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EBay To Scuttle Chinese Site

EBay plans to turn off its main auctions Web site in China after years of heavy investments. The company will partner with Beijing-based TOM Online to replace the site in 2007, the Wall Street Journal reports, citing people familiar with the matter.

One analyst called the news a "cautionary tale" for American Internet companies planning to invest in China's rapidly growing economy.

EBay did not return multiple requests for comment.

In a statement, TOM Online said that trading in its shares will be suspended today on Hong Kong's exchange, pending an announcement of a notifiable transaction made by the company.

According to the Journal's sources, 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 will keep a version of its site open for Chinese users running auctions for buyers outside of China. Layoffs are not expected, but TOM CEO Wang Lei Lei will take over as CEO of the new venture while Jeff Liao, CEO of eBay EachNet, will move to an as-of-yet unknown management role.

EBay's first major investment in China came in 2003 when it bought a one-third stake in EachNet, an online, person-to-person trading operation based in Shanghai. 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."