Taobao versus EBay in China - Case Study Example

24 December Taobao versus EBay in China Introduction In less than four years, Taobao defied its underdog status to become theleading online retailing website in China. This came in the wake of formidable competition from a California-based e-commerce business known as EBay. Several factors came together to catapult Taobao into its leadership position. A common theme that emerges from these strategies is localisation of the company’s strategies. EBay appeared to have been too global for the Chinese market. This model caused it to create marketing strategies, product portfolios, payment systems, online infrastructures that were inappropriate for the Chinese market. Comparison of China’s ecommerce websites- Taobao and EBay Alignment to the global system EBay China was always closely affiliated to its company headquarters but this interaction was tightened further in 2003. At the time, the company opted to change its operations so that it would utilise worldwide capabilities. The organisation was known as Eachnet and was controlling approximately 85% of the market. This decision has caused many analysts to question the wisdom of choosing uniformity over customisation within multinational corporations. In order to ensure that the global platform was maintained consistently, the company decided to move all the servers in China to California. There, engineers from the parent company would be responsible for maintenance (Stanford 4). CEO Whitman wanted to create a system in which the products sold around the world could be seen by all participants in EBay. This meant that a balding man in Cleveland Ohio could view a hair growth cream sold in Beijing China. The vision that leaders had at EBay was one in which people could bid and trade with each other irrespective of the geography. To achieve this, they needed to have a technology platform that was controlled by one team in the United States. During the pitching of this strategy, Eachnet managers realised that certain Chinese specific features would make the migration quite difficult. Furthermore, since the ecommerce industry was just picking up in China, this market was not yet ready to become part of such a large entity. Challenges in transmission speeds to Asia as well as other environments near this continent would be a challenge, but none of these concerns were taken seriously during the presentation of the idea. Furthermore, internet communication flow between China and the rest of the world was also controlled by the Chinese government. The latter development had not been considered by EBay and became a serious challenge for the organisation (So et. al. 20). The migration would prove to be the company’s downfall. At the time, EBay believed that the decision would cost them only moderately in the short term but would yield long term results. The opposite occurred; this migration would cost the company to loose almost 50% of its consumers. The organisation appeared to be detached from reality because the CEO of the organisation, Whitman, only learned of the migration a month after it occurred. Such drastic losses in traffic meant that the company needed to do extraordinary things in order to get back on track, yet no changes were forthcoming. What had worked in other parts of the world for EBay was assumed to be applicable to China as well so the status quo prevailed (Jin et. al. 86). A look at internet transmission between the company headquarters and its consumers revels that loading speeds became quite disappointing after the change. Their webpage was too slow to respond to consumer needs. In an ecommerce business, some things that other conventional businesses would take for granted cannot be ignored in such an enterprise. Since the number of users on these websites is high, it is likely that slow speed would be magnified during technical difficulties. The Chinese government firewall further compounded the problem for EBay. At the time, it used to censor information from outside its borders. Any material that was suspicious-looking could stay suspended for 24 hours or more. Services thus became slow and unstable at EBay. Consumers, who were already familiar with internet selling now looked for another alternative, and it made a lot of sense for them to choose Taobao; their speeds were quite satisfactory and they were more than willing to meet consumer demands. Just three months after the migration of the technology platform to the US, the company’s market share had reduced to almost the same level as its key rival Taobao. The percentages may have been the same but one organisation was losing its clients while the other was receiving them. A half a year after the global synchronisation process, Taobao upset EBay’s leadership by acquiring 60% of the market while EBay only had 30%. In 2004, EBay also introduced a regional branch in the continent of Asia. This served to further alienate the Chinese market as the headquarters were located in Korea. The strategy was also counterproductive because it did not correspond to an online marketplace. This meant that operations in China had to undergo two layers of management, with one in the region and another even further away. At the same time, Taobao had just entered the market and actually seemed like an underdog to the group (Greevan 18). EBay made all these changes with little regard for local needs. This may have emanated from the company’s overconfidence in the Chinese online market. At the time, the company thought that no other organisation could rival its internet offerings. Furthermore, it