eBay Faces Opposition in China

EBay Faces Opposition in China

A look into EBay’s window of foreign entry strategy

Thomas Liquori

Digitally signed by Thomas Liquori DN: cn=Thomas Liquori, o, ou, email=thomasliquori@a ol.com, c=US Date: 2011.04.21 18:38:08 -04'00'

By: Thomas Liquori IBS240: Professor Jaskierny February 19, 2009

EBay Faces Opposition in China

Table of Contents TABLE OF CONTENTS……………………………………………………………..………………………….1 INTRODUCTION…….……………………………………………………………………………………….2-5 SOCIAL ENVIRONMENT……………………..……………………………………………….………….5-6 POLITICAL ENVIRONMENT…………………………………………….……………………….........7-9

CULTURAL ENVIRONMENT…………………………………………………………………………10-13

LEGAL & REGULATORY ENVIRONMENT…..………………………….………………………13-14

FINANCIAL & ECONOMIC ENVIRONMENT....................................................14-17

BIBLIOGRAPHY………………………………………………………………………………………………18

FOOTNOTES…………………………………………………………………………………………………….19

Group Five

Page

2

EBay Faces Opposition in China

Once upon a time during the dawn of the internet, a man named Pierre Omidyar decided to sell a broken laser pointer online on his website called EBay, named after his consulting company Echo Bay. The site at that time during the year 1995 was not primarily an auction site, the auction part was an afterthought and was named auction web. Auction web grew quickly among internet fanatics, and soon Pierre had to hire several employees to take care of the many tasks that involved his day to day operation. After two years, the site name was changed to EBay, a site that was devoted to online auctions, soon after, the worldwide obsession with EBay and consumers. Currently, Pierre is ranked #54 among the 400 richest Americans in the country by Forbes.

During the year of 1998 Pierre hired an experienced CEO named Meg Whitman to become head of the public exploding company who now had 130 employees and a spot on the New York Stock Exchange with a symbol as EBAY. Over the course of the next 10 years with Meg Whitman’s leadership, EBay mania grew into an enormous multinational company who now employees over 15,000 employees in over 30 countries. EBay’s foreign entry strategies into other countries have played a key role in their success for worldwide domination in the online auction market. One entry in particular that we will be talking about is EBay’s foreign entry strategy into China, and whether or not we believe that EBay will succeed or are they making a wrong move trying to gain access to the Asian population.

In 1999, eachnet.com was created as China’s first online auction marketplace, and by 2003 eachnet.com had become very successful and held the majority of consumers of online auctions in China. So successful, that EBay decided to purchase eachnet.com for $180 million dollars in that year. During that same year, a new competitor emerged on the internet auction scene in China, Taobao.com. In all respect to the company, Taobao.com is a child company of Group Five

Page

3

EBay Faces Opposition in China

the largest import/export website in the world, who ranks number one among e-commerce and trading online according to Alexa.com, is Taobao’s parent company, Alibaba.com. This dominant internet giant was created in 1999 to connect foreign buyers with exporters in China and other manufacturing countries. The company is based out of Hangzhou, China, is privately owned, and employees over thirteen hundred people worldwide.

In the first year that Alibaba.com announced its new consumer to consumer online market site, Taobao.com had risen to becoming the market leader of consumer to consumer transactions over the internet. In 2004, Alibaba.com announced that it would invest RMB350 million, ($42 million) which quadrupled the amount of investing to start the site one year prior of only RMB100 million ($10 million). These investments would be a positive strategic move by the Chinese giant. Most of the funds went to expanding the site, creating a new easy to use payment system, enhancement in customer service, and a new improvement in their security system. Taobao.com had delivered unbelievable results in their short one year existence against their international competitor EBay, better known then in China as EBay eachnet.

Over the course of the next year in 2005, the Shanghai based company EBay Eachnet started losing consumers. According to a report by the China Internet Network Information Center, half the traders registered on Taobao.com were migrates from EBay Eachnet from the previous year. In 2005 Taobao.com accounted for 67% of consumer to consumer business in Shanghai, Beijing, and Guangzhou, and much higher than Eachnet’s 29%. EBay Eachnet saw a significant slow in growth due to increased competition, service fees, lack of online chat software to provide adequate customer service, and slow log-on speeds to their site.

