In 2003, eBay takes over China’s market leader in online auctions and seems impossible to catch. Jack Ma wins with Taobao all the same, because he knows the terrain better: Chinese buyers, Chinese sellers and their distrust of the internet.
A solid block of many teal dots moves across an open surface, and small mist-blue dots bounce off it. Then arcs and wavy lines narrow the path into a bottleneck; the block becomes a thin line and loses its order, and golden dots break away from the terrain on both sides.
Principle #35
Terrain: If you know the terrain better than your opponent and use its features, you fight where your own strengths count and your opponent’s come to nothing.
3 min read5 sectionsSituationLink to the principle
Contents
A market is a terrain, too. It has habits, obstacles, paths that hold and paths that lead nowhere. In the early 2000s, eBay was the most successful online auction house in the world. In China, it met an opponent who was smaller but knew the ground under his feet – a lesson in the principle of Terrain. Jack Ma is often quoted with an image that captures this difference: eBay might be a shark in the ocean, but he was a crocodile in the Yangtze. In the ocean the crocodile would lose; in the river it would win.
A rigid grid hovers, out of place, above undulating ground; small stalls sit on the ground and connect through golden arcs – as with Jack Ma and Taobao.
01
The giant arrives
Situation
eBay first acquired a stake in EachNet, then China’s leading platform for online auctions, and in 2003 took over the entire company. According to Business Insider, investors were told of a market share of at least 85%. eBay’s CEO, Meg Whitman, was regarded as confident of dominating Chinese e-commerce. Until then, Alibaba, Jack Ma’s company, had mainly operated a marketplace for business customers.
Link to the principle
Terrain is not neutral. If you enter it from outside, you bring your habits with you. For eBay, China was one more market in a worldwide series. For Ma, it was home ground whose features he knew.
02
Free instead of fees
Situation
Alibaba launched Taobao in May 2003. Sellers could list their goods free of charge, initially for three years; later the period was extended by another three years. From eBay’s camp came the comment that free was not a business model. According to Business Insider, Alibaba initially invested 1 million yuan in Taobao.
Link to the principle
For small Chinese sellers with little capital, every fee was a hurdle. Ma removed the hurdle. He took a feature of the terrain that eBay saw as a weakness of the market and turned it into his advantage.
03
Trust as the bottleneck
Situation
In 2004, Alibaba introduced Alipay, an escrow service: the buyer’s money was only paid out to the seller once the goods had arrived. Through the built-in chat program Aliwangwang, buyers and sellers could talk directly before a purchase and haggle, as is customary in Chinese markets. Business Insider also describes Taobao as more colorful and more personal.
Link to the principle
At the time, the biggest obstacle in Chinese e-commerce was distrust. Ma built bridges exactly there. He did not fight mainly through advertising but through knowledge of an obstacle his opponent underestimated.
04
An opponent who leaves his terrain
Situation
According to Business Insider, eBay dropped features that Chinese users had valued. According to figures published by The Economist in 2006, eBay’s market share fell from 79% to 36% between 2003 and 2005, while Taobao’s rose from 8% to 59%. At the end of 2006, eBay shut down its Chinese site.
Link to the principle
eBay transferred a global model to a local terrain. Taobao adapted to the terrain. That decided the market, even though eBay had more experience and, at the start, more customers.
05
What it was not
Situation
Taobao did not win through local knowledge alone. Alibaba had strong backers; in 2005, Yahoo bought in with $1 billion. A Chinese company also had advantages in its own country in terms of language, networks and dealings with the authorities.
Link to the principle
Terrain never works alone. But it often decides which means work at all. Money helped Taobao because Ma used it where the terrain rewarded it.
Key takeaways
Key lessons
01
Treat a market like terrain: it has hurdles, paths and habits.
02
Ask which hurdle holds your customers back the most, and remove it.
03
Don’t transfer a successful model to new ground without checking it.
04
Engage with the terrain instead of trying to make it fit you.
05
Choose the battlefield where your local knowledge counts for more than your opponent’s size.
Summary
In 2003, eBay came to China as the global market leader and bought the local market leader. With Taobao, Jack Ma bet on the features of the Chinese terrain: free listings for small sellers, escrow payment to counter distrust, direct conversations between buyer and seller. eBay stuck with its global model. Within three years the market had turned, and at the end of 2006 eBay shut down its Chinese site. If you know the terrain, you can beat even a bigger opponent.
