This lack of integration made it very difficult for auction sites to handle debit card payments online. The credit card option was even worse. Because China’s credit system was not developed, Chinese banks were cautious about issuing cards and the application process was complicated. By 2001, there were only about 25 million credit cards issued in China, accounting for less than 1 percent of consumer spending (compared to about 25 percent in the U. S. ), and credit cards were accepted at only about 3 percent of China’s shops. As the need for better credit card services intensified in the early 2000s, various institutions responded.
In 2001, Bank of China and China Construction Bank started accepting credit card applications online. At the same time, a large number of credit verification companies emerged to help banks work around the lack of a personal credit scoring system in China. These companies checked the backgrounds of applicants through various channels, including meeting the applicants in person.
In February 2002, the People’s Bank of China, China’s central bank, announced a project to enable the four largest banks to process cards across cities and banks. In the wake of these changes, China’s Internet industry experienced remarkable growth during the first years of twenty-first century. According to China Internet Network Information Center, during the period from 2001 to 2007, the number of Internet users in China climbed dramatically from about 34 million to 210 million5 (see Exhibit 1). The use of bank cards in China also increased greatly over these years.
In 1995, the total number of bank cards (debit and credit) was only 14 million, over a population of over a billion. By the end of 2002, the number of bank cards increased to 490 million, and by the first quarter of 2004 this number had climbed to 690 million. By May 2008, the total number of issued bank cards in China went over 1. 6 billion, of which 110 million were credit cards. 6 The card processing system had also been greatly China Merchants’ Bank did have an integrated nationwide debit-card system by 2001. However, market share of this bank was low. China Online Shopping Research Report, iResearch Inc. 2008.
By the end of 2002, most bank branches in China had been integrated into a single card processing system (China UnionPay), which was able to cross-process any bank card issued by a domestic bank. 7 Such development, together with the increased penetration of the Internet in China, led to a substantial increase in online shopping in China.
According to a research report issued by iResearch Inc. , by the end of 2007, the gross transaction volume of online shopping in China had reached 56. 1 billion RMB (approx. $8 billion), increased from 0. 6 billion RMB (approx. $85 million) in 2001. Particularly for C2C transactions, the volume increased from 0. 4 billion RMB (approx. $56 million) to 51. 8 billion RMB (approx. $7. 3 billion).
Earlier online shopping websites mostly followed Amazon. com’s business model, the one usually referred to as B2C. By 1999, C2C websites were among the hottest area of investment in China for VC firms. EachNet. com and Yabuy. com both were started in June 1999. Around the same time, Netease and Sina, two of the largest Internet companies in China at the time, also started auction services. Among these and many other start-ups, EachNet would quickly take the lead, so that the burst of the Internet bubble in 2000 would strengthen its position by eliminating weaker rivals.
Net was founded in 1999 by Chinese entrepreneurs Bo Shao and Haiyin Tan, Americantrained MBAs inspired by eBay’s success in the U. S. But copying eBay in China turned out not to be an easy task. One major problem faced by Shao and Tan was users’ reluctance to complete transactions online. Many customers used the website to negotiate deals, but then met in person at a public place to examine the goods and make payments. Because of this, as well as the lack of an efficient delivery system in China, most trades on EachNet were occurring only between people in the same city, and users of EachNet concentrated in the few very large cities such as Beijing and Shanghai.
EachNet’s management decided to facilitate this specific pattern of trading, and set up trading booths in the physical world. Users could take advantage of services available at these booths to complete their transactions, and they could also use the computers, digital cameras and scanners available there to register for a user’s account or upload pictures of items to the website.
On a typical weekend day, traffic at a trading booth might be in the neighborhood of 200 persons.Realizing low Internet penetration rates in smaller cities, EachNet actually focused on providing its services on a city-by-city basis for three cities in China: Shanghai (headquarters city), Beijing and Guangzhou. Taobao vs. eBay China IB-88 p. 4 and most users still preferred meeting at a location convenient to them.
Therefore, as users were getting more used to services available online, EachNet gradually closed down these trading booths, the last one surviving until early 2001. Management at EachNet also faced the problem of processing payments, given the limited options available to Chinese consumers in 1999. So management worked with delivery companies to create a cash-on-delivery system, with the delivery companies acting as collecting agents. This service was set up by June of 2000, and although not perfect, it offered significant improvements in consumer-to-consumer transactions.
Also, EachNet’s management worked with major banks to facilitate online payments. EachNet formed partnerships with the four largest banks in China 11 to encourage heavy users to get credit cards. By early 2002, about one-fourth of EachNet’s users were paying with credit cards, half with debit cards, and the rest with postal money orders and other means. To facilitate online transactions, EachNet’s management also experimented with an escrow service, starting in October 2000. EachNet worked as a collecting agent between the buyer and the seller, and held the buyer’s payment to the seller until the delivery of goods was confirmed by the buyer.
