Sep 12, 2019 in Business

Taobao's Impact on the Chinese Economy

The importance of Taobao to the Chinese economy is difficult to understand if one is not familiar with the game-changing impact of eBay, and with the different cultural undercurrents that exist when Americans and Europeans purchase items online in comparison to the way Asians conduct business with each other. In a nutshell, Taobao radically altered the Chinese economy by introducing a platform that is as effective as eBay when it comes to reducing the costs of running business and allowing small scale businessmen to reach out to millions of prospective buyers without having to spend a great deal of money as advertising expenditures. However, the true meaning and significance of Taobao to the Chinese economy is seen in the way it radically changed and adopted eBay's business model to better serve the needs of the Chinese people.

Contextual Background

In 2003, eBay entered the Chinese market and was expected to radically alter its national economy in the same way that it has affected the economies of the United States and those of developed countries of Europe. The company came in with great confidence knowing that the business model that was tried and tested in the US was a formidable one considering the way it changed how people view online shopping. From the perspective of the corporate leaders at eBay, the barrier for entry was too high, because they have created an efficient and relatively safe way for consumers and sellers to meet online and conduct a business without the need for a face-to-face interaction.

The corporate leaders at eBay were greatly mistaken when they came into China beaming with overconfidence, and they committed a grave error in not anticipating the innovative capability of the parent company behind Taobao. When Taobao challenged the dominance of eBay in China, the executives and strategists of the former noticed two glaring weaknesses of the latter’s online purchasing platform. First, eBay charges a fee for every successful transaction that transpires between a buyer and a seller. From the point of view of eBay's corporate leaders, this is not a weakness but a practical way of doing business, because there seems to be no other way to generate any form of income. However, they did not look far beyond their own world, even if they knew that there are other ways of making money online. Taobao decided to go the other route, and that was to remove the practice of charging of fees for every successful transaction. As a result, it introduced a game changer as consumers became delighted by the chance of further reducing the cost of purchasing items and doing business between sellers and buyers.

Taobao also noticed another weakness in the eBay business model. The foreign-based eBay utilizes a straightforward approach when it comes to buying items online. In its business model, the prospective buyer selects the product from the online portal and clicks on the virtual button to complete the transaction. Once the money was paid or in escrow, the seller ships the items to the consumer. From the point of view of eBay's corporate leaders, there is nothing wrong with this model, because the end goal has always been the need to provide convenience and, at the same time, reduce cost by creating a system that is closely related to automated machines. Taobao looks at the model and realizes how problematic it could be considering the cultural differences in the way Asians interact with each other, especially, when it comes to purchasing products, and, moreover, those items that are seen in the virtual world and are inaccessible to be assessed using different senses. As a result, It redefined the transaction method and, unlike on eBay, buyers from Taobao are able to interact with the sellers with greater depth and create deeper personal interaction. In fact, it is common to find clients and sellers talking on their mobile phones discussing the different aspects of the business transaction. At the same time, sellers are able to provide greater levels of customer satisfaction because they can add additional inputs regarding the product, and this type of information is oftentimes not included in the description of the item online. Thus, American or European consumers select similar looking jackets and decide to buy them based on what they believe is suited to their needs. In the context of Taobao, the customer does not have to guess the correct product, because he or she can express his/her needs and expectations to the seller, and in return, the seller can provide suggestions and additional information to give buyers a greater understanding of the specifications of the good. At the end, Taobao's system enables consumers to purchase the correct item that suits his or her needs. 

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Beating eBay China and Transforming Online Shopping

It is impossible to understand the impact of Taobao on China's national economy without first understanding the meaning and significance of eBay. When eBay radically altered cyberspace many years ago, the company provided a new mindset when it comes to shopping and exchanging goods between individuals and groups. In the past, the traditional way of selling products was through a certain supply chain method. In most cases, the goods come from the factories and funnel to distributor sites. In the case of computers and mobile phones, for instance, there are authorized distributors, and the model significantly affected the pricing of the products. For example, massive expenditures were needed to finance the warehouses that acted as storehouses for these items. At the same time, the company had to split some of the profits for the benefit of the authorized distributors. When it comes to other products, there exists a different layer of middle-men or buffers that separate the firm from its customers. The purpose was to create efficiency, because the managers from the factories were unable to provide the marketing requirements and the after-sales support that is usually necessary in the business environment surrounding the retail market. In other words, it is more expensive to purchase items using the traditional method. 

Another major contribution of eBay to 21st century commerce is not only the breaking down of walls between the manufacturer and the customer; the company also succeeded in eliminating the barriers of entry to the market that would have made it impossible for small entrepreneurs to reach thousands of prospective clients without having to spend hundreds of thousands of dollars as advertising expenses. Finally, eBay also made it possible to give products a new lease on life, because there is now a platform that people can use to sell second-hand items. 

From the point of view of the users of the eBay platform, they have found a great way of saving money as they are able to bypass the middle-men and the brick-and-mortar stores that have to charge a little higher because of the overhead costs of operating a physical store. When all the operating expenditures were eliminated from the supply chain process, consumers became happy with the final price reduction of the items they purchased through eBay. Even if large companies use intermediaries to sell products using this platform, considerable savings can be realized by getting rid of the costs that are associated with massive warehouses and salaried employees managing the goods. As a result, they are able to sell items at a competitive price ceiling. Aside from the savings that consumers are able to enjoy, increasing their purchasing power at the end of the day leads to greater economic stimulation.

If one considers how Taobao utilizes the same business approach in terms of connecting buyers and sellers online like eBay did in the United States and other parts of the world, then one can also begin to understand how Taobao can impact on the Chinese economy. In the same manner, Taobao became instrumental in streamlining the marketing and delivery of products as it eliminates the various cost-incurring practices found in conventional methods of transferring goods from the manufacturers to the consumers’ hands. Moreover, the company enables small scale businesses to interact with each other and increase their capability to reach out to millions of potential customers while significantly reducing the overhead expenses in terms of doing business in China.

Conclusion

If Taobao simply existed as copycat of eBay, it would not have created a significant impact on the Chinese economy. If the former remained a copycat, the latter would have been the biggest online shopping platform in the country with a population of more than 1 billion people. However, Taobao's executive leaders were prudent enough to see areas of improvement, such as, the elimination of fees to significantly lower the cost of doing business online and the creation of a new system that enhances user experience as buyers are now allowed to have greater interaction with the seller of goods. As a result, tens of millions of Taobao users are happy with the savings as it extended their purchasing power. Thus, the added capacity to buy more products further contributed to the stimulation of the Chinese economy. At the same time, the added features, when it comes to buyer and seller interaction, further increased the satisfaction rate of customers as they became able to purchase items that were meeting their needs. As a consequence, cost-efficiency was experienced and it was also an added boost to the Chinese economy.

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