Group Five

Page

4

EBay Faces Opposition in China

By 2006 Tom.com and EBay Eachnet decided to announce a joint venture agreement in China. The two companies would need to build a new China marketplace in 2007 to compete with China’s top auction site rival Taobao.com. EBay would have a 49% stake in the company and tom.com will have a 51% stake in the joint venture. In addition, EBay will contribute its Eachnet subsidiary, while Tom Online will contribute local management expertise, technology, and brand. In the summer of 2007 EBay was on ready to rejoin the online auction business in China, still under the same name Eachnet.com. That’s leaves us now to discuss what strategies were taken or should have been taken in each different type of environment.

First, we need to discuss China’s social environment to gain more knowledge of the kind of planning EBay needs to make part of their foreign entry strategy work. The idea of social structure as relationships between different entities or groups or as enduring and relatively stable patterns of relationship emphasizes the idea that society is grouped into structurally related groups or sets of roles; with different functions, meanings or purposes. Society is separated into different strata, which is race, class, disability, and gender.

China is still in the primary stage of socialism. We need to establish the system of a socialist market economy in order to raise the level of marketisation. Being modern, China should go through commercialization and marketisation. Entering China will want to compete with each other so there country will be able to accept advanced technologies, improve the quality of products, services and management, so they can survive the competition. China’s social forces will develop faster for modernization.

China’s product market economies under the supervision of socialism were it will remain supportive. The market economy is occupied in the transformation in China which is attracting

Group Five

Page

5

EBay Faces Opposition in China

attention of economists worldwide and causing concern amongst socialist China’s well wishers.

The Chinese are confident that they will successfully rage in a new trail that will integrate public ownership and a market economy.

The basic structures of China’s social make up consist of communist and capitalist class systems. When entering China there are social advantages and disadvantages. The advantages allows for increase market share and competition. With increasing economic structure for potential profitability is possible. Brand recognition and increasing market share could make EBay a dominate force in China’s market. The current laws help build on China’s infrastructure and strengthen the economy. Twenty-seven million customers online are expected to double every year for the next year four years.

The disadvantages in China is that the communist vs. capitalist. For capitalism, open competition is limited by the ideologies by communism. China’s government regulations limit ownership companies and create special economic zones. With increasing GDP, (Gross Domestic Product) the potential of profit has increased and some decreasing government regulations are opening the market share at a leisurely pace.

With the increasing economy, less strict government regulations, and potential for profitability, it is our recommendation that eBay enters the Chinese market; even if China is still in the primary stage of socialism. Since the growing of China’s population and technologies, especially eBay; it will give China a successful market economy.

Group Five

Page

6

EBay Faces Opposition in China

The next aspect that needs to be discussed about EBay’s foreign entry strategy is China’s political environment. The Chinese government and its laws with their structures in dealing with the internet give somewhat of an opportunist disadvantage to any Multinational Enterprise willing to take the risk to cross lines into China.

China maybe stopping some of the SPAM coming into the United States by getting tough on today’s internet users. Currently about 30 percent of all SPAM comes from China. But before you get all happy and break out the champagne you must realize that what they are doing has nothing to do with helping us. The Chinese government is afraid for freedom of the press, because it is undermining their political power. They are particularly upset with bloggers in this country as well.

The Chinese government of course is claiming they are trying to cut down on unhealthy or fraudulent activities. But their idea of unhealthy is political dissidence and anti-government publishing. The deadline posed was June first and if you were not registered by then, you were ordered to shut down. So far over 75% of the websites have registered and many have been shut down. One reporter called it the "Great Firewall of China" which is pretty hilarious indeed.

