Ebay’s decision to close its main online auction website in China and replace it with a minority-invested joint venture is a stark illustration of the difficulties facing foreign internet companies in the country.

The decision to give control of its main China operation to Beijing-based portal and telecom service operator Tom Online marks a stunning strategic shift for Ebay, which has struggled to fend off competition from Chinese auction rivals led by Alibaba.com.

The disclosure late on Monday of a retreat follows months of rumours, recently fuelled by apparent leaks to technology websites from disaffected employees of Eachnet, the Shanghai-based auction company it acquired for $180m in a deal completed in 2003.

Edward Yu, chief executive of consultancy Analysys International, said Ebay’s move reflected wider failures among foreign internet companies to adjust quickly enough to consumer demand and challenges from local rivals, and in maintaining good relations with Beijing regulators.

“Ebay responded very slowly to counter [Alibaba’s] Taobao auction website and other similar competitors,” Mr Yu said.

Ebay’s decision to work through a locally controlled joint venture echoes that of US portal Yahoo, which transferred its struggling China business to Alibaba last year.

Alibaba’s founder Jack Ma, who argues that only locally-controlled internet companies can succeed in China, has used astute promotion and a fee-less business model to build market share and undermine Eachnet’s dominance of online consumer auctions.

Ebay’s new strategy contrasts starkly with comments by Meg Whitman, chief executive, who said last year that its $100m investment during 2005 was “a sign of an unmistakable commitment and an unstoppable determination to be number one in China”.

Ebay had already been forced by Alibaba’s policy of offering auction services for free to change tack in China, scrapping all sellers’ transaction fees earlier this year even as it moved to raise fees in other markets.

However, Analysys International research found that Taobao had been growing faster than Ebay both in terms of users and completed deals, with the Alibaba unit accounting for around 60 per cent of all consumer-to-consumer online transactions in the third quarter of 2006.

Ebay is expected to contribute $40m for a 49 per cent stake in a joint venture with Tom that would launch a new online auction site next year.

Other foreign internet companies such as Google and Amazon have also struggled to replicate their international success in China.

MSN, which is far less popular in China than leading local portals, even announced this month that it would use paid search advertising services provided by Chinese rival Baidu.com – less than a year after Microsoft launched its own “AdCenter” advertising system.

“A copy-and-paste approach to targeting China, based on attempting the same business model as in a company’s home country, is unlikely to succeed,” says Jolyon Barker, head of media at the Deloitte consultancy.

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