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China's biggest wireless Internet service provider, Tom Online, has formed a minority-interest joint venture with eBay Inc. The eBay initiative was taken due to heavy losses and difficulties they've encountered in operating in the world's second-largest Internet market.

The US-based online trading business will inject its wholly owned Shanghai-based subsidiary eBay Eachnet and US$40 million in cash for a 49 percent stake in the new joint venture, called Tom Eachnet.

Tom Online, controlled by the Hong Kong business tycoon Li Ka-shing, will get 51 percent for US$20 million in loans and its expertise, technology and brand.

Famous in the US as an online auction site eBay is the second US Internet giant to entrust its local operation to a Chinese partner. In August 2005 search engine Yahoo! put its Chinese subsidiaries under the management of the country's e-commerce firm Alibaba.

"We don't see it as a failure," said Meg Whitman, president and CEO of eBay. "We see it as an evolution of our strategy in China."

Tom Online's shares rose 12 percent on Tuesday on the NASDAQ to US$17.74 in anticipation of the news while eBay's fell by 0.8 percent to US$32.13. The two companies both have an option to add US$10 million to the joint venture boosting the total investment to US$80 million. They declined to reveal the total valuation of the deal.

In 2002 and 2003 eBay paid a total of US$180 million to acquire Shanghai-based online auction website Eachnet and announced it would invest US$100 million in the Chinese operation last year.

However, challenges from local firms such as Taobao, now controlled by Yahoo!, insufficient understanding of users' habits and slow progress in localization meant a significant decline in market share for eBay's Chinese arm.

According to iResearch, the Chinese Internet market research firm, eBay's share of the Chinese auction market dropped from 72 percent in 2003 to 36 percent in 2005. And Taobao's rose from 7.8 percent to 58.6 percent in part because they don't charge for the service whereas eBay does.

In 2005 eBay Eachnet had losses of 68 million yuan (US$9.32 million). Its net assets were 144 million yuan (US$18.39 million) on October 31, 2006.

Other US Internet giants such as MSN under Microsoft, Amazon, and Google are all in difficult positions due to challenges from local competitors and an inability to adapt to local market needs.

Wang Leilei, CEO of Tom Online and new CEO of Tom Eachnet, said the new firm aims to achieve large-scale profits in two to three years. Its new website will be launched next year.

(China Daily December 21, 2006)