Analysis of Ebay's Failure in Mainland China Market - Example

Analysis of eBays Failure in Mainland China Market Analysis of eBays Failure in Mainland China Market Background In 1995, eBay was founded as AuctionWeb in Californiaby Pierre Omidyar, and it officially changed the name to eBay in 1997(Alani 2011). EBay beganitsglobalization from 1999 (LIANG 2012) and became the worlds largest website for exchanging goods with 65 million registered users from 150 countries and 971 million items for sale by 2004 (Wernick and Rhodes 2005). In 2002, eBay began to enter Chinese market which had become the second largest market in the world at that time, just behind the U.S (Berniker 2003). In the year 2002, eBay invested $30 million in the localChinese companyEachnet(Mangalindan 2006)which was the only significant e-commerce player in China (LIANG 2012), and then Eachnet changed its name to eBay-Eachnet. In the year 2003, eBay acquired the entireeBay-Eachnet for$150 in cash(Berniker 2003). At that time, eBay-Eachnet owned 73% of the market share of C2C online transactions in China with 4.3 million active user accounts (Yu, Hu and Li). In the same year of 2003, eBay invested a further $ 500 million ineBay-Eachnet to solidify its strength and ‘integrate Eachnet’s trading platform into eBay’s global infrastructure’(Yu, Hu and Li). In the same year of 2003, a new C2C company named Taobao was launched in China, established by the Chinese e-commerce company Alibaba Group (Wang 2010). Soon after that, eBay made more aggressive actions to dominate the market, such as signed exclusive advertising rights with major Chinese portals (e.g. Sina and Sohu ) to block advertisements from Taobao (Wang, 2010). Also in 2003, a C2C company named Taobao was launched in China by Alibaba Group, a Chinese local company, and became the rival competitor of eBay(Berniker 2003). Soon after Taobao was launched, eBay did more aggressive campaigns to dominate the market, such as signed exclusive advertising rights with some major Chinese portals (e.g. Sina, Sohu)for the objective of blocking advertisements from Taobao (Wang 2010). While the start-up of Taobao became mainland Chinas undisputed market leader just within two years, its market share surged from 8% to 59% between 2003 and 2005 (Berniker 2003). By March 2006, Taobao had overtaken eBay EachNet and became the pacesetter in China’s consumer-to-consumer (C2C) market, with 67% share of the market in terms of users, while eBay had only 29% market share (Wang 2010). Besides, eBay did not perform well in the stock market, its share pricedeclined more than 30% during the year 2006(Mangalindan 2006). In In the same year of 2003, a new C2C company named Taobao was launched in China, established by the Chinese e-commerce company Alibaba Group (Wang, 2010).Soon after that, eBay made more aggressive actions to dominate the market, such as signed exclusive advertising rights with major Cbinese portals (e.g. Sina and Sohu ) to blaock advertisements from Taobao (Wang, 2010). However, the start-up Taobao became mainland Chinas undisputed market leader just within two years, whose market share surged from 8% to 59% between 2003 and 2005, while eBay’s plunged from 79% to 36% (Daxue 2014). By the end of 2006, Taobao already had 30 million registered users, which presentsabout 75% of the total C2C usersin China market(Yu, Hu and Li). While on the other hand, although eBay had spent 300 million dollars on investment in China market by the end of 2006, little success was achieved (Knowledge@Wharton 2007).Compared to Taoboa’s 67%, eBay-Eachnet just had 29% of the Chinese auction market for the first six months of the year 2006 (Mangalindan 2006).Besides, the user satisfaction level was 62 %for eBay EachNet versus 77 % for Taobao (Wang, 2010). After the unpleasing independent development, eBay announced its joint venture with TomOnline enterprise on the 20th of December, 2006 and given up the e-commerce market of China by closing down its website, which was considered it failed in China(Wang, 2010). As the world’s largest on-line marketplace, eBay failed in second largest market—China—within three years. It has been considered as a textbook case as eBay had been through almost all the problems that an international company can meet in mainland China Market (Rein 2012). This paper will analyze the reasons behind eBay’s failure in China based on entry strategies, localization strategies and Porter’s five forces model. 2. EBay’s entry strategies in China In the year of 2003, eBay entered China by acquiring Eachnet(Berniker 2003). In this part, reasons of eBays failure associated with eBays entry strategies will be analyzed specifically. 