Supplementary Material for Taobao In 2002, the population of Chinese internet users was, although small compared to the US, around 59 million, representing a 4.6% penetration rate. By 2006, China already had 137 million internet users or had a 10.5 % penetration rate--about 43.1 million (31.5%) of them shopped online by the end of the year, transaction from C2C e-commerce had reached US $2.9 billion. In 2003, Alibaba.com, one of China's biggest business-to-business e-commerce firms, invested 100 million yuan (US $12 million) into the consumer-targeted e-commerce web company Taobao.com By the time Taobao entered the C2C segment, eBay’s global revenue were US$ 2,165 million and the company had about 5,700 employees. In addition to its dominant position in the U.S., eBay had established a local presence in 19 countries. Since its founding in 2003, Taobao has created an e-commerce ecosystem consisting of 80 million registered users and over 1 million sellers, as well as third-party service providers in payment, logistics. With 200 million items in selection, Taobao gives Chinese consumers the most comprehensive product choice on the Internet Taobao is the most trusted online commerce platform for Chinese consumers. 33% of China's Internet users have shopped online and 76% of these users have purchased items on Taobao. In 2002, eBay paid US$ 150 million to buy a two-thirds stake in Eachnet Inc to enter China. In 2003, eBay paid US$ 30 million for one-third of Eachnet's shares. At the time of eBay’s investment, EachNet commanded an 80% market share with revenues of RMB 12 million. Founded in 1999 by Tan Haiyin and Shao Yibo, both Harvard Business School MBA, EachNet was China’s first online auction website. After the acquisition by eBay, Shao Yibo remained in office as the chairman. Trust was particularly important in China, due to the lack of an adequate legal system or other formal means of dispute resolution. The development of e-commerce in China faces bottlenecks in the areas of payment, logistics, and etc. To attract buyers and sellers, the company needed to find a way to engender trust between sellers and customers. This is particularly challenging in Chinese context. Mr. Ma (the founder) is a Net star in China. To other Chinese Internet pioneers he is known respectfully as “Godfather," having formed China's first Internet company, Alibaba.com, in 1995. eBay entered China with the assumption that its brand image in the US as an industry leader would transfer to the Chinese market without any modification. However, given a choice between a new foreign company and a domestic one, Chinese would opt for the latter. Westerners prefer sparse site like Google’s, but Chinese consumers want their sites to be noisy, with lots of links. It was like in a Chinese department store. In 2005, eBay overhauled the Eachnet site to comply with Ebay's worldwide format. eBay EachNet’s website was therefore considered too empty by Chinese consumers. The design change confused some customers, and product listings plunged--down to 250,000 from 780,000 before the switch. In 2003, Taobao started Aliwangwang, its instant communication tool, to help buyers and sellers interact. While eBay EachNet did not initially allow direct interaction between buyers and sellers, until a sale had been confirmed. As a result, communication problems constituted only 8% of
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Taobao’s non-positive feedback; at eBay, this share stood at 20 %. At eBay, sellers could list products or services for sale while buyers could browse through these items and bid on those that interested them. All this was done without eBay’s mediation. eBay only informed the seller and the successful bidder by e-mail when a bid exceeded the seller’s reserve price (i.e. minimum price at which the seller was willing to sell) or at the end of the auction period. The limited range of auction items could also be attributed to the fact that in China, retailing was more like a combat between retailers and customers who would haggle over almost anything in order to get the best deal, the best usually meant that lowest price they could have Thus, an auction-selling format where prices only went up might have seemed bizarre to most Chinese consumers. eBay charged Chinese sellers listing fees (up to 3 RMB) and transactions fees of up to 2 % of the item’s value. One of eBay’s Chinese managers said: “We actually think fees are important to the health of the market place. By charging these fees, we can actually get legitimate sellers who are interested in selling their goods and put quality merchandise on the site rather than just putting a lot of junk upon the site. Our charges are actually moderate.” Taobao directly challenged eBay by saying “We call on eBay to do what’s right for this phase of China’s e-commerce development and make its services free for buyers and sellers in China.” Ebay responded: “Free is not a business model. It speaks volumes about the strength of eBay’s business in China that Taobao is unable to charge for its products.” Nevertheless, later, in response to Taobao, eBay dropped its listing fees to almost nothing, with a lowest charge of 0.05 yuan (half a US cent). Online credit card or debit card payment was very rare in China and customers usually paid cash on delivery. Alipay formed partnerships with leading Chinese banks and signed a long-term agreement with China Post, which meant customers without a debit or bank card could fund their Alipay accounts at any of its 66,000 offices. Taobao has also promised to refund all losses, if traders use Alipay in the transactions. According to Ma, 70 percent of transactions made on Taobao.com have used Alipay since the website introduced the service in 2003. Using Alipay, a buyer deposited payment for an outstanding order in an Alipay account. Alipay informed the seller when it received the funds, and the seller then shipped the goods. When the buyer informed Alipay that the merchandise had arrived, it instructed its bank to release the funds to the seller. Taobao members were able to use Alipay free of charge. On eBay, there were many buyers who complained that they did not receive an item. In 2005, EBay Eachnet, in fierce competition with Taobao, also announced that it would spend more than 100 million yuan (US$12 million) this year to launch a new online payment system similar to AliPay. In 2006, Taobao built strategic alliance with China Post to launch eYoubao. Supported by an advanced delivery network, China Postal Express & Logistics designed eYoubao according to the operational features of e-commerce at Taobao for individuals and enterprises engaged in online trade. The price was half of Express Mail Service’ fees. Yet, no such services were provided by eBay. In applying a consistent brand image to its Chinese market, eBay EachNet emphasized automation throughout the auction and transaction processes. eBay EachNet provided topic-specific guidelines
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and links to FAQ, both of which were meant for self help. In contrast, Taobao used hotline for customer services and technical supports. It also provided users’ community bulletins/forums to enable users to help each other if they could not resolve their problems by themselves. eBay's share in the Chinese consumer-to-consumer e-commerce market in 2006 was 15.4 percent. That was in sharp contrast to its 29.1-percent market share in 2005. eBay's share of the Chinese auction market dropped from 72 per cent in 2003 to 36 per cent in 2005. At the end of 2006, eBay shut its site.Taobao rose from 67.3 percent to 82 percent in the period.

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