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A year ago, Shao Yibo, a Chinese entrepreneur fresh out of Harvard Business School, decided to set up an eBay-style online-auction site. Shao was interested in starting an Internet company last April, but he quickly ruled out setting up a portal, since so many companies were already trying to make that business work. By contrast, the field seemed wide open for Net auctions in China. "I thought eBay would work," he recalls, "and nobody was doing it."
Today, online auctions have become one of the hottest sectors in China's Internet industry. Shao's company, the Shanghai-based Eachnet, is one of the biggest. Others have such names as Clubciti, Coolbid, and Yabai. Big Chinese portals like Netease are now making a run at auctions, too. Even eBay is positioning itself for the Chinese market, forming partnerships with companies like Hong Kong-based Chinadotcom.
But for all the buzz, big questions remain about whether online auctions can work in China. Companies face challenges that rarely trouble eBay in the U.S. Few Chinese have credit cards, making online transactions extremely difficult. Moreover, China has a creaky transportation network, so even if companies manage to make sales over the Net, they still have trouble ensuring that buyers can get the goods. And many Chinese simply don't trust doing business online, especially when dealing with another individual instead of a company.
FROZEN OFFERINGS.
Beijing certainly hasn't made it any easier. The government has put up several obstacles to China's fledgling online-auction houses. All Chinese companies need to get business licenses, but Shao says that it's not clear what sort of license an online auctioneer needs. That sort of legal uncertainty may not stop companies from doing business, but it can complicate their efforts to raise capital by going public.
Since the start of the year, Beijing's bureaucracy has been stonewalling efforts by private-sector portals like Sohu.com, Sina.com, and Netease.com that want to have initial public offerings on Nasdaq or Hong Kong's new second board, the Growth Enterprise Market (GEM). Until those portals go to market, the next generation of Chinese Internet companies -- which includes the auction sites -- are frozen, waiting to see what happens.
Like any good entrepreneur, Shao, 26, figures he'll find answers to most of the problems. Yes, China's vast size and backward infrastructure make the business difficult. But his short-term answer is to concentrate on a handful of China's big cities, where most Internet users are. For instance, Eachnet allows a buyer in Shanghai to hook up with a seller in Shanghai. The two can then arrange to meet somewhere in the city and exchange goods for cash in person.
MAKE IT LOCAL.
Cumbersome, to be sure. But for now, Shao says, it can work. And it's not such a bad thing to stick to a few big cities. After all, Shanghai alone has 800,000 Internet users, about a tenth of the country's total. Shao figures that the four big cities in China account for half of the country's Internet users. "We make it local and almost bypass the problems," he says.
The numbers suggest that Chinese Internet users are intrigued by auctions. Eachnet has 260,000 registered users, who buy and sell about $2.5 million worth of goods each month in 100 different categories of products. Shao says the site records 500,000 daily page views, but since China has no monitoring services, there's no way to have independent confirmation of these numbers. Looking more long-term, Shao recently formed a partnership with Sina, which is one of China's most popular portals. That should help win over users in other parts of the country, when it comes time to expand beyond a few major cities.
In the meantime, Shao has accomplished one thing since launching Eachnet six months ago: He has won friends in the Shanghai Internet community. That's no small feat, given the kind of rumor-mongering that characterizes the local Net scene, dominated by a small group of intensely competitive twentysomethings. Shao is a "fantastic young man," says Bo Feng, a venture capitalist with Chengwei Ventures who works with U.S. firm Robertson Stevens. "Even though everyone has questions about this space, if there is anybody who is able to take advantage of the market, [Shao] is the one."
"NO WAY IN HELL."
The question remains, of course, whether even Shao can make it work. eBay is looking at the Chinese market but so far is proceeding very cautiously, with a collection of chinoiserie on its online Chinatown location. "We have to be very careful," said Peter Yip, the CEO of Chinadotcom, shortly after announcing the portal's involvement in a deal with eBay. While delivery in America isn't problem, Yip notes, "Asia is more difficult."
Shao isn't impressed. "There is no way in hell that anyone in China will be remotely interested" in eBay's China offerings, he blusters. He's more concerned about the regulatory climate. Are online auctions actually legal? "Everyone is taking a wait-and-see attitude. No one knows what the law will look like," he says.
So for now, Shao is hedging his bets -- and looking for loopholes. Truth be told, says Shao, he's not running a true auction site anyway. "We are simply providing a place for people to exchange info on goods," he says. "It's quite different than auctions." Besides, Shao says, Eachnet is moving to fixed-price retailing soon -- just in case the mandarins in Beijing find his explanation less than convincing.
Einhorn is Business Week's Hong Kong-based Asian technology correspondent. His column appears every Monday on Business Week Online EDITED BY PAUL JUDGE
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