As compensation, EachNet charged 3 percent of the transaction amount as the service fee. However, this service did not really take off, and by the middle of 2001 only 2-3 percent of transactions took advantage of this service. EachNet management also considered offering a PayPal-like service. In the summer of 2001, the plan was to launch this service in the first quarter of 2002, and then make it mandatory in two months. But the plan was dropped in early 2002, and the escrow service was suspended around the same time. EachNet’s management implemented several measures to fight against online fraud.
First, although EachNet had a user rating system like that of eBay, EachNet only allowed each account to rate another account once every three months, making it more difficult to use pseudo accounts (or friends’ accounts) to artificially inflate ratings. Second, for reported cases of fraud, EachNet had a special team of employees to conduct investigations. Punishments for proved cheaters ranged from a warning to permanent rejection from the system. However, concerned about the cost in time and resources, EachNet did not pursue legal actions against fraud and abuse. Third, EachNet was particularly cautious at the point of user registration.
At the very beginning, EachNet only required an e-mail address to register for an account. However, EachNet soon discovered that this policy left too much room for abuse. In May 2001, EachNet management implemented a complicated policy to require ID verification for new account registration. Under this policy, applicants had to verify their identity through one of the following options:
- faxing a copy of national ID card;
- applying with a debit card or credit card;
- receiving a password through cell phone;
- receiving password by mail at the home address;
- applying with an ISP e-mail account.
In March 2002, the company replaced this policy with a simpler and more effective one, the “Real Name Program. ” Under this program, an applicant only needed to submit her/his name and national ID number. China has a very strict citizen registration system and the Public Security Bureau keeps a database of such registration information. EachNet successfully negotiated access to this database and therefore was able to verify the applicant’s identify information effectively.
The four are: the Industrial and Commercial Bank of China, Bank of China, Construction Bank of China, and Agricultural Bank of China. In April 2000, EachNet management found themselves under stricter scrutiny when raising capital, since the capital markets had became less favorable to internet startups. That year EachNet’s valuations had been lowered several times, and investors had nearly pulled out more than once. Under those circumstances, EachNet’s management was under pressure to prove the company’s ability to earn revenue, as well as to consider different options for financing. Early on, EachNet had offered all services for free, and the only source of income was advertising on their website.
But this income was far from adequate to offset EachNet’s costs. So in August 2001, management decided to charge listing fees to sellers. EachNet’s management also planned to charge commissions on transactions on its website, starting from late 2002. With these sources of income, EachNet’s management hoped to improve their ability to raise capital in the future. Yet Chinese Internet users had become used to free services, and they found no reasons to respond positively to EachNet’s fee schedules. Not surprisingly, on the implementation of listing fees, the number of auctions on EachNet. om fell dramatically. Meanwhile, eBay approached EachNet 12 in early 2001 to discuss the possibility of investment or outright acquisition.
eBay’s CEO Meg Whitman even made a trip to Shanghai in May 2001 to meet with Shao and his business partners. EachNet’s difficulties raising capital made the eBay option attractive. As for eBay, it had recently failed in Japan and was looking for another approach to Asian expansion. eBay management also thought that there was a strategic fit between EachNet and itself. As William Cobb, eBay’s senior VP for global marketing, commented at the time: He (Shao) had studied eBay up one side and down the other and had really tried to adapt a lot of the eBay principles to the market. ” 13 eBay acquired one-third of EachNet’s shares in March 2002, and the other two-thirds a year later.
In total, eBay paid $180 million for EachNet. This price was a record high in China’s emerging Internet industry then, and was widely recognized as a strong signal of foreign investors’ elevated interest in China’s fast-growing Internet industry. 14 eBay China Providing an online platform for millions of users to buy and sell, eBay was known to be a global leader in Internet C2C services. Bay was founded in September 1995 as an experiment, by an engineer named Pierre Omidyar. Yet within a few years eBay grew to be a business worth billions of dollars.
In September 1998, eBay went public on NASDAQ and before long was considered to be one of the most successful Internet companies in the world. With capital from its IPO and the accompanying higher pressure for growth, eBay soon reached out of United States for additional growth opportunities. In 1999, soon after its IPO, eBay took over a four-month-old local auction website in Germany (Alando de AG) for an estimated $47 million and started its first non-U. S. operation. Later in the same year, eBay launched its own 12 13 Some other sources believe it was EachNet that first approached eBay instead of the other way around.
In 2000, eBay added Japan, Canada, France, Taiwan and Austria to its list of marketplaces. During its annual financial analyst meeting that year, eBay concluded that among the five overseas markets where it had operations, eBay was the leading online trading platform in four? Australia, Canada, Germany and the U. K. , and was at least twice as large as its nearest competitors in terms of GMS (Gross Merchandise Sales). 16 In 2001, eBay invested in Korea’s Internet Auction Co. and in MercadoLibre, Latin America’s leading online auction company.
In Europe, eBay acquired iBazar for about $130 million, which introduced the company into Italy, the Netherlands, and Spain. And eBay established operations in Ireland, Singapore, New Zealand, and Switzerland. 17,18 By the end of 2001, eBay had expanded its operations to 17 markets around the world, and had spent more than $1. 6 billion on international acquisitions.