2.1 “Where”—Location Choice In any case, the markets into which a firm chooses to continue its internationalization should be those that will offer a great potential benefit (Gallego et al, 2009). a. Potential of Local Market As it mentioned before, China had become the second largest market in the world. According to the report publishedby China Internet Network Information Center(2003), in 2003, there were 68 million Internet users in China. In spite of the huge number of the people using Internet, the portion to the Chinese population of about 1.3 billion (Chinability.com, 2015) is very low, and the online shoppers just account for a small part of all the internet users form Chart 1. All of those indicate that the market potential of china is huge and therefore beneficial for eBay to enter. Figure 1 - Purpose of using Internet a. Competition in Local Market As it mentioned in the background section, eBay got around 73% of share market by acquiring the local company, Eachnet. And even Taobao was launched soon after eBay entered China, the majority of market share was still hold by eBay during the first year which can be seen from the figure 2. Figure 2 - market share: Taobao VS eBay b. Cultural Distance The majority of customers in China had not accepted the idea of shopping online. Most Chinese customers preferred shopping in stores with the lack of trust in online purchase (LIANG 2012). Because of the feeling of insecurity, Chinese customers would not choose to buy products online Although eBay had a third-party payment, PayPal, to reduce the risk of fraud, Chinese customers were unfamiliar with PayPal, as well as that PayPal was unable to provide secure service that connected trade, payment and receiving product seamlessly, which consequently increased the difficulty of market expansion in China (UK Essays 2013). Taobao provide a new payment system Alipay to secure the money of buyers. Buyer pay money to Alipay and seller send goods to buyer, seller cannot receive the money until goods are arrived and be checked by buyer (ChinaSEO.com n.d.). Many Chinese customers like this relatively safe payment method and start to shop online in Taobao (Chang et al 2013). To sum up, the huge market potential and low initial competition which were beneficial to eBay were not the reasons of the company’s failure, but the culture difference did a big matter which will be analyzed later. 2.2 “When”—Timing Choice The timing of the market entry may have far-reaching consequences in terms of firm performance(Tuppura 2008). Just before eBay entered China market, it did not perform well in other Asian areas including Japan, Korea and Taiwan (UK Essays 2013). For instance, after failing to capture significant market share against Yahoo! Auction in Japan, eBay withdraw from the Japanese market andtried to enter China in March 2002.We consider that the entry into China is hasty without adequate time to analyze itsfailure in Asia area. Besides, even in a propitious environment the early entrant has the possibility of achieving substantial first-mover advantage, but at the same time the pioneering strategy is always risky(Schnaars, 1994). Since eBay was the first international e-commerce company in China, they had no former successful experience of other international companies to learn from. Therefore, considering the failures in Asian areas and pioneering cost, eBayshould not enter such a new but enormous market like China rushly. 2.3 “How”—Mode Choice Initially, eBayinvested US$ 30 million for acquiring 33% equity of Eachnet to open the Chinese market (Mangalindan 2006). Eachnet is a Chinese C2C (customer-to-customer) company and online auction site that enable its users to trade a wide range of items (Chang et al 2013). Choosing acquisition as its entry mode, eBay wasted significant amount of time integrating the senior management of the subsidiary which resulted in ignorance of Taobao’s marketing strategies. Furthermore, the headquarters in US did not endow the subsidiary enough decision-making power. Due to the lack of localization, eBay’s market share continuously decreased from 2002 to 2006.Apparently, acquisition is not the optimal choice for eBay to use as an entry mode. 3. Global Strategy Analysis: The “Failure” of localization GI-LR framework is and graphicalmodel to evaluate a company how managing differences and operational integration are beneficial to an internationalizing company (Fan, Nyland& Zhu 2009). As figure 3 shows that 4 distinct representing 4 strategies, which might be adopted by an internationalizing company (Kumar 2015). Figure 3 A global strategic plan is effective when the differences among consumers in countries are small and competition is global. A multi-domestic approach involves producing products tailored to individual countries. Following this strategy innovation comes from local R&D; managers decentralize decision making; and encourage local sourcing(Makhija, Kim & Williamson 1997). E-commerce is an industry that highly depends on local customer consumption habit. The high managing differences and low operational integration are favorable to e-commerce industry, especially in mainland China market(Chang et al 2013). As figure 1 indicates, Taobao choose Multi-Domestic strategy to ensure the localization of business operation when eBay insisted to globalize the mainland China business. 3.1 Internal Management EBay has its own product and business operation model of e-commerce market which has been proven successful in US.In China market, however, eBay was failed in localization. In fact, many international companies found the problem of localization is far more serious than their expectation in China(Wang, 2010). The initial mistake was, eBay easily moved their global e-commerce trade platform to China without any specific modification. Due to the standardization of global trade platform, it was technically difficult to localize the trading system to apply to Chinese e-commerce environment. The defect of trading platform limited eBay’s development in mainland China at the beginning. Besides, eBay totally copied the management method and operation mode from US to China, including the understanding of customer behavior, the positioning of product and the strategy of marketing.EBay China didn’t have appropriate self-governing power. In the past a long period of time, eBay adopted the line management, which means, most critical decisions are made by eBay US headquarter directly. The branch offices, which are mostly located in China, are considered as performers of orders from headquarter. Their major task was promoting products that are existed in US before(LIANG 2012). 