The News

Investors bid up shares of

Tom Online

eBay's

Wall Street, perhaps hoping for some good news from the online auction powerhouse's faltering growth strategy in China, embraced unconfirmed reports that eBay was forming a joint venture with Beijing-based Tom, one of China's leading portal sites and a pioneer in mobile payment systems. EBay only recently spent another $100 million on its efforts to penetrate China, but has thus far failed to deliver appreciable returns on the investment.

Both companies declined to comment on a Wall Street Journal report Tuesday that Tom and eBay would form a 51% to 49% joint venture that would effectively shutter the China version of eBay's main auction site and replace it with a site run by the newly formed company. The Journal reported that eBay would initially put up $40 million for the new company, while Tom would chip in with $20 million. The new site is supposed to launch in 2007, the newspaper reported.

While it's another body blow for eBay's attempts to establish itself in Asia, there may be longer-term benefits to the San Jose, Calif., company's flexible though chastened approach to a market that still represents enormous growth potential. In 2002, eBay abandoned a three-year effort to unseat Yahoo as the dominant online auction player in Japan, an expensive failure that has influenced its bids for market share in China.

The Analysis

EBay could use some good news about China, and in picking Tom for a partner, it may well get some. Its smartest move is to find a company that has a foundation in online business, but has moved deftly into mobile commerce, a much more promising area in a country where cellphone users outnumber computer users by more than 4 to 1.

The China woes stretch back several years. Since 2002, eBay has spent $280 million on a market that's changing so fast that management has had trouble getting a handle on the evolving consumer culture. In 2003, it spent $150 million on EachNet, a Chinese auction company, a year after putting $30 million into the venture. In 2005, it made a $100 million push to wrest market share from TaoBao, an auction site owned by Hangzhou-based Alibaba.com, which counts Yahoo as a 40% stakeholder.

The plan hasn't succeeded, says Tian Hou, an analyst at C.E. Unterberg Tobin. She says TaoBao, which loosely translates to "digging for treasure," still commands about a 70% share of the Chinese online auction market. China, the world's second-largest Internet market, accounted for only 3% of eBay's listings.

"EBay/EachNet hasn't been able to catch up in terms of capturing the user base," Hou says. "E-commerce has never taken off in China."

There are two big hurdles to success. The first is the lack of an effective online payment system in a country where few people possess credit cards. The second is Alibaba's willingness to subsidize losses at TaoBao with its business-to-business sales.

"The online payment system is a real bottleneck for China," Hou says. "Even people who have [credit] cards in their wallets have them for status, not for convenience. They have the cards but they pay in cash."

Tom, which has beneficial relationships with state-owned businesses that control mobile phone-based payment systems, may be able to build on a pilot program unveiled this year in the southern city of Zhejiang that essentially lets users make payments based on their mobile accounts.

"That could replace credit cards," she says. "The [Zhejiang] program was pretty successful. The idea [for the new company] is to use the Internet as an auction platform, but use mobile phones as the payment system, and Tom has both online operating experience and mobile payment applications experience."

But Alibaba Chief Executive Jack Ma won't be ceding ground easily, warns Ina Steiner, editor of AuctionBytes, an online newsletter based in Natick, Mass. Chinese users shunned eBay because it charges sellers listing fees, which TaoBao does not.

"Jack Ma challenged eBay and said TaoBao wouldn't charge fees for another three years," she says. "At the time, eBay said, 'Free is not a business model,' but now, although it charges fees for more prominent placement on the site, it has stepped back."

The Bottom Line

Doing business in China is not for everyone, and it's not like any other market. Give eBay credit for being able to rethink its approach, and some props to Tom as well. If it can interpose itself as a mobile payment platform, it'll be less dependent on its portal services for both computers and mobile phones both of which are occasionally subject to capricious government intervention.

"This is good for Tom in the long run, because they've been under the [threat of] tremendous intervention from [government controlled] China Mobile, and it's been a big headache," she says.

Avoiding content-distribution-related businesses will remove some of the risks Chinese Internet companies face, she says.

If the new venture pays off, eBay should shine as an example of the rare American company that headed off to China with a misconception of the market and was able to adapt.

"I think it's a question of recognizing that they were not achieving what they were hoping to, and finding a solution that offers them a better opportunity for the long term," says Patti Freeman Evans, an analyst with Jupiter Research. "I think it's an indication of how complex and difficult China is. In most of the other countries where eBay has expanded, those have been pretty mature and stable economies. China is neither."

While investors and expansion-minded companies shouldn't downplay the possibilities of the China story, Freeman Evans says the eBay tale demonstrates that local knowledge may be the most prized asset of all.

"I think this shows that localization efforts in China are much more complex than in other places," she says.