TOM Online Must Focus on Products: Connections Don't Ensure Success

I read a recent New York Times article by Keith Bradsher entitled “For eBay, It’s About Political Connections in China,” and I began to scratch my noggin yet again after reading a NYT article on China. The article discusses eBay’s (EBAY) decision to set up a company with TOM Online (TOMO) and basically retreat from the China market.

Bradsher argues that eBay decided to partner with TOM Online because of its purported great connections in China through the CEO, Wang Lei Lei, who is the grandson of a Chinese general, and through majority shareholder, Hong Kong billionaire Li-Kai Shing. Bradsher states that “connections matter” in the Chinese market, intimating that if eBay had better connections, they would not have muddled their way to yet another international muck-up.

But then Bradsher goes on to say that TOM Online has not done well because of their "heavy dependence on value-added cellphone services”, which “has made it especially vulnerable" to Chinese regulators. The result – TOM Online is a "fairly small, struggling company".

If connections are the magic pill for doing business in China and is all that left eBay from making money here in the first place, why is TOM Online with all of their backing still a 3rd tier if that portal?

Bradsher perfectly illustrates the misconceptions for doing business in China. While business relationships are important here, they are not enough anymore to ensure business success. As China’s markets mature, relationships here take on the same importance as relationships in the US. Having them is helpful, but having them alone is worthless.

Political connections cannot help a poorly run business suddenly become profitable. As I have written before about Shanda (SNDA) and connections, companies that rely too much on them to ensure success will ultimately fail because China’s market is increasingly becoming consumer-driven.

Consumers don’t buy a Motorola (MOT) mobile phone, Estee Lauder (EL) lipstick or a Coach (COH) bag because of the political connections the MD of China has – they buy because of the style, price, and distribution. The same reasons consumers in the US buy products. When was the last time you heard someone say that they will buy a flashlight at Target (TGT) because the owner knows the grandson of General Patton?

Any firm that places undue reliance on connections to make money will ultimately lose money in China. Many MNCs entering China hire supposedly well-connected people or engage consulting firms with “connections” and seem to think that is enough.

It is odd that so many smart people lose their heads when it comes to investing in China. Don’t forget the 4 Ps from business school!

eBay's problems in China had more to do with a lack of understanding their customers than in not having political connections. The Eachnet team did quite well before eBay screwed it up. If Meg Whitman et. al. had actually taken the time to understand their consumers (and listened to their employees from Eachnet on the ground in China for that matter), then China would have been a success for them as Jack Ma’s Taobao (YHOO) has been.

My firm, the China Market Research Group [CMR], has done extensive research into why eBay has failed in China. None of the reasons we found are because of lack of connections. Here is an article I wrote about eBay’s demise "eBay Faces a Tough Road in China."

Going forward, TOM Online needs to get the right services at the right price for consumers, not work on connection building. In fact, Li-Kai Shing might need to take a lower profile after his son’s bungling attempt to sell PCCW, drawing the ire of China Netcom (CN).

TOM Online is in a sector that is at the mercy of China Mobile (CHL) and does not have not the true business leadership to expand into other money-making ventures as Sina (SINA), Sohu (SOHU), and Netease (NTES) have done.

The new venture with eBay is going to have a tough time getting off the ground. The remnants of the Eachnet team and eBay never fully integrated well. Adding TOM Online’s folks into the mixed could cause even more discomfort in the office.

I would hold off on buying any TOM Online stock for a while until the new entity can prove they can get the right product and service mix for China’s consumers. The upside in the short-term does not justify the risk, but the downside could be huge.

There are better places to park your money right now.

TOMO 1-yr chart

Comments

[Peter Jones]

Every single word in this article is 100% on the mark. Ebay's steps have seemed so entirely predictable that I'm not surprised they chose a parnter company with "connections"... rather than relevance to their actual operations. This is probably Ebay's last great American mistake in the China market before complete disintigration in that market.

To see why they really screwed up in China, go to Alexa.com and chart a comparison of page views eachnet.com vs ebay.com.cn vs taobao.com. You can see that Eachnet was gaining momentum until they made the mistake of "delocalizing&quo... their platform in China and using their US platform instead. At the same time the platforms were linked, Taobao's traffic took off. One can only wonder what had happened if Eachnet had stayed eachnet, they might even be ahead of taobao at this point.

In the end, it was business issues, not political issues that led to Ebay's demise in China. Although, political and regulatory issues create a convenient excuse for ebay management...

[PaulDenlinger]

Taobao's biggest advantage is that it is run by Chinese and serves the Chinese market from China. Large American corporations have a hard time accepting this simple and basic truth. From their US HQ, it is hard to understand why other markets, even one as big as China, should develop any differently from the US market.

Add to that virtually all of the management people in the US don't know Chinese, and don't know enough to hand it off to people who do know Chinese. It is worth noting that most American corporations, until very recently, have put no added value on foreign work experience and linguistic knowledge.

And when they fail, they inevitably blame the Chinese market, saying that they lack connections. "This proves that the Chinese market is biased against western corporation," they inevitably proclaim in a loud chorus!

This is why many US corporations will continue to fail in China, and management in China will continue to localize. It isn't that the Chinese market is biased against western corporations; it's just that western companies which do not know Chinese and are not willing to learn from Chinese consumers have no value-added to offer in this growing market.

[Stephen Ngai]

Practically, you can't do business well in China if you don't have CONNECTION. In business school, 4 Ps can only be applied well in North America. For China, you need 4 Ps + Connection.

How can you sell MOT phone, EL lipstick or COH bag if you don't have the followings:
1. Good location
2. All licenses of all levels of governments
3. All permits of all regulators
4. Permissions / Permits of New Products and New Businesses
5. Others

Connection will help to get all of the above.

Setting up a business in China especially an internet related company is very complicated. Without Connection, you can do nothing although you have the BEST 4 Ps. Without Connection, you can't sell new products and you can't get into those new profitable JVs.

As a former Ebay executive mentioned on your Article, " They (Ebay) needed to listen to the Eachnet Team which were closer to the consumers." This is the reason why Ebay have to marry Tom in China.

You may not know Li Ka Shing (Li) well. His son's drama of PCCW / CN had no effect on his relationship with China. Please don't under-estimate the Gold Finger of Li due to his vision, his ways of handling businesses and his way of managing good government connections.

Please don't under-estimate Wang Lei Lei, time will tell that he is WAYMORE CAPABLE to turn around the business of this Ebay Eachnet/Tom JV.

TOM is NOT in a sector this is at the mercy of CHL. TOM is the TIER 1 in wireless internet as comparing to SINA & SOHU based on the revenues of this sector. You are discriminating TOM.

Time will prove you (SELL) are right or wrong.

Disclosure: I am holding shares of TOMO and SNDA.