Actually if the Chinese government thinks that they have a problem now with only 135 million Internet users, yet a population of 1.32 Billion people, just wait. Perhaps the Internet will in fact bring democracy to the world; Bill Gates was right. But it will be awhile until the other 90% of the Chinese population gets online. The growth in Internet use is huge and growing, but there is a lot more growth where that came from. The Chinese Government likens the problem to a virus of Bird Flu or the AIDS crisis there. They want censorship but also want the trade and

Group Five

Page

7

EBay Faces Opposition in China

know they must have the Internet to have the cash infusions needed to tax businesses and build up their military for the future war with the United States and World War III.

So far it is estimated that there are some 32,000 Internet police in China, who cannot keep up, but frequently find and arrest people who openly speak online against the government.

They have so far blocked search engine sites, closed Internet Cafes and blocked emails. The Chinese government, since it maintains the routers in Shanghai and Beijing can re-route website traffic to alternate sites. This also affects web traffic in other nearby countries like North Korea and Vietnam. Does anyone else have a problem with this or is it just me?

China will overtake the number of Internet users in the United States by the end of 2005 and we can never catch them, because we do not have enough folks living in the country. Heck, we do not even have that many bullets? So what happens to you if you piss off the Chinese Government online? Oh the usual; Torture, beatings, detention, prison, execution, etc.. A recent case, a man got 11 years in prison for down loading articles from a Chinese democracy website?

If we in the United States are going to have free trade, well let's um-huh have some "Free-Dumb" too? We and the world should demand it. If not we are supporting tyranny on one end of the stick and then sticking it to another easier target nation. It is time for the world to get on the same page and if we allow this to go on, who are we kidding. America is nothing more than a paper tiger and a bunch of hypocrites; unless we call an ace an ace and a spade a spade.

That is what the Chinese Government is calling us these days; no one seems to be filtering out that noise? One good thing about this is with less information flowing they are stifling their own innovation and progress. This along with artificial currency manipulation to lessen the effect of

Group Five

Page

8

EBay Faces Opposition in China

inflation and keep their currency low for trade is eventually going to run into a big fat Wall of China, but this wall will be made of cards so then a paper tiger is not all that bad, now is it?

The Chinese government and dealing with internet control with the recent Olympic Games came under the microscope, about how China’s deals with their internet users. There is considerable speculation as to how the Chinese government will deal with Internet controls during the upcoming Olympic Games in Beijing. At least 30,000 foreign journalists are accredited to the Olympic Games, and Beijing is contractually obliged to the International Olympic Committee to provide free Internet access for them. How and whether that will be accomplished is so far unknown, but there are several possible scenarios short of the unlikely rolling back of all filters.

For example, China may reduce or eliminate controls over access to popular English language websites, news services, and blogging platforms, while keeping in place or even enhancing filters on the local language equivalents. This policy would give outsiders the impression that restrictions are minimal while targeting those sources of information that matter most for domestic policy. Already there is evidence that such a policy has begun, with longstanding restrictions on the English language version of the BBC news now lifted while the Chinese version of BBC remains inaccessible to users in China. China may also set aside a block of IP addresses for journalists that the routers will ignore; it is unclear, however, how that system would work for journalists accessing the Internet through multiple locations while traveling, such as in Internet cafes outside of official Olympic sites. Whatever method is ultimately employed, it seems highly probable that after the Olympics the controls will return to the status quo ante.

Journalists covering the Olympic Games, would do well to come prepared with a reliable circumvention method and a list of banned Chinese language websites to check for accessibility.

Group Five

Page

9

EBay Faces Opposition in China

Another aspect of EBay’s foreign entry strategy is China’s cultural environment. EBay’s central idea into transitioning themselves to China is based on treatment with the same consideration the company gave to their founding country. Even though this was the central idea, the company has been, for lack of a better word, slacking in the “the selling themselves department”. So what does eBay do? Rethink their strategy, and rethink it as much as possible.

Because like John Yunker states, "Every market is different and will require a different strategy”i, and so the process begins. In order to determine what the new strategy will be, one cannot simply just throw out ideas. The company now has to take two very important facts into consideration, demographics, and China’s cultural views.

