American businesses that want to operate in China have learned that local connections and knowledge of the market are critical to any business’ success there. EBay’s decision to close its Web site in China and take a 49% stake in an e-commerce venture with Chinese company, TOM Online Inc. seems to demonstrate just how important those local connections are.
Until recently, TOM Online was a fairly small company that earned 90 percent of its revenue from providing cell phone services, like sending text messages with entertainment news and weather to cell phone users. Over the last few years, Chinese regulators have attempted to crack down on certain services like those TOM Online was offering. Last summer, all companies were required to offer free trials and to require two customer confirmations before starting a service. These new regulations hit TOM Online hard, and their profits fell 59% in the third quarter compared to a year earlier as a result. Just when things were looking bleak for the company, eBay offered their partnership.
The pairing seems odd to some who question whether this company’s line of business is compatible with eBay’s. The two companies also have cultural and leadership differences that will make working together a challenge. Yet, there is no mistaking what TOM Online brings to the table. With the connection to TOM Online, eBay gains the political and local connections of its leaders. EBay has already run into logistics trouble in China and has not been offered the same benefits offered to Chinese companies in the country. Chinese regulations have limited the financial transactions that eBay’s payment mechanism, PayPal, can offer. The Chinese government plans to issue 10 licenses next year for online financial services, but is widely expected to only grant them to companies in which Chinese partners have a high degree of control.
Meg Whitman, eBay’s CEO, suggested that TOM Online is a natural partner for eBay because the two companies are already involved in a joint venture, TOM-Skype, an Internet phone service with 15.5 million registered users.
While TOM Online is known for its quick commercial reflexes, eBay’s culture is more consensus-seeking. The TOM Online alliance can also help eBay move more quickly when opportunities in the Chinese market arise. Mr. Wang, the chief executive of TOM Online is known for his decisiveness and blunt words and actions.
While some might view the fact that eBay had a commanding position in the Chinese market in 2004, and is now reaching out to a small local company for help as a sign of business failure, others are more optimistic. As Meg Whitman says, the company’s business strategy is continuing to evolve in China.