eBay’s Strategy in China: Alliance or Acquisition Group 3 MANSI 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 Bubble Mid 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 24 th 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 0 500000000 1000000000 1500000000 2000000000 2500000000 3000000000 3500000000 4000000000 4500000000 Revenue 0 500000000 1000000000 1500000000 2000000000 2500000000 Items 0 50000000 100000000 150000000 200000000 250000000 Number of Registered Users 0 500000000 1000000000 1500000000 2000000000 2500000000 2001 2002 2003 2004 2005 2006 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 $2.9bn Other 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 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 day By 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 China Requirement 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 Promotions New 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 services SMS, MMS, WAP, news subscription, games, ring tones, etc. Provided through mobile telecommunication operators, alliances with mobile handset manufacturers & traditional media Internet Services Content 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 & 5 th 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 & Skype Alliance (November 2004) Co-develop a customized, simplified Chinese version of Skype Attracted 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 sector Develop 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 3 rd 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 million local knowledge, technology, brand value Benefits Diversification into m-commerce Local knowledge Political connections Diversification into online auction Reduce 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 Kong Wang 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