly localized approach.Ma's first move was to announce Taobao would offer free services to traders on its website, which had been proven successful in many industries, as many Chinese were still very price-sensitive". (China Daily 2005) Alibaba.com invested $ 12 million within the first two months after Taoabao was launched and later on increased the investments to $ 42.2 million. One major obstacle faced by Taobao was that it lacked attention of the public due to lack of advertising, while each leading website in China entered into standard advertisement arrangement with EBay. Taobao entered into advertising agreements with smaller websites and later on found a novel way of catching the attention of the public by hosting online auctions of items of famous stars used by them while acting in hit movies. This move yielded good results for Taobao. It also released advertisements in the Television media which reached millions of curious buyers and sellers. The growth of Taobao was tremendous in that the company's growth was traced at 9 percent of the market in Quarter I of the year 2004 to more than41 percent of the market in Quarter IV of the same year. During the same period there was only EBay and Taobao was the only major player present in the market with an insignificant market share being enjoyed by the third player 1pai. "Given the newness of the market and the low penetration, the only real conclusion which can be drawn from this is that further shifting of market position, and possibly new entrants, can be anticipated."(Billsdue) Hence with the anticipation of more new entrants in the market, both EBay and Taobao invested substantial funds and resources in the business with the intention to sustain their positions and the market shares they were enjoying. 4.2 Special Features of Taobao's Approach and Business: Basically Taobao is in a consumer oriented business and uses the website www.taobao.com to launch the products and services. The special features of the business of Taobao can be enumerated as below: The products of Taobao is user-friendly and appeals to the majority of the consumers. In fact this is the basic strength of the portal Taobao to achieve such a rapid growth within a short time of its inception. Any business in China to thrive and succeed should have a cultural touch in it as the Chinese people have more lenient towards their heritage and culture. The name 'Taobao' was drawn from the ancient fictional characters in the Chinese novels and as such the name has a familiarity among the customers. Product superiority and localization are the other important aspects of the business dealing of Taobao that had brought an instant success to the firm. Based on an independent research report it has been found that a significant volume of customers of ecommerce business are quite satisfied with the products and approach of Taobao. 4.3 Functionalities of Taobao: The major operation of the company Taobao is online Consumer to Consumer (C2C) market place. With this basic function it has added the Business to Consumer (B2C) to include the products and services being provided by major manufacturers. According to the General Manager of Taobao.com while the American model B2C players have failed in China the Taobao will make it a success by "connecting large sellers to consumers, rather than taking possession of the goods and serving as a middleman, and also by offering a solution that will benefit both manufacturers and consumers in China." (Alibaba.com 2006) According to China Intelli Consulting Corporation (CIC) Taobao.com is in control of over two-thirds of China's Business - to - Customer domain and Customer - to - Customer domain. C2C online shopping with Taobao has increased from 16.2 percent in the year 2005 to 23.0 percent in the year 2006. This rate is extremely high as compared to the Buyer - to - Customer market level of 13.5 percent. "Of 4 million Beijing, Shanghai and Guangzhou residents who shopped on the Internet in 2006, 2.9 million shopped on Taobao.com, 0.9 million on EachNet.com, 0.9 million on Dangdang.com, 0.8 million on Joyo.com, and 0.3 million on Paipai.co" (China Economic Review 2007) ( Dangdang, Joyo and Paipai are the other players of recent origin in the e commerce business in China in competition with Taobao and EBay) For the first half year of 2007 the Gross Merchandise Volume (GMV) has been shot up to US $ 2.06 billion which accounts for almost double of the volume traded for the same period in the year 2006. "By mid-year, there were approximately 75 million online product listings on Taobao per day, a 100 percent increase from the same period of 2006. Taobao's number of registered users reached 39.9 million by the end of June 2007, an 80 percent increase from that of the first half year 2006 and accounting for nearly all Internet shoppers in China" Auction Bytes (2007) Taobao is being preferred by a large number of retailers and global brands for opening specialized shops on the website of Taobao. During the first six months of the current year about 7,827 manufacturers have approached Taobao for opening up of their shops in the' Taobao Mall' being the special site the company has dedicated to such kinds of large retailers and brands. P&G, Apple and Motorola are some of the world leaders who have opted for opening up their business in Taobao Mall. The top selling products in the Taobao site for the first half of 2007 include: Mobile phone Household commodities Cosmetics Notebook computer Mobile phone recharge card Computer hardware Coat Camera Exercise equipment Food 5.0 Comparison of the Functionalities of EBay and Taobao: With an attractive name 'Taobao' meaning 'digging for treasure' in Chinese the online dealer gets lot of attention among the local people through the television and other advertising media. There existed a fierce competition between eBay Eachnet and Taobao. "Morgan Stanley analysts estimated Taobao's market share increased from 9% to 40% in 2004. For the first quarter of 2005, eBay EachNet reported 100 million in gross merchandising value while Taobao reported 120 million". (Helen Wang 2005) It had always been the case that understanding the preferences of local customers and their tastes helps the local players to gain a competitive advantage over their counterparts from the other regions of the globe. This is evident from the following observations made on the functioning of EBay and Taobao. 