RealTime IT News

It's Official: EBay Folds Chinese Subsidiary

Hours after announcing plans to leave China, EBay made it official. The online auctioneer will scuttle eBay EachNet, its online, person-to-person trading operation based in Shanghai.

The company will partner with Beijing-based TOM Online to replace the site in 2007, according to a statement. EBay said it chose TOM Online for its "local market knowledge" and active wireless base of more than 75 million users.

EBay will contribute an initial $40 million to take a 49 percent stake in the partnership, while wireless operator TOM Online's $20 million will buy 51 percent. EBay also said it will "contribute" its EachNet property and if mutually agreed, the two companies can share in an investment of up to an additional $10 million.

EBay will keep a version of its site open for Chinese users running auctions for buyers outside of China and said it will continue to grow its China Development Center for worldwide product development.

Layoffs are not expected, but TOM CEO Wang Lei Lei will take over as CEO of the new venture while Jeff Liao, former CEO of eBay EachNet, will move to a new management role in the joint venture.

EBay's first major investment in China was EachNet in 2003, and it spent $30 million to buy a one-third stake in the operation. Optimism abounded at the time.

"Over the next three to four years, China's e-commerce revenue is projected to grow nearly twelve-fold to more than $16 billion," said then eBay president and CEO Meg Whitman. In 2004, eBay took full ownership of EachNet for $150 million in cash.

But while China's e-commerce revenue has grown at least as wildly as Whitman predicted, eBay was never able to fully take advantage.

That may be because China's wild growth was too wild, JupiterKagan research analyst Patti Freeman Evans told internetnews.com. She said eBay's most successful foreign investments have been in more mature markets such as Europe.

She characterized eBay's history in China as a "cautionary tale" for other American Internet companies lusting over China's exponentially growing economy.

"China is rapidly emerging. It is changing economically, culturally and demographically at a pace that is not easy to figure out. EBay's re-purposing reflects how difficult the challenge is," Evans said.

In a 2005 interview with internetnews.com, Jack Ma, CEO of the Chinese Internet company Alibaba, said eBay would ultimately lose out to his company's now-market leading auction site Taobao because eBay "committed the same mistakes that most multinational companies make when they come to China."

Ma said that eBay shouldn't have assumed what worked in the U.S. would work in China. He also said eBay would fail because they were too quick to replace local management at EachNet with foreigners who didn't understand China's market.

Freeman argued, however, that eBay's China investment isn't necessarily a failure. EBay still hosts 30 percent of all online auctions in China, and given the size of the market, that's "huge."

"It all depends on how you define failure. For me failure is that there's no way you could succeed in the marketplace and you just left. They haven't done that. They are actually re-invested heavily in a new strategy. It's a re-positioning."