Online Auction Market in China: eBay/EachNet vs. Yahoo!/TaoBao

Includes: AABA, EBAY
by: Tycoon Report

They used to say that America was “the land of opportunity.” Although I definitely agree with that statement, the same can certainly be said for China in today’s times.

China’s 2nd Quarter GDP numbers just came in. The economy grew by 11.3% last quarter – its highest quarterly growth rate in over a decade (since 1995 to be exact).

The country’s trade surplus exploded to $38 billion in the second quarter as well – up from $23 billion last year.

And believe me when I tell you it’s not just “big business” and government spending helping to fuel this blistering growth in China – the “little guys” are doing their part as well.

And the Internet is playing a huge role in how small businesses are being established and helping to fuel the hyper growth coming out of the Middle Kingdom. Let me give you a perfect example:

One of the earliest visions of the Internet was what it could do for retailers and wholesalers – we were going to have a “frictionless” marketplace, they said. Meaning, buyers and sellers could meet online (no store location), conduct business, and exchange a product for money.

The one company that truly embodied all of that, across the board, was eBay (Nasdaq: EBAY). In this online auction house, buyers and sellers never meet, they transact money for goods and eBay doesn’t have to be involved in the most cumbersome part of e-Commerce, shipping the product (that’s totally up to the seller.)

eBay, and online auctions in general, are the true embodiment of a “frictionless marketplace.”

Now, let’s talk about that in relation to China.

Once upon a time, back in 1999, there was a company called EachNet. EachNet was China’s very first online auction system.

In a country like China – where retail is more of a combative process with customers and retailers haggling over the price of everything – an auction system where buyers and sellers never meet and the price only goes up over time was going to have a tough time reaching the mainstream.

But by 2003, EachNet had become a very successful company and held the majority of the online auction market in China – so much so that eBay purchased the company for $180 million.

Today there are other competitors in the domestic market, like TaoBao, but the domestic market for buyers isn’t what has everybody so excited in China – it’s selling to foreign buyers, like you and me, where local residents are seeing some real opportunity.

After having lived there, I can tell you, first hand, that China is one of the most entrepreneurial societies on earth – everybody has a hustle – and online auctions are one of the best ways tiny upstarts can flex their muscles.

By buying super cheap products from local factories, using Google AdWords to market, and listing the products directly on eBay, these “mini-retailers” have created thriving businesses for themselves.

Many people who used to hold white collar jobs, and sold items on eBay part-time, are now finding themselves quitting their day jobs and strictly selling products to westerners online.

Let’s break this down by the numbers …

* In 2004 the entire Chinese Auction market was about $561 million.
* In 2005 that number jumped 200% and reached $1.7 billion! (If that’s not proof that this model is catching on, then I don’t know what is.)
* In 2004 there were roughly 15 million online auction users in China. By the end of 2005 that number is almost 30 million – a 100% increase.

E-commerce in the country, in general, rose over 60% from 2004 to 2005 – growing from approximately $43 billion in ’04 to almost $70 billion in 2005.

These statistics are mind boggling – we haven’t seen growth like this in the US online market in over six years.

Now that we know the online auction market in China is red-hot, the real question is, can we profit from it?

As of right now, the country has two online auction systems, EachNet and TaoBao. TaoBao is owned by Alibaba, which in turn is 40% owned by Yahoo! (Nasdaq: YHOO).

Up until a few years ago, eBay/EachNet was the dominant auction player in China – but as of this year, Alibaba’s TaoBao soared past them taking 57.74% of the market and leaving EachNet with roughly 35%.

This town isn’t big enough …

And this is an industry where “two’s a crowd!” Chinese mini-retailers don’t want to deal with more than one auction system, more than one payment system, etc.

They want a one-stop shop for all their mini-retailing needs. That’s why these two companies are fighting for their lives out there.

eBay will have to figure out new ways to maximize revenue aside from charging high fees – once TaoBao started allowing no-fee auctions is when the company gained all of its market share.

This is a very unique market, and if eBay doesn’t learn how to properly navigate it, they could be at serious risk of losing their grip on one of the fastest growing and most lucrative markets in the world.

It’s definitely too early to make the call on who will become “king of the hill” in China – but I’d say Yahoo!/TaoBao is in a great position, and truly “gets” the Chinese market (something I still haven’t seen from eBay.)

Nonetheless, it will be an interesting ride.

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