had first mover advantage and presumed that its large number of participants gave them enough security against potential competition. One may thus state that EBay restructuring was tailored to meet the needs of the global company platform but at the same time, it ignored the needs of the local market. Marketing approaches As a first mover, EBay got a head start in marketing. It created exclusive marketing contracts with key Chinese websites. These organisations were to market for EBay China and were to remain loyal to only them. Competitors like Taobao had no chance of penetrating these websites so the latter company opted for a different approach. It decided to use a creative way of getting its messages out there. The firm relied on bulleting board services, where users could read thousands of messages from the above company. EBay started by using a protective approach to marketing. It secured exclusive advertising contracts with Sohu, Natease and Sina, which were the primary internet companies at the time. By blocking Taobao from using these mainstream internet locations to advertise, Taobao had to result to grassroots methods, such as the one mentioned on the former paragraph and several others. The problem with EBay’s approach was that it presumed many people in China used the internet for business, yet this was not true. Taobao did the opposite when marketing its products. It noted the relatively modest internet penetration levels in China. Therefore, it used traditional advertising channels like televisions to describe themselves. All key television channels aired Taobao ads and they were coming in fast and loud. Conversely, EBay opted to place their advertisements on buses and other public forums. Pricing and listing models Unlike EBay, which charged fees for every item on their listings, all of the items sold by consumers at Taobao were listed for free. This model would also prove to be the unique selling point for Taobao. By 2005, several consumers were leaving EBay China for Taobao. This also came in the wake of the restructuring efforts that had taken place at EBay. There were plenty of consumers who were not happy with their alienation from the company management. Therefore, they were more than willing to embrace a free platform locally. It should be noted that several players were initially suspicious of such a move. In fact, EBay China stated that free services were not a business model. However, Taobao would work around this problem by creating different types of platforms that the company could use for revenue generation. The most obvious one was advertisements. The organisation has pay for transactions as well as pay for performance platforms. It also has advertisements for brands. Others included value addition and support for sellers. The organisation also launched a B2C platform known as TMall in which it charged commissions for the revenues generated. These creative ways ensured that it continued to make money even when an unconventional model was adopted (Hatoum 17). Listing methods were quite flexible at Taobao and rigid at EBay. EBay only allowed members to work within their listing periods. They were not given any extensions as their parent company did not allow them to do so. Taobao on the other hand gave customers an opportunity to extend into the next period. Furthermore, a number of them could enjoy up to a fortnight worth of listings. This was relatively generous in the ecommerce industry. Taobao also demonstrated its understanding of the Chinese market in comparison to EBay through its listings focuses. In line with their global strategy, EBay China considered itself a leader in consumer to consumer auctions. Therefore, auctions accounted for 40% of their listings. Conversely, Taobao only allocated 10% of its listings to auctions. It knew that most Chinese users simply wanted to sell their items online. So sales accounted for the rest of the listings. The restructuring efforts that had taken place at EBay in 2003 also coincided with an alteration of the listing strategy. The firm instated the EBay formula which involved features fees, final value and insertion fees. This formula was blindly applied to the Chinese market without regard for their personal needs. Furthermore, the company believed that so long as buyer and seller dominance was maintained, and sellers made money, then there would be no problem with the model. EBay was initially blinded by the fact that its revenue appeared to increase after introduction of listing and transaction fees as far back as 2001. However, those increments were created by other goings on and not the new pricing model (Crampton 9). Insertion fees referred to payments made by sellers in order to insert a product in their listings. In auction style formats, the listings would depend on the reserve or starting prices. For fixed price goods, the figures were already preselected. The organisation also had a final value fee in which the buyer was expected to pay about 9% of the costs of their items. Features fees were charged on the basis of the features that the seller wanted to add onto their items. Multiple fee charges like listing upgrades or reserve price fees would eventually ensure that the company does relatively poorly in the marketplace. All the relative changes that took place concurrently in EBay meant that the organisation had few justifications to charge customers for its services. It often makes sense to charge a premium for one’s services if one offers extra value to the client. EBay initially had a large user base that guaranteed returns for its investors. It also used to respond to customer needs very fast and was moderately innovative. After its technology transition in 2003, the services became slow and unpredictable. Additionally, users diminished dramatically, as the two key sources of value that EBay used to justify its pricing model no longer existed. However, the firm’s continual insistence on charging caused several buyers to think of other alternatives. It had tried reducing its listing prices slowly from 2003 and eventually stopped charging them in 2005. This decision took too long to be made because at the time, EBay’s control of the market share had now reduced to a pitiful 30%. One should note that registered users at EBay were still significantly higher in EBay than Taobao. However transaction volumes were the key indicator. 