😲 Alibaba v/s eBay: Victory of the Underdog
Here's how Alibaba started out as a small marketplace and soon drove out e-commerce giant eBay from China.
“Victory is a thousand times sweeter when you are the underdog.”
The Alibaba Group, which manages the top e-commerce sites in China, tasted this sweet victory when it successfully drove out global e-commerce giant eBay from China in 2006.
But how did a company which just made its first profit in 2002 (the year eBay entered China), manage to beat a global giant?
Well, eBay made a major mistake: it thought China was just like the other countries it was dealing with. And we’re here to explore what exactly it did wrong.
🗞 Historical Context
After China joined the World Trade Organisation in 2001, the world’s most populated country was open for business, giving eBay the perfect opportunity to expand.
It decided to enter the mainland of China in 2002 by acquiring a 33% stake (later it acquired the remaining 67% in 2003) in a consumer-to-consumer(C2C) marketplace, called Eachnet (C2C refers to a platform wherein the seller and the buyer come together to trade with each other on a marketplace).
🧐 The Problem
Back then in 2002, Alibaba was just starting out so eBay entered and garnered a 85% market share. It gradually reduced to 37.4% in 2005, and finally, in 2006, eBay exited the Chinese marketplace making Alibaba a clear winner.
With almost no funding as compared to eBay (which had $2bn in revenue), it was almost impossible for Alibaba to beat the company.
And yet, it did it. Let's unwind Alibaba's success strategy.
⚡Alibaba's Strategy
🔮 Step 1: Anticipate the Future
Alibaba realised early on that even though eBay had entered the C2C segment, it would give its B2B platform a tough competition as many small business suppliers basically acted like consumers. So, they could shift to eBay's C2C site.
In preparation, Alibaba started on a top secret project: the creation of Taobao, its C2C marketplace.
And once Taobao was launched, a full on e-commerce war began between the two companies.
🔍 Step 2: Focus on Customer Acquisition
You see, Taobao kind of went the Jio way. eBay was focused on making money out of this huge market, Taobao just wanted to win customers over.
So, while eBay was charging consumers a listing fee and a transaction fee, Taobao was free to use for the first three years!
And though eBay complained that "free was not a business model," it couldn't do much.
However, eBay was still a popular competitor and one with a lot of cash.
🧠 Step 3: Think Local, Act Global
eBay also launched aggressive marketing campaigns and signed exclusive deals with companies to make sure Taobao didn't get advertising slots.
But Taobao again played to China's interests. It launched an ad featuring the army to incite patriotic fervour and targeted the local channels that most people watched rather than the high-profile channels that eBay had partnered with.
And it started running ads every 30 minutes.
But this was not the end of the road for eBay. Itl could have outlasted and taken over Taobao with the right strategies.
But instead of thinking local, the company decided to implement its tried and tested strategy in China as well: a clean easy-to-use website for users.
Wait, isn't that a good thing?
Well, not from China's perspective.
You see, Chinese customers were used to flashy graphics and cluttered websites.
To them, eBay's rather clean website seemed foreign, so they stuck to Taobao.
💡 Step 4: Understand Customer Pain Points and Innovate
Also, the Chinese, like the rest of us Asians, like to bargain.
Plus, most Chinese didn't like the auction format that eBay and Taobao used at the time (Taobao was only seeing 10% sales from auctions).
So, the company decided to launch a live-chat platform, where consumers could talk to each other and bargain.
What's more, it realised that the Chinese were sceptical of online shopping because they had to first pay upfront and would get the goods later. And why not? The internet was new and the idea of online payments was scary.
So, it launched Alipay, an escrow based mechanism of payment settlement, wherein, the buyer first placed an order and then transferred the amount to the escrow account (held by local banks). Thereafter, when the goods were received by the buyer and physically inspected, a go ahead signal from them transferred the funds to suppliers.
🥊 The Final Showdown
All of this brought the two companies neck to neck in 2005.
And eBay decided to pump the gas to finally get ahead of Taobao. It invested an additional $100 million in Eachnet.
But after seeing this e-commerce giant unable to beat a local company for so long, investors started losing confidence in eBay.
Result? The company's stocks tanked by almost 20%.
Meanwhile, Alibaba got a major boost in the form of $1 billion from Yahoo. The company would now run Yahoo's services in China.
This gave Alibaba and Taobao an unbeatable advantage over eBay. The company could no longer afford to burn massive cash in China without investor concerns, especially as Alibaba also had massive cash reserves now.
So, in 2006, it was forced to bow out of the race.
Not only has eBay lost its former glory, it is nowhere even close to Alibaba, now the world's 25th most valuable company.
A major reason behind Alibaba's victory is also its attitude. Despite being a small company that was just starting out, it was always optimistic about its chances and never lost hope.
And this is something that startups today can learn from. Building a successful business does not always require massive cash burns; all you need to do is understand your customer deeply and work with a persistent passion towards solving their problems.
⚡ In a line: Alibaba started out as a small marketplace in 2002, but soon after drove e-commerce giant eBay out of business in China with its innovative strategy playbook.
💡 Quick question: What do you think startups should adopt from Alibaba's playbook?
Share this with your friends via WhatsApp or Twitter and help them declutter news from noise! See you tomorrow :)
You can also listen to our stories. Catch it on Spotify, Apple Podcast, Amazon Music, Google Podcasts, Gaana or Jio Saavn.
If you are coming here for the very first time: Don’t forget to join us on WhatsApp to get daily updates! 👇