Many defaults in China’s demographics are crumpling its big wall, and setting up more challenges for international expansion. Which in turn sets up the fall of China’s economic prosperity and perhaps would set them back to a time where China was filthy rich in poverty, and expansion to such a country was unthinkable. Seeking Alpha, an online economic information center, questioned, just two years ago, if China would grow old before it would grow rich.

Richard Shaw, the author of the article, goes on to state that China faces some enormous developing demographic problems: two few women of marriageable age, too many old people and too little retirement protection for most people. With the population skyrocketing, in 2008, to over one billion people, and with a limitation to one child a family the population is at a huge unbalance. Currently the male dominance is at an all time high resulting from the murders of any child who is not born male. Even though it might not seem like such a big issue now, what happens forty years down the road? When Chinese men no longer have the opportunity to marry because most of the population of the women are married and with child? Will China be able to

Group Five

Page

10

EBay Faces Opposition in China

reproduce enough female babies to build the population to a balance, or will the population grow old, without care, and suddenly, once again without economic prosperity.

Another issue that concerns many a company is being able to adapt, and understand a country where culture is looked at through different views. Where a nice gesture here can take offence to many there China must be examined carefully. China, unlike the United States, is more family oriented. They believe that family comes first, and that honor for your family must be kept as honor and nothing else. If you so dare to dishonor the family one can even be disowned. Also, unlike the United States where the elderly are usually pushed aside, a lack of space, and mostly frowned upon. The elderly in China are considered wise, and intelligent, and are most likely the head of the family.

When one thinks of cultural differences usually everyone thinks of basic culture. Well, what about business culture? Is that not what a company sets forth to do in another country for business? Although, in China, most business people do have English as their second language, they seem to communicate in a Chinese dialect, and vice versa with the United States. Just because one knows how to speak a language doesn’t mean one knows how to communicate.

When I say communicate I mean the way of speech, such as, our free speech. Hear in the United States we tend to speak more directly, and have a freer since of speech. We use slang, and sometimes it transitions into the way we do business. We forget to “fix� our communication when it comes to business, be it here or in another country. China on the other hand, is more respectful towards one another. They rather save face than embarrass anyone and the way of speech is mostly strict in the work place.

Group Five

Page

11

EBay Faces Opposition in China

Once a company can understand the “communication� part we can now look into other important factors that could affect EBay in any which way. Age ratios, religion ratios, education ratios, income levels of population, media transportation such as percent of people who have access to television and how much of the Chinese population are wired for the internet are some very important factors when it comes to auctioning online. The GDP of the country helps us determine where China stands in their economy. The age structure of the country that EBay intends to enter in is as follows: 0-14 years: 20.4% (male 143,527,634/female 126,607,344), 1564 years: 71.7% (male 487,079,770/female 460,596,384), 65 years and over: 7.9% (male 49,683,856/female 54,356,900) (2007 EST.)

The population growth rate in the country helps us determine how much advertisement EBay would have to invest. The approximate number is estimated at 0.606% for population growth in 2007 for the country. The religion factor helps us understand the diversity of religion within the country. It is estimated that the Taoist, Buddhist, Muslim ratio is 10% to 20% and the Christian religion is estimated at 30% to 40%. The remainder is unofficially estimated to be atheist. Literacy within the country helps us determine what kind of advertising is needed. The estimated age of population age 15 and over can read and write, which breaks down to 92.9% male and 78.8% female. As of 2005 electricity production in the country was 2.5 trillion KWH. There are approximately 400 million television viewers as of 1997 and as of 2006 there are 137 million internet users.

Asia has developed into a global force on the international commercial, political and cultural network. Experts predict that 95 percent of all South Korean households will be wired for broadband Internet by the year 2010. Ninety-four percent of Japanese homes will have

Group Five

Page

12

EBay Faces Opposition in China

broadband access, with Hong Kong, Singapore and Australia expected to be nearly 80 percent wired. By 2010, China will have replaced the US as the largest Internet market in the world.

Certainly eBay has come a long way from Auction Web, but it faces difficulties entering China, and the plan must be rethought out. The question isn’t should eBay enter the Chinese market once more, but whether or not we can succeed with a culture that would have to be studied from the inside out.