57% of these transactions took place at the latter company. Technology development Taobao decided that it would use innovative technological features to keep the customers that it was getting since 2003. Those who had moved due to the migration that occurred in EBay as well as the ones who were attracted to its listing for free model would need something to keep them in the business. First, the company realised that its buyers and sellers had to know one another. Therefore it provided them with an online chat function. It changed its layout to fit into the interests of its new clientele (Wang 8). The online chat function was also appropriate for mobile device usage. Mobile phone penetration was much more intense than computer usage. This was also in tandem with the voice mail services that Taobao launched for its users. People could communicate through a device that they were highly familiar with and this went a long way in their offerings. Taobao even changed its user interface in order to coincide with the needs of the market. A number of female users had started increasing in the market. Therefore, the company altered the appearance of the website in order to capture this new model. Furthermore, the company was aware of Chinese buyers’ preferences for vibrant and lively websites. They also want to garner as much information as possible whenever they visited a certain website. Therefore, the placement of a number of web links was evident on the company website. Meanwhile, EBay stayed true to its global model, which was a sparse and less vibrant avenue. Conversely, EBay was unable to make any changes on their website without cumbersome protocol issues. Development was kept to a minimum in EBay China because the US platform wanted to incorporate all the Chinese-related features into their offering. It would be almost impossible for the global enterprise to make these changes if EBay China was changing things all the time. Therefore, as their rivals at Taobao were making new and impressive changes in their offerings, workers at Eachnet could not replicate this. They had to work with their existing features regardless of what happened in the marketplace. The COO for Eachnet was finally given the permission to change some things months after the technology migration. A lot of losses had occurred therein. Minor alterations like fonts or even negligible changes to words took slightly over two months to make. In a virtual world where consumer needs alter so fast, it is imperative to keep technology development in the hands of the local team. Sadly, this was not the case for the concerned enterprise as Chinese representatives had lost control over innovation (Li et. al. 68). Relationship building It is already a known fact that the Chinese are a communal society. They value interpersonal relationships and will often engage in business with persons that they trust. Taobao seemed to be aware of this need when it started business in China. It created swift gaunxi within its business premises. The latter term refers to mutually beneficial interpersonal relationships that arise from highly interactive social exchanges. As mentioned in the previous section, instant messaging was one of the technological platforms that had been launched by Taobao. Consumers could interact with each other as well as with sellers. They would ask each other, questions about the products on sale as well as each other. To an outsider, Taobao’s instant chat system was nothing but another incentive to attract buyers. However, to the Chinese-based firm, this was a platform for connecting and building relationships among its consumers. On the flipside, EBay was not doing any of this. The closest they ever got to facilitating relationships between buyers and sellers were rumours of a skype application for members. Video conferencing is a highly demanding process that consumes a lot of technology resources. This system was never made available by EBay and as a result, consumers felt alienated from each other. China’s worldview differs greatly from the western one. The COO and CFO appointed to manage EBay China were not exposed to this cultural concept and few of them therefore pushed for its implementation. Taobao on the other hand leveraged on technological tools to build personal interactions (The Economist 15). One of the greatest objections to online selling even in other parts of the world is their impersonal nature. Companies that understood this concept are able to look for alternatives to connect with participants, and this is exactly what Taobao did. Aside from facilitating relationships among buyers and sellers, the company also worked on strengthening the bond between itself and its buyers. It did this by creating a user interface that was appropriate to their needs. It listed