Why eBay Must Win China

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For all its reputation as the city of tomorrow, a place that will marry capitalism and cool as effortlessly as New York City or London, the city of Shanghai, truth be told, is not a particularly pleasant place during the summer. It's a steambath, and when the occasional typhoon blows through, it will rain for three days nonstop. Many of the streets simply reek as garbage rots in the oppressive heat. Most people, if they have a choice, try to avoid Shanghai this time of year.

Meg Whitman would not be among those people--at least not this summer. If, in fact, the CEO of eBay, the world's most famous and successful e-commerce company, had to write an essay this fall titled "How I Spent My Summer Vacation,'' it might begin, "I didn't have one. I went to Shanghai instead, trying to figure out the China market, because my company's future may depend on it."

In February, Whitman said that for eBay, "market leadership in China will be a defining characteristic of leadership globally." Lots of big-time CEOS say things like that these days. Few follow it up by summering in Shanghai. The company cast Whitman's stint in China as business as usual. "She goes there quite a bit [but] it's not too extraordinary," says Matt Bannick, president of eBay's international division. "You know, Meg travels a lot." Whitman, in an e-mail interview with TIME, says, "China is unique. It is growing rapidly, and it has a tremendous amount of potential, which is why we have made it a priority for the company."

Yet her Shanghai sojourn is not business as usual to anyone who is anyone in the booming e-commerce market in China. That includes the CEO of the local company giving eBay fits there, Yun (Jack) Ma of Alibaba-Taobao. On Aug. 8, the Alibaba-eBay competition ceased being a David vs. Goliath battle. Ma announced he was selling a 40% stake in his company to Yahoo! for $1 billion.

"We welcome her and the eBay team to China, and with this Yahoo! deal, we decided to give them a nice big welcome gift," Ma says puckishly. The move instantly transformed the pivotal fight for the e-commerce market in China into a high-profile showdown between two of the most successful companies of the Internet age. "The competition [for the China market] will be fierce, no doubt about it," says Yahoo! co-founder Jerry Yang, who has been friends with Ma for years.

Ma says he and Yang started talking seriously about a deal in May. The key to it, Ma says, is that it gives Alibaba a strong position in four growth segments: business to business, consumer sales, online payments and now, with Yahoo!, search. "When we started Taobao, even our own chief technology officer said, 'Jack, you are crazy. Don't forget eBay.' But we passed eBay in China in just two years." Whitman, for her part, could not have been surprised by Yahoo!'s entrance into China. "Given how quickly the Internet and e-commerce market is exploding in China, you would expect to see a number of players staking claims, which is exactly the case," she told TIME.

On Aug. 5, a search-engine outfit called Baidu, a.k.a. China's Google, launched an IPO in the U.S. The stock was initially priced at $27--and closed at $122.54 after its first day of trading, a move that evoked nothing if not the infamous dotcom bubble of the 1990s. Except that no one believes China's Internet boom is a bubble, given that there is so much potential growth.