The fifth strategy that EBay should look into for their foreign entry strategy is the legal and regulatory environment of the country of entry. The company’s foreign entry strategic and operational plans are related to and the expected financial impact of, the announced strategic agreement. Those statements involve risks and uncertainties, and actual results could differ materially from those discussed. Factors that could cause or contribute to such differences include, but are not limited to, regulatory uncertainties & legal relating to doing business in the People’s Republic of China (PRC), the rate of development of the mobile and internet-based marketplace business sector in the People’s Republic of China, the reaction of users of each company's services to the strategic agreement and associated product changes, the reaction of each company's competitors to the strategic agreement, potential product development issues, and the possibility that the expected benefits of the strategic agreement may not materialize to the extent expected or at all.

Statements that are not historical fact relating to the financial performance and EBay’s business operations include the continued growth of the Internet Web and telecommunications industry in China; the expected benefit of any strategic alliances with other companies and EBay’s ability to cooperate with their alliance partners. Also included is the development of the legal and regulatory environment is EBay’s latest product offerings, and the company’s ability to Group Five

Page

13

EBay Faces Opposition in China

successfully execute its business strategies, including its ability to expand its market share revenue through strategic alliances.

Such forward-looking statements reflect the current views of EBay with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forward-looking statements as a result of a number of factors, including, without limitation, any changes in our relationships with telecommunication operators in China. Also, the effect of competition on the demand for the price of our services, changes in customer demand and usage preference for EBay services, changes in the regulatory policies of the Ministry of Information Industry and other relevant government authorities, any changes in telecommunications and related technology and applications based on such technology, and changes in political, economic, legal and social conditions in China, India, and other countries where the Company conducts business operations, including, without limitation, the Chinese government’s policies with respect to economic growth, foreign exchange, foreign investment and entry by foreign companies into China’s Internet Web and telecommunications market.

The sixth point that we should analyze in a foreign strategic plan should be the financial environment hosted inside of China. A question we should ask is how is China’s financial environment among its fifty major cities? The Governor of the People’s Bank of China Zhou Xiaochuan stated, “China has vividly compared their financial environment with their ecological environment in major Chinese cities. Financial ecological environment refers to economic and legal systems, social credibility and cultural environment in a city. According to a report on financial ecological environment assessment among major Chinese cities compiled recently by

Group Five

Page

14

EBay Faces Opposition in China

Chinese Academy of Social Sciences, Shanghai has ranked the first among the top 50 cities in China in its financial environment.�ii Just to refresh everyone’s memory, EBay’s host city in China is based out of Shanghai. The Governor goes on to state that, by the end of 2006 ( during the time EBay and tom.com were finalizing their joint merger) total capital assets in foreign banks in Shanghai reached over fifty billion dollars, accounting for 55% of foreign banking assets all over China.

China's foreign financial assets increased 33% year-on-year to reach $1.63 trillion by the end of 2006, according to a statement released on May 25 by the regulator Safe (State Administration of Foreign Exchange). FX Week reports foreign financial liabilities rose by 21% year-on-year to reach $964.5 billion, the regulator found. Foreign reserves reached $1.07 trillion, the largest in the world for any country, and accounted for 66% of total financial assets.

According to a survey conducted by People's Bank of China, during the transitional period, 70%80% of bad loans were due to government administrative intervention. Whether market economy is dominant or not, the key is to see if the government has stopped direct intervention in and withdraw from business or financial affairs. It is reported that the Financial Institute of Chinese Academy of Social Sciences will continue to follow the financial environment in various cities and will compile a report on financial ecological environment assessment every year till such concept of financial ecology is wiped out in China.

Our last point of foreign entry should include the economic imperative strategy. This plan of action should include a plan based on cost leadership differentiation, and segmentation. EBay takes into account these planned strategies, the company provides an online trading service company that brings together millions of buyers and sellers every day on a local, national and

Group Five

Page

15

EBay Faces Opposition in China

international basis through an array of websites. EBay provides online marketplaces for the sale of goods and services, online payment services and online communication offerings to a diverse community of individuals and businesses.

