Yahoo's Yang found a way to beat EBay during hikes

It started with walks along China's Great Wall and culminated at California's Pebble Beach resort, where Yahoo Inc! cofounder Jerry Yang (楊致遠) decided to make a US$1 billion bet on Alibaba.com (阿里巴巴) Chief Executive Officer Jack Ma (馬雲).

The friendship the two formed on their Wall hikes led to Yahoo's purchase of 40 percent of Ma's privately held Alibaba, China's biggest electronic-commerce company and No. 2 online auctioneer. Now the question is whether the goodwill that spurred the acquisition will help Yahoo overtake EBay Inc, China's leading online auctioneer, and win more search-engine customers in the second-biggest Internet market after the US.

"The Alibaba purchase gives Yahoo a strong local entrepreneur, a heavyweight in the industry, who can drive the company to success," says Duncan Clark, managing director of Beijing-based technology consultant BDA China Ltd. "China is a high-maintenance market. It is highly regulated, highly sensitive and difficult to manage from 15 hours' time difference away."

Yahoo controls just 3 percent of China's online auction market and ranks second among search engines. To turn the company from a laggard into a leader, Ma, 40, faces the challenges of winning the loyalty of Yahoo's 600 China-based employees and attracting customers in a relatively undeveloped electronic-commerce market.

"Chinese Internet users tend to focus on online games and spend a lot less on e-commerce," says Frank Shi (史方遒), an analyst at CLSA Ltd in Hong Kong. "The Chinese market is still immature, and there is a lot of potential."

Ma also has to ensure that Yahoo employees in China don't defect, says Victor Gao, CEO of China State-Owned Enterprise Investment Co, a Beijing-based merger consultant. "There is a risk that the staff at Yahoo China may not want to follow Ma," Gao says. "He needs to move quickly to win them over."

Zhou Hongyi (周鴻禕), Yahoo China's current president, said in an Aug. 8 interview that he didn't think the Alibaba transaction made sense. Zhou, 35, said last week that he would resign at the end of the month to join IDG Venture Capital.

"Alibaba has its own business-to-business and consumer-to-consumer revenue models, while Yahoo is strong in search engines and e-mails," says Zhou, who sold 3721 Network Software Co, the operator of a Chinese search engine, to Yahoo in 2003. "The revenue models don't match."

Sunnyvale, California-based Yahoo agreed on Aug. 11 to swap US$1 billion in cash and its local unit for 40 percent of Hangzhou-based Alibaba. In addition to its auction site, Taobao.com (掏寶), Alibaba runs an online trading service with more than 6 million business subscribers in China, according to the company.

Yahoo, which runs the world's most-visited Web portal, is expanding in China to tap a market where the number of Web users has grown sevenfold in eight years to 94 million. China's online auction market will expand sixfold to US$2.6 billion by 2007, Beijing-based market researcher iResearch Inc forecasts.

Yang, 36, is turning Yahoo China over to a local partner after the company failed to raise its share of the nation's Internet auction market above the 3 percent iResearch estimates it has.

Yahoo began competing in that market last year, investing an undisclosed amount to form online auctioneer 1pai.com through a venture with Sina Corp (新浪), which operates China's most popular Internet portal.