EBay Inc yesterday formed a minority-interest joint venture with China''s biggest wireless Internet service provider Tom Online, due to heavy losses and difficulties in operating in the world''s second-largest Internet market.

EBay President and CEO Meg Whitman (left) and Tom Online CEO Wang Leilei (right) shake hands at the launch ceremony of their joint venture in Shanghai yesterday. Tom Online will hold a 51 per cent stake in the joint venture.

The US-based online trading business will inject its wholly owned Shanghai-based subsidiary eBay Eachnet and US$40 million in cash for a 49 per cent stake in the new joint venture, called Tom Eachnet.

Tom Online, controlled by the Hong Kong business tycoon Li Ka-shing, will get 51 per cent for US$20 million in loans and its expertise, technology and brand.

Ebay, famous in the United States as an online auction site, is the second US Internet giant to entrust its local operation with a Chinese partner. In August 2005, search engine Yahoo! put its Chinese subsidiaries under the management of the Chinese e-commerce firm Alibaba.

"We do not see it as a failure," said Meg Whitman, president and CEO of eBay. "We see it as an evolution of our strategy in China."

Tom Online''s shares rose 12 per cent on Tuesday on the NASDAQ to US$17.74 in anticipation of the news, while eBay''s fell by 0.8 per cent to US$32.13.

The two companies both have an option to add US$10 million into the joint venture, boosting the total investment to US$80 million. They declined to reveal the total valuation of the deal.

In 2002 and 2003, eBay paid a total of US$180 million to acquire Shanghai-based online auction website Eachnet and announced it would invest US$100 million in the Chinese operation last year.

However, challenges from local firms such as Taobao, now controlled by Yahoo!, lack of sufficient understanding of Chinese users'' habits, and slow progress in localization have meant a significant decline in market share for eBay''s Chinese arm.

According to the Chinese Internet market research firm iResearch, eBay''s share of the Chinese auction market dropped from 72 per cent in 2003 to 36 per cent in 2005, while Taobao''s rose from 7.8 per cent to 58.6 per cent, in part because the latter does not charge users for its services, whereas eBay does.

In 2005, eBay Eachnet had losses of 68 million yuan (US$9.32 million). Its net assets were 144 million yuan (US$18.39 million) on October 31, 2006.

Other US Internet giants such as MSN under Microsoft, Amazon, and Google are all in difficult positions due to challenges from local competitors and inability to adapt to local market needs.

Wang Leilei, CEO of Tom Online and new CEO of Tom Eachnet, said the new firm aims to achieve large-scale profits in two to three years. Its new website will be launched next year.-China Daily