3.2 Strategy of Culture Difference Analysis Culture is the most informal and least codified part of a country’s institutional framework, it impacts the strategy of firms. Firms must understand cultural rule sets of the society (Kumar 2015).The following aspects ofspecific strategy will give specific examples to evaluate culture related strategies of eBay in China.Hofstedes cultural dimensions theory is going to be employed so that a better understanding of how culture influences a person’s behavior can be drawn. According to Hofstede, a person’s cultural beliefs will directly define his values and these values will influence how one behaves. Hofstede came up with five cultural dimensions which can be used to analyze the difference of culture between US and China. These cultural dimensions include;Indulgence versus restraint, Power distance index, Long-term orientation, Individualism vscollectivism,Masculinity,Uncertainty avoidance index. a. Charge mode or Charge Free mode In Chinese customer culture, they always prefer charge free items, especially for e-commerce. EBay insist the same operation mode as US market, which is, charging sellers for goods listing and transaction. However, Taobao made the charge fee strategy at first, they promised that Taobao will provide a charge free period to sellers and customer(Wang, 2010). Interestingly, Taobao never mentioned how long the charge free period will last. It is one of the most critical mistakes made by eBay China. Comparing to Taobao, Chinese private sellers obviously to prefer the charge free things and many eBay sellers decided to transfer their goods from eBay to Taobao. As a result, eBay lost much mainland China market share year by year(LIANG 2012). The charge free mode was greatly influenced by the indulgence versus restraint cultural dimension. Chinese people have been known to be very conservative as far as their culture is concerned and that the reason why they stuck to the charge free items which could not be traded at EBay. The Chinese could not indulge in the US culture which charges duty on items traded at EBay and that’s why they opted to trade at Taobao which offered charge free transactions. b. Communication between Buyers and Sellers In Chinese culture, buyers prefer to trade with seller directly, which means a good communication between seller and buyer can make trust. Trust plays an important role in e-commerce trading especially in China.During the period of 2003-2006, e-commerce is definitely a new stuff to Chinese customer, most customers still doubted about the trading safety of e-commerce. Therefore, trust is a critical factor for online trading which can only be built by communication and time. At the beginning, eBay didn’t encourage buyersto communicate with sellers directly to avoid the private agreement of price.Many buyers felt eBay restrict their appropriate rights of communication. Conversely, Taobao allow sellers to provide any contact information to buyers(Makhija, Kim & Williamson 1997). Taobao even developed an instant message software called Aliwangwang, which is similar to MSN, to provide a platform for trading.Chinese customers like the process of bargaining which can build trust between both side, Aliwangwang satisfied the Chinese consumption habit and more customers got used to trade by Aliwangwang. The Chinese culture is one which is characterized with uncertainty avoidance in all the transactions in which they are involved in. These people cannot engage themselves in any transaction which has some degree of infidelity and that the reason why they opted for Taobao instead of EBay. The uncertainty came as a result of the lack of communication between the buyers and sellers who traded at EBay. Hofstede has named this form of cultural dimension as uncertainty avoidance index. c. Brandposition and recognition As one of the world’s most famous e-commerce brand, eBay try to put the brand into a high-level and serve for high-income customers in mainland China. The major customer group in mainland China is, however, middle-income customer(Wang, 2010). Lack of mainland China marketing understanding make eBay adopted biased marketing strategy. When eBay focus on branding promotion and try to advertise the high-end brand products like Zippo and iPod, Taobao was trying to sell daily necessities and raise social topics to enhance their brand image.For example, some female sellers of Taobao started to sell second-hand underwear to particular buyer, it raised a broad discussion on internet and more people know Taobao by this topic. It is not such a proper advertising and it is unbelievable and ridiculous in eBay’s eyes; however, it did work in China(Makhija, Kim & Williamson 1997).Middle-income customer and general public is the major part in mainland China e-commerce market. In conclusion, eBay management level was trying to globalize brand and connect mainland China market to the world, meanwhile, Taobao made a good use of local management and fundamentally understood the demand of local customer. Two apparently different localization strategy leads different results –eBay lost their marketing share from 72.40% to 7.70% during 2003-2006 (Barnett, Feng &Luo, 2010) but Taobao became the largest e-commerce platform in mainland China.This effect can be best explained by Power distance index cultural dimension which was developed by Hofstede. According to Hofstede, power distance determines the extent to which individuals accept to be manipulated by the more powerful people in the society. Communities with a high degree of power distance can be easily manipulated but those with a lower degree cannot. The Chinese culture is characterized with a low degree of power distance and that’s why EBay could not easily manipulate them by offering expensive products to be traded. 