1. With the understanding that the auction requires much sophistication which is lacking in the local market, the Taobao site had restricted its activities in this line of business having only 10 percent of its listings for auction, while the it was 40 percent of the listings for auction in the case of EBay EachNet. (as of 2005) 2. With the free listing offered by it Taobao was able to get more number of registered sellers on its roll. The company had a listing of around 10 million during the period September 2005 which is more than 10 times larger of the listing of EachNet;s. 3. Another distinct feature that went well with the customers of Taobao is the long listing period. Usually Taobao allowed a listing period of 14 days which can be extended for one more period automatically at the customers' instance. EachNet never had this facility of a longer listing period or the extension there of. 4. Taobao had its competitive edge over EachNet by categorizing its listings more 'customer -oriented' than products. For instance there used to be different listings catering to men, women and so on. Whereas EachNet had its listings product centered and was keen in maintaining its 'global platform' of classifying the listings according to the categories 'buyers' and 'sellers'. 5. On the basis of the research made by IResearch Taobao had a higher customer satisfaction level than that of EachNet. The customer satisfaction level was 77 percent for Taobao and it was 62 percent for EachNet. 6.0 Reasons for Preference of Taobao over EBay: Well-funded by Soft Bank and Ailbaba, Taobao is a financially sound online company and because of this background the company was able to win the confidence of the customers. It is also ably supported by a local senior management team who has a strong sense of local community and hence will be able to assess their needs and amend the business policies accordingly. Taobao has been more successful as an ecommerce player than EBay or any other competitors for that matter because they have sensed the nerves of the Chinese market than any other players and has refined their approach in a pure Chinese way which is more appealing to the Chinese consumers. Whereas in the case of EBay the approach was totally different and it wanted to practice the kind of business it is doing in the United States which does not go with the local needs and culture. Moreover the company Taobao has a strong orientation towards the Chinese culture which is a major distinguishing contributor for its success. A strong product orientation that can ensure the customer satisfaction is the strength that Taobao possesses which helps in its success. Another factor that goes in facour of Taobao is its ability to introduce innovative products swiftly because of the basic entrepreneurial skills it possesses. EBay could never adjust itself to the local realities. They are looking for the same global platform in whichever country they are operating with the same look and feel. This may not work favourably for them in China. 7.0 Conclusion: The Ecommerce business in China is a low penetration market and hence there may not result any first mover advantage to any firm who wants to do business first. In spite of the presence of all network dynamics Chinese market do not present an opportunity for a winner-take-all position. Moreover the market is not matured enough so far for the charging of any attractive charges as almost all the customers are still in the process of testing the value proposition by entering in to test transactions. This is basically due to lack of mutual trust between the buyer and the seller. The lack of confidence acts as a major obstacle for the development of ecommerce business in China is the 'settlement risk'. While the buyer does not want to part with the money till the time he receives the products, the seller is unwilling to dispatch the products unless he receives the money for the value of the products. References: Alibaba.com 'Taobao.com Launches B2C Services' http://resources.alibaba.com/article/10059/Taobao_com_Launches_B2C_Services.htm Auction Bytes 'Chinese Online Auction Site Taobao Releases Earnings' http://www.auctionbytes.com/cab/abn/y07/m07/i19/s02 BBC News 'EBay and Tom in China Partnership' http://news.bbc.co.uk/1/hi/business/6196797.stm Bills Due 'Alibaba/Taobao/Alipay--A Growing Nightmare for EBay in China' http://bbb.typepad.com/billsdue/2005/03/alibabataobaoal.html China Daily 'Keeping Challengers at Bay' http://www.chinadaily.com.cn/english/doc/2005-05/09/content_440384.htm China Economic Review 2007 'Tabao Well in the Lead' http://www.chinaeconomicreview.com/it/category/taobao/ Daniel 2007 'China's E - Commerce Explosion' http://www.cscout.com/china/m=200706 Helen Wang 'Taobao vs. eBay China' http://helenwang.rdvp.org/pacific/2005/11/taobao-vs-eBay-china.html Katie Hafner 2006 'EBay is Expected to close Its Auction Site in China' The New York Times December 19 2006 http://www.nytimes.com/2006/12/19/technology/19eBay.htmlex=1185336000&en=ea67466c6dadc5e8&ei=5070 Michael Arrington 2006 'Is EBay Bailing out of China' TechCrunch September 26 2006 http://www.techcrunch.com/2006/09/26/eBay-bails-out-of-china/ Nicholas Ning 'Taobao.comTriples Its Net Trade to Beat EBay' Shanghai Daily.com 18th July 2007 Rebecca Fannin 'The eBay of China: Eachnet: a Shanghai online auction firm set out to imitate eBay. In June, eBay bought it - Regional Report' http://findarticles.com/p/articles/mi_m4070/is_191/ai_109669776 Summer Lemon 2006 'EBay China Decides 'free' is a Business Model ' Network World http://www.networkworld.com/news/2006/012006-eBay-china.html Victoria Shannon EBay Returning to China' International Herald Tribune June 21 2007 http://www.iht.com/articles/2007/06/21/technology/eBay.php Wayne Mulligan 'Online Auction Market in China: eBay/EachNet vs. Yahoo!/TaoBao Seeking Alpha http://china.seekingalpha.com/article/14162 Read More