Houston Community News >> Ebay to Close Auction Site in China

12/18/2006 China-- Acknowledging that the online auction market in China is enticingly fast-growing but frustratingly tough to crack, eBay will shut its main Web site in China and enter into a joint venture with a Chinese company instead, a person briefed on the plans of the companies said yesterday.

EBay will take a 49 percent stake in the venture, he said, with Tom Online Inc., an Internet company based in Beijing, taking the majority share and administering the venture, which has yet to be named.

The plans call for eBay to put $40 million into the venture and Tom Online to contribute $20 million. Meg Whitman, eBay’s chief executive, is to make the announcement tomorrow at eBay’s office in Shanghai.

EBay, which has already spent hundreds of millions of dollars trying to establish its presence in China, declined to comment yesterday.

Analysts said the move was not a surprise. “It’s an admission that they failed in China, on their own at least,” said Tim Boyd, an analyst with Caris & Company. “But I think that’s something the market already knew.”

The decision was also seen as a sign of the pressure Chinese government regulations put on foreign companies to set up joint ventures, even when they may be reluctant to do so for fear of helping to turn their Chinese partners into global rivals.

Ina Steiner, the editor of AuctionBytes.com, an online newsletter, said that “a bailout in China would be a huge concession by eBay.” She noted that last year, Ms. Whitman touted China as eBay’s biggest long-term opportunity in local markets.

“The company sold analysts on China as a way to counter slowing growth rates in its more mature markets like the U.S. and Germany,” Ms. Steiner said.

China has not been easy territory for eBay. The company established itself in China as early as 2002, when it pulled out of Japan in a concession to Yahoo’s sizable lead there, and bought a third of Eachnet.com, China’s principal online auction site.

The next year, eBay acquired the rest of Eachnet, bringing the total price to $180 million. In 2005, eBay spent another $100 million on marketing in China. Ms. Whitman predicted in 2002 that within four years, e-commerce revenue from all sources in China would grow nearly twelvefold, to more than $16 billion.

The projections were on the mark, Mr. Boyd said. “But the problem has not been the growth in e-commerce in China. The problem has been that eBay is losing market share.”

EBay has steadily been lagging behind Taobao, the consumer auction arm of Alibaba.com, China’s largest e-commerce company. The research firm Analysys International said that in 2005, Taobao’s share of the Chinese online auction market was 57.7 percent, compared with 31.5 percent for eBay Eachnet.

EBay’s move is similar to a partnership Yahoo struck last year with Alibaba. With its own Chinese operations failing to gain traction, Yahoo paid $1 billion to hand over operations to Alibaba in exchange for a 40 percent stake in the company.

Both deals represent new thinking among Internet companies that what works in other countries does not necessarily work in China, where strong local managers are needed.

Last September, Martin Wu, the chief executive of eBay Eachnet, resigned after just a year, and since then rumors have swirled that the company would quit the market.

Ms. Steiner also said eBay failed to understand the Chinese marketplace and culture. For example, she said, in contrast to Taobao, eBay Eachnet provided no phone support and discouraged buyer-seller contact that could lead to haggling.

Also, she said, eBay failed to react quickly enough when Taobao entered the market with no user fees. In January, eBay Eachnet stopped charging transaction fees.

“It has lost market share in China to Taobao and continues to face regulatory and other challenges,” said Ms. Steiner said. “A partnership with Tom Online would be an effort to salvage its Chinese investment.”

A senior executive at Alibab, Porter Erisman, said, that “ any new deal where eBay changes its model in China would be great for both companies because now we can work out ways to cooperate.”

EBay has played down its troubles in China. As recently as October, in a conference call with analysts and the media, Ms. Whitman sought to dispel speculation that the company might reverse course in China. “We are committed to China for the long term,” she said on the call.

EBay’s stock has been climbing back after hitting a 52-week low of $22.83 in August. Shares closed yesterday at $32.42, down 1.5 percent.

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.

Over all, Mr. Boyd said he was encouraged by the news of eBay’s new alliance. “Now they’re partnering with a strong Chinese presence on the Internet,” he said, referring to Tom Online. “In hindsight, I think they’d say this is the way we should have gone about it at the beginning.”

The person briefed on the plan said that eBay was also considering partnerships and other options for its electronic payments site, PayPal China.

Although eBay’s current site will be shut, he said, a separate site will be maintained to give Chinese users access to international auctions. And eBay’s Kijiji China, a Chinese classified ad site similar to Craigslist in the United States, will continue operations unchanged.

Duncan Clark, the chairman of BDA China Ltd., a technology and media consulting firm in Beijing, said Chinese regulations requiring domestic control over companies engaged in many kinds of financial transactions had limited the ability of Ebay’s payment mechanism.

“The end game is who can control online payment,” he said. “They’ve had their hands tied on that.”

The Chinese authorities are preparing to issue 10 licenses for online payment systems, and eBay will have a much better chance of winning one, Mr. Clark said, if its operations are in a joint venture controlled by a Chinese partner.

(Contributed by NY Times)