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Why eBay Failed in China

Successful in dozens of countries, the multi-billion dollar business was no match for China, where citizens place a premium on interpersonal relationships and high-quality social interactions. What lessons can others learn?
eBay headquarters in San Jose, California. (PHOTO: COOLCAESAR/WIKIMEDIA COMMONS)

eBay headquarters in San Jose, California. (PHOTO: COOLCAESAR/WIKIMEDIA COMMONS)

In was around the mid-2000s when many Internet-based sales companies started eyeing China as the big economic prize. With a rapidly expanding middle class and over one billion people, the country had—and still has—enormous purchasing power. eBay, the San Jose, California-based online consumer-to-consumer corporation, nearing its 10th birthday at the time, entered the country in 2004 with hopes of beating competitors to the reward. Two short years later, then Chief Executive Officer Meg Whitman flew to Shanghai to announce the company’s exit from China’s online auction market.

So why did eBay fail in one of the world’s most populous countries when it had succeeded so successfully here in the United States? Researchers think they have finally found the answer by analyzing the sales data from TaoBao, an eBay-like operation founded by Jack Ma; TaoBao currently holds 96 percent market share in China.

“There is only one big winner, so eBay has failed,” said Paul A. Pavlou, professor of management information systems at Temple University’s Fox School of Business. Along with Tilburg University’s Carol Xiaojuan Ou and Robert M. Davison of City University of Hong Kong, Pavlou found that TaoBao had a better grasp of what makes Chinese consumers tick. “Those buyers really want to get to know the sellers,” Pavlou said.

The use of technology to accommodate a worldview such as guanxi could mean more savings for consumers all over the world, not just those in China.

TaoBao helps buyers and sellers simulate close personal relationships and build something called “swift guanxi.” This is a Chinese concept “broadly defined as a close and pervasive interpersonal relationship” and “based on high-quality social interactions and the reciprocal exchange of mutual benefits,” according to a study by Ou, Pavlou, and Davison, “Swift Guanxi in Online Marketplaces: The Role of Computer-Mediated-Communication Technologies,” that will appear in an upcoming issue of MIS Quarterly. “For U.S. companies who want to do business in China, they have to understand this concept,” Pavlou said.

In building TaoBao, Ma understood swift guanxi, and he equipped his online marketplace with tools that would allow this kind of relationship to bloom. Customers on TaoBao spend an average of 45 minutes using what the researchers call computer-mediated-communication technologies (think instant messaging) to ask sellers questions about themselves and their products before purchasing anything. eBay’s developers, on the other hand, didn’t grasp the importance of the Chinese concept and, although Pavlou said there were rumors after Whitman’s team purchased Skype that it would install video conferencing technology on its auction pages, the company never made is newest technology available for those purposes.

Jeff Menzise, a doctor of clinical psychology and a research associate with the Institute for Urban Research at Morgan State University, said that the factor underlying the success of TaoBao in China has everything to do with cultural worldview and their specific axiology. “One of the highest values is on personal relationships,” he said. “That’s how you see the tech they’re developing now is effective.”

The use of technology to accommodate a worldview such as guanxi could mean more savings for consumers all over the world, not just those in China. In their research, Ou, Pavlou, and Davison talk about how companies might use computer-mediated-communication technologies in association with an exclusive online discount.

Alison Hummel, a sales expert based in Philadelphia, recently helped her mother-in-law buy a car. She was on a local Fiat dealer’s website when she noticed an online-only discount. Hummel wanted more details, and was surprised when an instant messaging window popped up. Using that technology, she was able to talk to someone at the dealership who explained how the discount worked. “It was such a large purchase that I thought I’d better understand it fully,” said Hummel, who had seen instant messaging windows on retail sites but had never seen them associated with savings before.

If America were to adopt a similar view of business to that of the Chinese, there might also be less need for government oversight. In the MIS Quarterly write-up of their study, Ou, Pavlou, and Davison “blame a lack of higher infrastructure for the existence of guanxi, but because guanxi exists, there’s less need for those infrastructures,” said Morgan State University’s Menzise.

There is some debate about what generational differences could mean for the implementation of more personal online sales tools and procedures. Menzise sees younger and future generations having less attachment to personal interactions but suggests that this can be corrected. “If we don’t establish [some way of creating personal relationships in online sales], it’s gonna turn real cold and real soon,” he said.

Despite all of the questions that still need answers, sales and psychology experts foresee this concept of personal relationships growing in online sales across cultures. “It wouldn’t surprise me if other countries started to shift away from impersonal online interactions,” Menzise said.

And don’t count eBay completely out of China just yet. “China is truly not over,” said Daniel Feiler, eBay’s director of communications for the Asian Pacific region. He noted that eBay had good competition in the tight Chinese market for consumer-to-consumer auctions, and although eBay has left that business in China once before, the company, Feiler said, has a “very fast growing export business, taking out all the middle men.”