3.3 Recommendation: EBay should employee more local management to understand local marketing better. Self-governing power is necessary for eBay China to response any local market competition activities. 4. Porter’s Five Forces Model Figure 1 Figure 1 shows that strategy of a firm should link the firm and industry environment. To achieve success in China, eBay has to link itself with Chinese e-commerce market including considering its goals, resources, structure, competitors and suppliers. Porter’s five models would be used to explain about the main forces that influence making business unsuccessful or successful (Porter 2008). It’s a useful tool to analyze competition environment in Chinese e-commerce industry. Competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products (Porter 2008). 4.1 Intensity of Rivalry Rivalry intensity in e-commerce is quite high. As a local company, Taobao is more familiar with Chinese users’ spending habits. It became an increasing threat to eBay. Due to the influence of Taobao’s success, eBay’s market share declined gradually until it lost dominance and finally exit Chinese market, as mentioned before. Except for the most significant competitor Taobao, there were other Chinese companies like Paipai grabbing market share.The switching cost for customers in e-commerce industry is low (Pinkinelli 2014). And as it lacks of product differentiation, customers can choose different online sellers with low cost. 4.2 Bargaining Power of Customers Customers include both sellers and buyers of eBay. Firstly, there are an increasing number of customers of online shopping. Sales volume of each individual seller will only cover an unimpressive proportion of eBay. Thus, for individual customers, they are not able to hold high leverage of bargain power. Secondly, eBay and Taobao own about 90% market share from 2002 to 2007 (Pinkinelli 2014). As a result, the two major players are customers’ best choices. But it should also be indicated that the switching cost is low for customers. Therefore, Customers’ bargaining power is medium. 4.3 Bargaining Power of Suppliers Bargaining Power of producers and Suppliers is medium in Chinese e-commerce industry. One of the suppliers of eBay is the ICT provider (Pinkinelli 2014). The sources that creates traffic on eBay’s situate can further be placed in the same category as suppliers. Search engines such as Google hold considerable leverage as they account for over 20 percent of traffic on eBay if we account for both paid and organic search. Besides, there was relatively less number of post and delivery services and shipping carriers; hence any pricing disruption or variation in their services could hinder eBay’s ability to deliver products timely. Therefore, there are many kinds of suppliers for eBay and each of them can influence the outcome of eBay’s service, though these influences are not crucial(Makhija, Kim & Williamson 1997). 4.4 Threat of potential entrants The e-commerce market is described by few barriers to entry. It is comparatively easy for newer players to get into the market. However, eBay and Taobao already had its brand recognition built which is crucialin e-commerce industry (Makhija, Kim & Williamson 1997).It’s quite difficult for a new company to compete with eBay or Taobao.Additionally, security is a paramount during online payments. Hence, newer players that do not have the necessary brand recognition will find it difficult to attract new customers. While on the other side, Taobao is actually a new entrant to eBay. It’s equipped with strategy that is more suitable in Chinese market and finally bested eBay. This shows that a potential entrant may come to be very competitive. 4.5 Substitute Products There are few substitutes to trading online (Vakil 2012). But customers can choose from a wide range of offline players. Physical shops provide different shopping experience: costumers can try and claim the product right away; besides, there is no transaction cost (Pinkinelli 2014).As a result, some costumers will choose physical store instead of online shopping. The threat ofSubstitute products is medium. 5. Conclusion According to analysis above, eBay’ failure is not an accidental and there are multiple reasons, such as the inappropriate entry mode of acquisition and the low level localization. In general, the core reason is that eBay did not understanding China market sufficiently and therefore cannot make appropriate strategies to achieve the company’s objectives. However, the battle between multinational e-commerce companies is far from over (Yu, Hu and Li). If it could learn from its failure in China market and find the appropriate strategies in its future globalization process, it would perform much better. 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