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Last week many experts in the IT and marketing sectors came together at the Ad Tech 2006 Shanghai Conference. I met many regular readers of Seeking Alpha. Along with Lisa Lai, CEO of online classified ad company Xiaoxishu.com, and David Chamberlin, GM of Edelman in Shanghai, I sat on a panel about blogs in China. We discussed how bloggers can influence the operations of MNCs in China. The panel covered a lot of the issues that I wrote in a recent article in BusinessWeek entitled “Blogging Down in China”.

It was a timely panel considering the recent blowup by P&G’s (NYSE:PG) SKII brand in China because of fears of dangerous ingredients and simply bad PR when it came to return policies. The outcry in the blogosphere has been brutal and SKII basically is not being sold in China anymore. Unless P&G can somehow figure out how to brush up SKII’s image real fast or magically get another substitute blockbuster, look for P&Gs numbers to be off this quarter. Poor PR can now destroy amazing how years of brand building in just a few days.

The highlight of Ad Tech was a keynote speech by Jack Ma, the CEO of Alibaba, the e-commerce company that Yahoo (NASDAQ:YHOO) bought a 35% stake in for $1 billion USD. It was disappointing that Robin Li, the CEO of Baidu (NASDAQ:BIDU), who was supposed to be the other keynote cancelled at the last minute. But Jack Ma made up for it. It was my first times hearing Jack speak in person, and he certainly had the charisma and panache that he has become famous for amongst western audiences. Jack related how he beat up Ebay (NASDAQ:EBAY) with its Taobao auction site and emphasized social responsibility.

With rumors flying around that Ebay is going to leave the China market or cede control to a local company like Tom.com (NASDAQ:TOMO), I decided to have a few of the analysts in my firm see whether consumers agreed with Jack and were migrating away from Ebay and, if so, why.

The Consumers

We interviewed 14-18 years old and 18-25 year olds about e-commerce in China. It seemed that my article entitled “China’s Booming Online Sales” was on track with the youth segment.

57% of those surveyed have used either or both Ebay and Taobao in the last month. That conflicts sharply with the percentages for older Chinese consumers where e-commerce is in the single digits, but clearly Chinese youth are internet savvy and willing to buy items online. This bodes well for Mastercard (NYSE:MA).

But the key finding was that nearly 80% of those surveyed preferred using Taobao over Ebay. And it was not for the reason most analysts have touted as the reason for Ebay’s downfall in China – that Ebay charges while Taobao is free. Indeed, Ebay’s fees were not one of the 5 biggest reasons why Chinese consumers resoundingly chose Taobao over Ebay. In fact, they were “willing to pay” if they felt that they were benefits for doing so.

Bad Customer Service

Instead, the biggest complaint that consumers had with Ebay was the perception that it did not care about both buyers and sellers. They said that Ebay did not have a phone number that consumers could call when they had a problem. Before Ebay acquired Eachnet, sellers and buyers could call a number for service questions. After the acquisition, Ebay brought in the same practices it had in the US and did not offer buyers or sellers a phone number to call, expecting consumers to email questions or join online discussion groups.

Consumers in China view this as a major lack of customer service rather than as an efficient way to get answers and as a way to make friends with others in the Ebay sphere. They said that if they were going to pay to sell their products, they should at least have a number to call if they ran into problems.

Payment systems and Buyer-Seller Immediate Connections

Customers also preferred Taobao’s Alipay over the payment systems that Ebay has been using in China. They felt more “secure” using Alipay and felt it “facilitated” deal-making.

Moreover, Taobao allowed the buyers and sellers to contact each other directly via mobile phone or instant messaging. Respondents liked the real-time haggling and bargaining on Taobao, while all communication via the Ebay platform has to go through Ebay so that Ebay could get its cut, slowing down the negotiation process.

Types of Sales: Corporate Governance

On the good side for Ebay, respondents overwhelmingly felt that items auctioned on Ebay were more likely to be real because Ebay did a better job of “policing” the site. There was a real concern about whether or not the goods sold on Taobao was pirated or not. However, the respondents said they buy items on Taobao that do not matter to them if they were pirated or not, such as books and DVDs, because they were cheaper and there is no value added for buying a legitimate version.

For electronic items like a Nokia (NYSE:NOK) or Motorola (MOT) mobile phone or cosmetics from Estee Lauder (NYSE:EL), the vast majority of respondents prefer Ebay over Taobao. However, they prefer to shop in retail stores for these higher end items because it is more “fun” to shop in person and because they still have some concerns about pirated versions.

Conclusion

I spoke recently with one former Ebay executive who played a key role in the integration of Ebay and Eachnet. He said to me, “I just don’t think that Ebay will be able to catch up to Taobao now. Maybe 6 months ago, but Ebay simply made too many mistakes in China. They needed to listen to the Eachnet team more who were closer to the consumers.”

Based on the pessimism of Ebay executives who were involved with the integration and the clear preference for Taobao by Chinese youth, it is hard to imagine how Ebay will be able to grab back market share in China.

Shaun Rein is the Managing Director of the China Market Research Group, a firm headquartered in Shanghai that helps firms get the market intelligence they need to make smarter decisions in China.

Source: EBay Faces a Tough Road in China