EBay operates three business segments in their online services to the community which are their marketplaces, payments and communications platforms. EBay’s marketplace segmentation provides the infrastructure to enable global online commerce on a variety of platforms, including the traditional eBay.com platform, and EBay’s other online platforms such as EBay’s online classifieds for businesses, another platform is EBay's marketplace to buy and sell tickets for events, StubHub.com, which EBay bought in February 2007 for approximately $292M. EBay's online shopping comparison website, Shopping.com, which EBay bought in August 2005 for $634M. EBay's apartment listing service platform Rent.com, which EBay bought in February 2005 for approximately $415M, as well as EBay's fixed price media marketplace Half.com.

EBay's payment segmentation is comprised of payment solutions PayPal.com, which EBay bought in Oct. 2002 for approximately $1,492,504. This payment service enables individuals or businesses to securely, easily and quickly send and receive payments online. EBay also has another payment platform named Billmelater.com, which enables online U.S. merchants to offer, and U.S. consumers to obtain, transactional credit at the point of sale, which EBay bought in November 2008 for approximately $910M. EBay's communications segmentation, which consists of Skype.com, enables VoIP calls between Skype users and provides low-cost connectivity to traditional fixed-line and mobile telephones which EBay acquired in Oct. 2005 for approximately $1,301,500,000.

Group Five

Page

16

EBay Faces Opposition in China

EBay, being that it is E-commerce based, in some certain ways gets benefits. For example, EBay does not need to hold any inventory or manufacture any products because it is a totally a buyer/seller marketplace, and another good aspect is that these buyers and sellers never have to meet. Meaning, buyers and sellers have no store front locations, making EBay a “frictionless” environment where buyers/sellers can meet online, conduct business and exchange monetary value for a specific product. EBay doesn’t even have to be a part of the shipping process, that part is totally up to the seller. The type of business that EBay’s conducts leaves no room for generic clones, but only for stiff competition, especially in China. EBay has become a global dominant figure by globally outsourcing to over 30 countries and growing. The company has such a strong foothold in the e-commerce market it would be pretty hard for the company to flounder in the future. With all of EBay’s subsidiaries and acquirements over the years, EBay has enough internet power to stay around for a very long time unless something severely catastrophic happened to the online world.

In conclusion, our group feels that it is EBay’s best interest to continue their venture and penetration into China. Based on the demographic figures that were spoken about earlier, it seems to be that there are enough consumers to go around for everyone to benefit from. The problem exists, is that it is not up to EBay to tell consumers how to chose between them, the International company and their adversary taobao.com, but it is up to EBay to make the proper strategic plans to gain the trust and loyalty of foreign individuals to an international company, thereby moving EBay into a successful future with a global lock on the online internet auction marketplace.

Group Five

Page

17

EBay Faces Opposition in China

BIBLIOGRAPHY WORLD WIDE WEB RESOURCES

http://www.nytimes.com/2007/06/22/technology/22ebay.html?_r=2 http://web2.commongate.com/post/Tom_com_to_buyout_eBay_China_PayPal http://www.chinadaily.com.cn/bizchina/2006-05/10/content_586012.htm http://news.bbc.co.uk/1/hi/business/6196797.stm http://news.bbc.co.uk/1/hi/business/6196797.stm http://www.cbsnews.com/stories/2006/12/20/tech/main2286494.shtml http://www.cbsnews.com/stories/2006/12/20/tech/main2286494.shtml http://en.wikipedia.org/wiki/EBay#International http://www.mergentonline.com.ezproxy.library.berkeley.org/compdetail.asp?c ompany=95547&Page=business http://harvardbusinessreview.org/search/ http://www.ebaygroup.com/eng/index.asp http://www.worldeconomicforum.org

Group Five

Page

18

EBay Faces Opposition in China

Footnotes i

http://www.globalbydesign.com/blog/2006/07/25/ebay-tries-to-expand-globally-withoutoffending-locally/ ii

http://english.peopledaily.com.cn/200606/04/eng20060604_270988.html