Managing Global Business

Case Study: e-Bays Strategy in China- Alliance or Acquisition

Presented by Group 4:
Case Facts
eBays evolution

Founded in 1995 by Pierre Omidyar, e-Bay provided a virtual

trading platform and is one of the very few survivors of the dot
com bubble

eBay offers an online platform where millions of items are traded

each day enabling trade on a local, national & international basis

Revenue model- eBay sellers were charged an Insertion Fee,

Optional Features Fee & Final Value Fee

Strong management team Jeff Skoll to take care of business

and Meg Whitman as President and CEO

In 1997 got US$ 6.7 Million in VC Funding

Launched IPO in 1998 and raised US$ 66 million

EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION

Case Facts
eBays global expansion

Company expanded rapidly through various expansion

strategies with localization as a goal, using the following
methods
Regional sites managed locally and supported by
grassroots
Acquisition
Alliances
Joint Ventures
International operations became profitable in 2001 Q4
In 2002, retreated from Japanese market due to competition
By 2006, expanded to 35 global locations and had 221.6
million registered users worldwide
Net revenues were US$ 2.2 billion domestic and US$ 2.1
billion internationally
By end of 2006, eBay had 14% of overall e-Commerce market
share

EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION

Case Facts
eBays China entry and expansion

e-Bay entered China in 2002 by acquiring 33% interest in

EachNet
Within one year, EachNet was fully acquired and the venture was
known as e-Bay Eachnet
High competition from local players particularly, TaoBao,
subsidiary of Alibaba
In 2006, eBay EachNets market share declined to 29% against
60% of TaoBao
Advertised heavily
Largest online advertiser
$100 million advertisement expenditure (2005)
By 2006 end, eBay EachNets investment in Chinese market
totaled $300 million
eBay wanted to save its flagging business in China
In 2006, eBay and TOM online announced a joint venture
TOM online had joint venture with Skype for operations in China.
Skype is fully owned subsidiary of eBay (Acquired in 2005 to get
a foothold in the online communications business)
EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION
Critical Analysis
e-Bays entry into China with Eachnet
Market with potential- 250 million strong emerging middle class,
growing internet penetration and online shoppers
Risks posed by Chinese market
Slow internet speed
High internet access costs
Imbalanced economic and technological development in
China
Absence of reliable credit system for online payment
Government regulations
Lack of transparency and inadequate legal system
Entry to China
In 2002 acquired 33% interest in EachNet for $30 Million and in
2003 fully acquired for $150 Million
Rebranded as eBay EachNet
EachNets strengths at the time of 33% interest acquisition
by eBay
Sound business and operational strategies
Modified auction model to accommodate payment systems,
demographics and consumer behaviour face to face meetings,
fixed price trading, feedback forums etc.
EachNets position at the time of full acquisition
85% market share, Valuation- $225 Million, Revenue- $1.8 Million
EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION
Critical Analysis
eBay EachNets decline

Increasing competition from local players

Localisation of services by domestic players and eBays failure to
adapt its products and services- Escrow account for payment,
buyer seller interaction, customer service hotline, charges for
services
Poor customer service by eBay- Instant messaging, customer
service hotline
Customer Perception and cultural differences
Trust - Consumers felt eBay EachNet did not devote effort for
building trust towards company and between buyers and sellers
(Eg. Escrow, Alibabas presence)
More reliance on new domestic company than new foreign
company
Cultural differences- Do it youself approach, simple interface for
brand consistency
Brand image transfer proved inapplicable in China
eBays approach to Chinese business
Failed to accept that China is different from its other markets-
Adaptation of products and services
Centralised decision making- Inflexibility and lag in response to
EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION
changing Chinese market
Critical Analysis
e-Bays entry into China with EachNet

Advantages and disadvantages of acquisition mode of entry

Advantages
Faster
Direct ownership of facilities in
target country
High degree of control
Ability to better understand the
consumers and competitive
environment as a result of direct
presence
Provide consistent customer
experience globally
Eliminates the issues in other
modes of entry- mistrust,
performance ambiguity,
terminations etc
Disadvantages
Requires high level of resources
Requires high degree of
commitment
Higher risk
Factors that proved
disadvantageous to eBay in China
Failure to localise service
offerings
Delay in responding to changing
market
Adopting consistent
representation of brand ignored
cultural differences of China
from other target markets

EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION

Critical Analysis
eBay's Re-entry to China with Tom Online

Sets up a JV with Tom Online in 2006:

Tom Online is one of the largest wireless service provider and 5th
largest internet portal in China
JV, with e-Bay having 49% ownership and Tom Online having
51% ownership; Venture renamed as TOM Eachnet
eBay EachNet platform was to be transferred to a new platform
and eBay would invest US$ 40 Million in cash
Tom Online was to invest US $ 20 Million plus access to local
knowledge, technology and brand value

EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION

Critical Analysis
eBay's Re-entry TO China with Tom Online

Why after failure to succeed with EachNet did eBay choose a

different mode of entry with TomOnline? Critically evaluate
the decision and expectation of success in regaining market
share from Tao Bao?
JV was clearly an indication that eBays strategy of EachNet
acquisition was faulty; needed to adopt a better strategy to re-
launch and stay competitive in the market
Wanted to step down from the forefront of online auction battle in
China after they suffered huge losses, yet not fully withdraw from
China like Japan
With JV eBay was able to share the risks involved in the business
with Tom Online and also have access to Tom Onlines knowledge
of the local market, the strength of its brand among Chinese
consumers and its technological know-how
With majority stake, e-Bay wanted Tom Online company to drive
the business and leverage its political clout
Recognition that Chinese consumers had more faith and
confidence in indigenous firms than foreign firms and will to
EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION
patronize foreign brands that are well established in the China
Critical Analysis
eBay's Re-entry TO China with Tom Online

Benefits of Joint Venture for e-Bay and Tom Online

Pooling of Resources & expertise for e-Bay & can venture into
mobile commerce, where Tom Online is a market leader
Tom Online could expand into a online auction, a high growth
industry and minimize its reliance on mobile value added service
for revenues-89% revenue from value added mobile phone
services
Opportunity for the Joint venture to:
Form strong brand
Cultural Adaption
Expand Product and Services
Leverage political connects

EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION

Conclusion
Going abroad comes with huge risks and costs; Failure will be
detrimental to whole business
Before internationalization company should develop a strong
internalization framework covering:
Market size and growth
Competitive environment
Cultural, administrative, geographic and economic distance
Countrys institutional contexts- political and social systems,
openness, product market, labour market and capital
market
Hence firms:
Must make right choice on the country
The required alterations to the product or service to
adapt to the customer in the country
Deciding on appropriate entry time and modes
considering the dynamics of the countrys business
environment

EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION

Conclusion
eBays acquisition strategy
eBay wanted to take advantage of growing online shoppers in
China Growing internet penetration and penetration of online
shoppers
eBay should have entered China through a JV with EachNet
because:
Cultural differences- Self help, direct interaction, website
presentation
Underdeveloped payment system
Trust factors due to lack of adequate legal system
Favour towards new domestic companies
Quick response requirement for changing Chinese market
Joint Venture by e-Bay and Tom Online
Joint venture has its own advantages and can help eBay thorough:
Local market knowledge
Brand image of a local player
Strong political network in China which can safeguard against
changes in government policies

EBAYS STRATEGY IN CHINA- ALLIANCE OR ACQUISITION