Alibaba Group’s Taobao platform was a latecomer to consumer-focused e-commerce in China, yet has managed to dominate the sector.

When questioned how he could possibly beat eBay, Alibaba’s Jack Ma memorably said: “eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose—but if we fight in the river, we win.”

These are excerpts from an excellent report released this week by research and consultancy firm BDA looking at China’s e-commerce and Taobao’s success.

Taobao is now so big, that it has become a proxy for the entire e-commerce sector in China.

That was not always the case. Bo Shao, whose company eBay bought to expand into China, Eachnet, explains that eBay’s mistake was migrating Eachnet users onto a common US-based eBay platform.

The day of the migration, eBay China’s traffic dropped by half and the local team lost the ability to adapt to fast-changing China market.

“It took nine months to implement any major changes and nine weeks to even change a word on the website as everything had to go through the headquarters technology development team,” said Shao, in an article posted on the Taobao parent company website.

Chinese e-commerce heading to a scale of US
By mid-year 2009 China had an estimated Internet population of 338 million. Today almost one third of Internet users, or 105 million according to iResearch, are engaged in online shopping. This number is set to almost double by 2011. Sales generated from these shoppers are set to grow rapidly. iResearch forecasts the market to grow from RMB 190 billion (USD 28 billion) in 2009 to over RMB 400 billion (USD 60 billion) in 2011. By comparison the consumer e-commerce market in the US in 2008 totaled USD 178 billion.

More than 40% of all Chinese Internet users are registered on Taobao
Taobao’s massive lead is reflected in the number of goods offered on its site – over 200 million vs. less than 20 million items from its rivals. Mid 2009, Taobao claimed 143 million registered users or 43% of the Internet population, although a more useful datapoint is the number of active users – 30% of the total, or c. 47 million – which Taobao defines as those purchasing on their site at least once within the last six months. By comparison, eBay recorded 86.3 million active users worldwide at year end 2008.

Taobao’s top 10 products are thus a good proxy for China’s e-commerce market
there is a range of specific factors driving online sales. “China-specific” features need to be considered, which explain why some categories online thrive in China but not in the US or other developed markets.

For mobile phones, the availability of smuggled (for example iPhones with WiFi functionality not available locally, or “shanzhai” ‘bandit’ phones) or 2nd hand handsets drives sales on Taobao, which claims 10% of all handsets sold in China this year. For cosmetics, cutting out the cost of a physical retailer makes online goods substantially cheaper than offline. For apparel, consumers may choose to buy (knowingly) fake goods of decent enough quality, widely available in China given its massive manufacturing output, or look for niche clothing such as baby clothes not easily available in their local stores, especially in Tier 2 or Tier 3 cities.

In addition to Taobao and other general contenders, niche sites are exploiting growth in the above listed areas as well as other promising categories including health products, housing-related products and services (ranging from home improvement to apartment rentals) and food/dining related services.

Business model of Taobao vs eBay
In the case of eBay in the US transaction commissions represent c. 90% of the revenues of the company (USD 4.7 billion in 2008) with other items such as hosting fees or advertisements the remaining 10%.

In China, eBay had built a presence since 2002 through its investment and absorption of Eachnet. Taobao was a relative latecomer to the market – founded by Alibaba in 2003 – yet succeeded in rapidly taking on, and humiliating, eBay in this market by adopting a ‘free of charge’ strategy to compete with Eachnet’s listing fee model. How then to make money?

The answer is advertising. Taobao’s traffic makes it (according to Alexa.com) already the 5th largest website in China behind Baidu, QQ (Tencent), Sina and Google’s Chinese site. Over 80% of Taobao’s c. USD 300 million estimated 2009 revenues came from advertising, mostly ‘pay for performance’ ads as well as ‘pay for transaction’ and brand advertisements. The remaining 20% of revenues were generated between commissions that Taobao charges on its new (launched in 2008) Taobao Mall – a B2C area within its C2C platform – and value added services for merchants. Of course not (yet) charging transaction fees means that the “take rate” of Alibaba – the revenue generated for the company vs. the GMV – is only c. 1% vs 7.9% in the case of eBay, but this also explains the rapid increases in the GMV and the barriers for other contenders to take on Taobao.

Sign Up

Enter your email address below to subscribe to the mailing list and register for Social On Us, the [email protected] webinar series.


Newsletter updates
Webinars invites

Leave a Reply

40 comments

  1. george

    the answer is not only “advertising” but also “alipay”.

  2. george

    the answer is not only “advertising” but also “alipay”.

  3. george

    the answer is not only “advertising” but also “alipay”.

  4. taobaofocus

    Taobao.com beats Ebay shortly after its appearance in 2005, it is now China's biggest shopping website and has more than 80% market share. It is such a great shopping website(cheap+great quality!) but not well known to foreigners yet.If we buy from Taobao by using a good Taobao agent, for example taobaofocus.com, it is even much cheaper than buy from wholesale chinese products website! learn more in taobaofocus.com and start spreeing in Taobao!

  5. Pingback: China digital and IWOM/social media reads: January 18, 2009 | China IWOM Blog- Making Sense of the Buzz

  6. Sou da Zona Norte de Porto Alegre
    Parabéns pelo blog.
    Sempre quando eu posso eu volto aqui.
    Abraços
    zonanortepoa.com.br

  7. Sou da Zona Norte de Porto Alegre
    Parabéns pelo blog.
    Sempre quando eu posso eu volto aqui.
    Abraços
    zonanortepoa.com.br

  8. Sou da Zona Norte de Porto Alegre
    Parabéns pelo blog.
    Sempre quando eu posso eu volto aqui.
    Abraços
    zonanortepoa.com.br

  9. SL

    very good elaborations. Guess Taobao will compete with eBay in global market one day.

  10. SL

    very good elaborations. Guess Taobao will compete with eBay in global market one day.

  11. SL

    very good elaborations. Guess Taobao will compete with eBay in global market one day.

  12. Taobao will beat EBay not only in China, but in many other countries soon as well.

  13. Good article, interesting read. One must think outside the box to take on established players

  14. Better local market knowledge and excellent execution is the reason

  15. Better local market knowledge and excellent execution is the reason

  16. Pingback: Quora

  17. Pingback: eBay takes adventage of small sellers… « Helen's Doll Saga

  18. Pingback: Pattern seven: Leveraging the long tail « Peter's Web 2.0 Blog

  19. These are excerpts from an excellent report released this week by research and consultancy firm BDA looking at China’s e-commerce and Taobao’s success.

  20. ok,Extreme weight has forever presented a drawback for me. I tried the correct drug after that I burned much weight. Afterward I determined to keep from having this since I already had the normal body. I recommend you  perhaps that's the best item you require for a wonderful body.

  21. Pingback: clicking here

  22. Pingback: betta fish for sale

  23. Pingback: outdoor advertising

  24. Pingback: First look at the disintegration of the family or the queen of fashion nirvana Beyonce

  25. Pingback: Reachout Wireless application

  26. Pingback: Get England and Scotland facts on Wikipedia

  27. Pingback: Click At this website