RudeVC: Can eBay’s failure in China teach us something in Europe ?

Mar 18, 2014
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Most of us in the West have never shopped on Tmall or Jingdong. Yet these two firms represent the leaders of the imminently largest e-commerce market in the world: China.

Although JD.com (formerly 360Buy) is a distant second to Alibaba’s Tmall platform, the firm still served a cool $16 billion worth of goods to 140 million Chinese consumers in 2013. Furthermore, last week JD announced a strategic partnership with Tencent in which the latter takes a 15% stake in JD in exchange for Tencent’s e-stores (QQ Wanggou and Paipai) and a minority share of Tencent’s Yixun ecommerce marketplace. TechInAsia provides an excellent explanation of why this alliance will threaten arch-rival Alibaba.

The announcement led me thinking about eBay’s failed foray into China back in 2004, and more broadly, the perils of underestimating the importance of local knowledge when entering foreign markets.

Although today Paypal is viewed as the jewel of eBay, back in 2004, eBay brandished a certain degree of swagger. They were the leading C2C marketplace in the world. The company was rolling out its global presence with success, snapping up regional auction or classifieds websites like Mobile.de, Baazee.com, and Marktplaats.nl in 2004 alone. In China at the time, Alibaba was a local Chinese company that helped small businesses transact online. Most people in the West had barely heard of them, and eBay publicly proclaimed their ambition to crush Alibaba and dominate China.

Fast-forward to today: eBay has not come to dominate China; Alibaba is preparing a potential $15 billion IPO in New York. Even JD has reportedly filed for a U.S. stockmarket listing.

How did local upstart Alibaba outsmart the global giant of eBay ?

As Helen H. Wang points out in her book, The Chinese Dream, Alibaba understood the requirements of the local market better than eBay did. “At that time, China had about 300 million cell phone users versus 90 million Internet users. [Alibaba’s] Taobao offered instant messaging and voice mail to mobile phones for buyers and sellers because Chinese users were cell-phone savvy rather than computer savvy.”

In Wang’s analysis, eBay also committed several critical mistakes. For example, eBay failed to recognize that the Chinese market and the business environment are very different from that of the West. eBay sent a German manager to lead the China operation and brought in a chief technology officer from the U.S. Neither spoke Chinese nor understood the local market. Secondly, because the top management team didn’t understand the local market, they spent a lot of money doing the wrong things, such as advertising on the Internet in a country where small businesses didn’t use the Internet. The fact that eBay had a strong brand in the United States didn’t mean it would be a strong brand in China. Moreover, rather than adapt products and services to local customers, eBay stuck to its “global platform,” which again did not fit local customers’ tastes and preferences.

I submit that the experience of eBay in China in 2004 offers some broader lessons that are even more relevant today. This refrain falls within a thesis I’ve been working on – and forgive me if you’ve heard this one before. Innovation is of course becoming more global, particularly in IT. Companies must learn how to scale internationally. Penetrating worldwide markets is contingent upon an ability to properly discern the key components to success on the ground locally in those markets. A senior executive from JD once stressed to me the importance in China of owning the distribution and logistics chain, as there exists a serious last mile challenge at play there. (JD is famously known for its lightning-fast shipments, and charismatic delivery men, offering 24-hour delivery to 156 cities in China).

The U.S.’s status as a large market with the highest volume of early-adopters will wane. Already, we see leading Chinese firms preparing to compete with the American counterparts in almost every sector of tech. European firms, with the capacity of spanning cultural differences built into their DNA, should be well-placed to capitalize on these shifts, in theory. To be continued…