Foreign Internet companies struggling in China

eBay follows Yahoo on the way out of Chinese e-business market

For the second time in two years, a major U.S. Internet company has chosen to offer its subsidiary to a local company, after failing to be competitive and attain profitability in China.

EBay's Wednesday announcement that it will move from stand-alone ownership of its eBay EachNet subsidiary and enter into a joint venture with Tom Online capped a three-year slide in eBay popularity in China. When the auction giant bought the 67 percent of Shanghai-based EachNet that it didn't own in 2003, that site held about 90 percent market share. As of Wednesday's sale, it has about 29 percent.

Ironically, the company to which eBay lost that lead is Alibaba.com's Taobao auction site. Alibaba was the local entity in a deal that may have set the scene for Wednesday's joint venture. Yahoo paid US$1 billion (AUD$1.28) for a 40 percent stake in Alibaba and Alibaba took control and majority ownership of Yahoo's China operations. That August 2005 deal created a new business model: foreign-branded Internet companies run almost entirely without input from the companies that built those global brands.

Although only Yahoo and eBay have officially pulled the plug on their operations in China so far, they are not alone in encountering difficulties in China's Internet market, with 123 million users, now the world's second largest.

One observer summarized U.S. Internet companies' problems in China this way: "In any industry you can name, China is the most competitive market in the world. Few American companies come here prepared to devote the executive time and corporate focus that China demands, and those that don't give this place the time and attention it deserves are, sadly, doomed to be sent packing. It's just a question of when," said David Wolf, chief executive officer of Beijing-based technology consultancy Wolf Group Asia.

For example, Google's meteoric rise elsewhere has been less than stellar in China, plagued by problems with government relations, specifically disagreement over search results the government deems sensitive or with which it disagrees.

Google created a separate Chinese site, "Gu Ge," or "Harvest Song" in Mandarin, that would appear to users logging in from Chinese IP (Internet Protocol) addresses and filter results accordingly. Results vary on the site, but in June, Google co-founder Sergey Brin publicly questioned his company's handling of the situation, saying that the company had agreed to "a set of rules that we weren't comfortable with," and that "Perhaps now the principled approach makes more sense." Users both inside and outside of China questioned whether the filtering violated Google's philosophy of making money without doing evil.

Buy, rather than build, seems to be the path to success in China so far. Although Amazon.com put up a site recruiting staff for a planned Amazon.com.cn site as early as the late 1990s, in the end it chose to dip into its war chest instead, and acquired Joyo.com in 2004 for US$75 million. Joyo remains China's top online retailer of books, music and video products.

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