TOM Online Must Focus on Products: Connections Don't Ensure Success

Includes: EBAY, TOMOY
by: Shaun Rein

I read a recent New York Times article by Keith Bradsher entitled “For eBay, It’s About Political Connections in China,” and I began to scratch my noggin yet again after reading a NYT article on China. The article discusses eBay’s (NASDAQ:EBAY) decision to set up a company with TOM Online (NASDAQ:TOMO) and basically retreat from the China market.

Bradsher argues that eBay decided to partner with TOM Online because of its purported great connections in China through the CEO, Wang Lei Lei, who is the grandson of a Chinese general, and through majority shareholder, Hong Kong billionaire Li-Kai Shing. Bradsher states that “connections matter” in the Chinese market, intimating that if eBay had better connections, they would not have muddled their way to yet another international muck-up.

But then Bradsher goes on to say that TOM Online has not done well because of their "heavy dependence on value-added cellphone services”, which “has made it especially vulnerable" to Chinese regulators. The result – TOM Online is a "fairly small, struggling company".

If connections are the magic pill for doing business in China and is all that left eBay from making money here in the first place, why is TOM Online with all of their backing still a 3rd tier if that portal?

Bradsher perfectly illustrates the misconceptions for doing business in China. While business relationships are important here, they are not enough anymore to ensure business success. As China’s markets mature, relationships here take on the same importance as relationships in the US. Having them is helpful, but having them alone is worthless.

Political connections cannot help a poorly run business suddenly become profitable. As I have written before about Shanda (NASDAQ:SNDA) and connections, companies that rely too much on them to ensure success will ultimately fail because China’s market is increasingly becoming consumer-driven.

Consumers don’t buy a Motorola (MOT) mobile phone, Estee Lauder (NYSE:EL) lipstick or a Coach (NYSE:COH) bag because of the political connections the MD of China has – they buy because of the style, price, and distribution. The same reasons consumers in the US buy products. When was the last time you heard someone say that they will buy a flashlight at Target (NYSE:TGT) because the owner knows the grandson of General Patton?

Any firm that places undue reliance on connections to make money will ultimately lose money in China. Many MNCs entering China hire supposedly well-connected people or engage consulting firms with “connections” and seem to think that is enough.

It is odd that so many smart people lose their heads when it comes to investing in China. Don’t forget the 4 Ps from business school!

eBay's problems in China had more to do with a lack of understanding their customers than in not having political connections. The Eachnet team did quite well before eBay screwed it up. If Meg Whitman et. al. had actually taken the time to understand their consumers (and listened to their employees from Eachnet on the ground in China for that matter), then China would have been a success for them as Jack Ma’s Taobao (NASDAQ:YHOO) has been.

My firm, the China Market Research Group [CMR], has done extensive research into why eBay has failed in China. None of the reasons we found are because of lack of connections. Here is an article I wrote about eBay’s demise "eBay Faces a Tough Road in China."

Going forward, TOM Online needs to get the right services at the right price for consumers, not work on connection building. In fact, Li-Kai Shing might need to take a lower profile after his son’s bungling attempt to sell PCCW, drawing the ire of China Netcom (NYSEARCA:CN).

TOM Online is in a sector that is at the mercy of China Mobile (NYSE:CHL) and does not have not the true business leadership to expand into other money-making ventures as Sina (NASDAQ:SINA), Sohu (NASDAQ:SOHU), and Netease (NASDAQ:NTES) have done.

The new venture with eBay is going to have a tough time getting off the ground. The remnants of the Eachnet team and eBay never fully integrated well. Adding TOM Online’s folks into the mixed could cause even more discomfort in the office.

I would hold off on buying any TOM Online stock for a while until the new entity can prove they can get the right product and service mix for China’s consumers. The upside in the short-term does not justify the risk, but the downside could be huge.

There are better places to park your money right now.

TOMO 1-yr chart