its products based on people’s preferences. For instance, one could find items for women, men and several other categories. In contrast, EBay stuck to their usual routine of separating listings according to two categories; that is buyers as well as sellers. It thus became difficult to find what one was looking for in this website. For this reason, Taobao was perceived as the more in tuned company. Many regarded it as an informal and friendly organisation. Its ability to meet and supersede consumer requirements was insurmountable. Payment systems In a country like China, where trust is crucial to business, one must have a payment system that is not only simple enough for all to use but one that enforces honesty in relationship building. The payment system used by Taobao was once again more powerful than the one relied on by EBay. Taobao only has one payment system called Alipay. The latter is a branch of Taobao. It was created in 2004 and has been the backbone of the company’s success. Chinese consumers had a low degree of trust in online business at the beginning of Eachnet’s success in 2001. In fact, this emanated from failure of traders to deliver their goods after consumers paid. The lack of internet infrastructure and legal mechanisms to support these defaults meant that a lot of consumers were losing money. To mitigate this problem, the two ecommerce companies each came up with their own strategies for dealing with the problem. Taobao introduced Alipay, which was a platform managed by the organisation. After a buyer and seller had come to an agreement, the buyer would pay through Alipay. Taobao would notify the seller that payments have been made and the seller would then deliver the goods to the buyer. Once the customer received the item, then Alipay would release it to the seller. This provided a seamless way of verifying that consumers do not lose their money due to the invisibility of the ecommerce platform. This service was available to all, and one did not have to pay to enjoy it. The latter company also had another alternative for Alipay. Consumers could choose to pay upon delivery of their items. The company was well aware that other methods of online payments like credit or debit cards were not so prevalent in China. Most individuals were also used to cash payment. Therefore, they had the option of checking the goods they received and paying for them. This mirrored the idea found in most departmental stores or retail outlets. Therefore, it was quite appropriate for China. Alipay was so effective that it went outside the confines of Taobao to several other sellers around the country. People could trust the method because it was backed by long periods of success. Furthermore, the CEO of Taobao, Ma, had already built a long term relationship with the Chinese government. It was thus quite difficult to find any complications with the transaction. Furthermore the delivery system was such that it was well integrated with the user interface and could create consistent results. Conversely, EBay was not as successful as its counterpart in launching it payment systems. It had acquired Paypal in 2003 and also launched An Fu Tong in 2004. This created confusion in the minds of consumers as some of them thought that they were on the An Fu Tong yet they had migrated to Alipay. The company strived to tell consumers that these methods were different but the damage had already been done. A number of consumers would assume that the system has not registered their transaction, yet it was their misconception that had caused the problem. The use of such separate methods eventually led to poor incorporation of the services in business transactions. Only 21% of EBay buyers actually utilised their two methods. They complained that it was not integrated. Conversely, a whopping 79% embraced Alipay at Taobao (Lafevre 8). Conclusion Taobao was able to overtake a first mover in the highly competitive ecommerce platform because of its ability to understand the consumer and to respond to their needs accordingly. It was a highly flexible organisation that took into account the local knowledge of its founders to enrich its customer experiences. Every platform including pricing, website design, infrastructural set up, and marketing occurred in response to buyers’ preferences. On the flipside, EBay was unsuccessful due to its rigid nature. The company was so focused on is global identity that it lost relevance to the local market. Its listings and pricing models were appropriate for the firm’s global vision but did not reflect Chinese needs. Marketing did not take into account Chinese buyers’ level of exposure to internet platforms or their need for relationship building. Generally, the company had too much bureaucracy to customise its service to Chinese buyers. The organisation was out of touch with goings on in the country thus alienating its target market. The success of Taobao and the failure of EBay teaches multinational corporations important lessons. Rather than trying to change consumers’ tastes and preferences, it is more effective to adapt to them. EBay dedicated a lot of resources to the wrong marketing strategy because it did not take the time to study its market. Finally, multinationals ought to empower local subsidiaries to make critical decisions in business. The centralisation of core functions like technology development in ecommerce spelt doom for EBay China. Multinationals should give target nations power to control such aspects of their business processes. Works Cited Crampton, Thomas. 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