By Gordon Chu | Tuesday, July 21, 2009
I love underdog movies. Watching Rocky Balboa struggle up those courthouse stairs and throwing his hands in the air in victory, how can you NOT be rooting for him in epic fight with Apollo Creed. Here's the man who wasn't born into a whole lot of money or had much luck, but made his way up the boxing ranks for the fight of his career by sheer determination and grit. This is what movies are made of. This is what glory is made of.
I digress – perhaps I got too misty-eyed thinking of Rocky movie(s), but we get the point. Underdog stories are a fan favorite and certainly translate between the silver screen and the business world.
Taobao (Chinese version of eBay) versus eBay is a classic David and Goliath story. In one corner, there’s eBay. With a near $25 billion market cap, no question that eBay is the Goliath of this story. It practically has a monopoly on the online market and you know it’s big when the company’s name unofficially becomes a verb (Just ‘eBay’ it online).
On the other corner, we have Taobao. I’d be lying if I said that Taobao started off with modest roots because it actually was birthed from Alibaba, one of China’s largest online companies. But, for argument sake, if you compare the two companies and where they were several years ago, Taobao really was microscopic in comparison.
eBay entered the market in 2002 with pretty ambitious goals. Meg Whitman (former CEO of eBay) toted China to be THE market in 2005 as the anchor to the company itself. And when eBay bought 33% sake of Eachnet (now de-bunked China online site) for $30M, no one argued that eBay was serious about China. In one swift acquisition, here comes eBay that now owned nearly 90% of the market share in China.
Taobao entered the market in 2003. A subsidiary of Alibaba, Taobao was the first legitimate competitor to eBay but without the deep pockets, without the marketing force, and without the know-how of the vast experience eBay had brought from the US. However, in two years’ time, Taobao did the unthinkable – it eclipsed eBay’s market share and became the leader in online auctions in China. Today, Taobao has over 100 million registered users and has around 70% of the market share in China.
So, where did eBay go wrong? Or, rightfully, what did Taobao do right? I wished there was a climatic Rocky-esque training session that Taobao undertook, but the real answer comes from smart, practical, and logical business 101. What eBay had thought were strengths, were actual barriers for growth; and what Taobao had as a start-up, were what makes it what it is today.
Consumers versus Products. We’ve talked a lot about localization and customers for China in past newsletters. Well, let me carve it in stone – Know Thy Customers. I cannot stress how important this is and how critical for marketing to reflect that knowledge of understanding your customers. Looking at eBay versus Taobao superficially, there are not a lot of differences in function. They both are C2C platforms and the sites facilitate the transaction between seller and buyer, right?
Here’s where details count and makes all the difference for the consumers and especially in China. Where as eBay categorizes and organizes the site by products (i.e. by “buyers” and “sellers”), Taobao categorizes and organizes the site for the consumers (i.e. for “men” and “children”). Small detail, right? However, in a nascent and budding Internet market like China circa 2003, the whole idea of online shopping had to be about consumers. In fact, that mentality still is prevalent today and small details like this can be the bane for even the biggest sites.
Fees, Fees, and Fees. I forgot to mention fees. eBay’s revenue model works on taking fees from sellers. You sell something on eBay, there’s a little bit that goes to uncle eBay. It might be small and nominal, but over millions of transactions, then the revenue becomes more sizable and, thus, you can garner a $25 billion market cap in the public market.
Taobao, on the other hand, has no fees for either sellers or buyers. On a side note, that is not entirely true – Taobao charges a fee for their online payment transaction, but for comparison purposes, there are no fees to either sellers or buyers. This may or may not seem to be a deal-breaker between eBay and Taobao, but for the vast China market, this is a big selling point in the psychographic of the Chinese online consumer.
If you take a look into everyday frenzy of the 1.3 billion population in China, there’s a common thread that is woven into the culture of every individual – competition. This is a culture that competes for the small arm space they have in the crowded buses, you have to believe that this spirit of give-me-what-I-can-take mentality is going to bleed into their buying behavior as well.
At the end, Chinese consumers do not like middlemen. This is a highly efficient market and if a Chinese consumer can make a transaction by eliminating the unnecessary, they will go at lengths to get that better deal. Unfortunately for eBay, they got that China lesson 101 the hard way.
On-the-ground Leadership. In any country, having local knowledge of your market is good. Having local leadership on-the-ground is better.
eBay had the advantage coming into China. Here’s the company that INVENTED the online auction business model and primed to launch it in a market that is a perfect fit for eBay. One issue – business was done in China, but senior management resided in San Jose, CA.
You can make all the argument that we live in an information-driven world and how the Internet has bridged the gaps of international lines, but the big advantage goes to Taobao with management on-the-ground with on-the-ground knowledge and on-the-ground execution.
Treating China Differently. Here’s the tricky part for any company looking to expand globally: how to create a uniform global business model that works on all territories. Sounds easy enough, right? eBay tried that with China and its market share shrank from 90% to a modest 30%. Where did it go wrong? Here we are talking about the company that invented the C2C business model, the brainchild behind online communities, the geniuses that was able to actually MAKE money online…
The moment it decided to enter in China with a preconceived notion of simply extending the business model across the Pacific Ocean was really the beginning of the end. How does a static business model in China? Simple answer – it can’t. China needs to be treated separately and business models need to be tweaked in order to succeed. Not convinced? Look at Google, Microsoft, eBay, and Yahoo! Every one of them is still evolving the business model to work in China. There is no easy answer – you just have to be flexible.
Taobao, on the other hand, had the luxury to learn from eBay’s mistakes. Without any preconceived business model it had to adhere to, Taobao was quick to adapt, quick to act, and quick to capitalize on what the China market wanted. Sure, it helps to have Alibaba’s on your side, but there is still truth to what Taobao did right – it created a business model specifically for the China market.
There is a plethora of information, theories, and case studies on the differences between Taobao and eBay. Some I agree with, some I do not – but, at the end, the proof is in the pudding. Taobao did what eBay could not which is to create a successful online auction for the China market.
Taobao’s success wasn’t based on hardcore marketing analytics or even by the backed Alibaba dollars – Taobao’s success is a function of business smarts and product differentiation.
So, next time you feel like an underdog, seize the opportunity and make sure you come out on top!
