Sun Zi: Competing Strategically with Resource Disadvantages1

Case: How Taobao Crushed Internet Giant eBay in China

Lim Min Li Michelle2 and Lee Khai Sheang3
April 2013

Sun Zi:
(6.13) The soldiers of Yue may be many, but what good are they in gaining victory?
Victory can be created; the enemy may be many, but can be made unable to battle.4

Abstract

This is a story of how Taobao, a fledging Chinese internet company, beat giant eBay
out of China in a short span of five years. eBay, the global leader in Internet C2C
services, began its foray into the Chinese market through an acquisition of
EachNet.com in 2002. EachNet was founded in 1999 by Chinese entrepreneurs Bo Shao
and Tan Haiyin who wanted to emulate eBay’s success in China, and was successful
locally. eBay soon became massive in China’s online C2C market, and held 72%
market share in 2003. Jack Ma, founder and CEO of Chinese online B2B website
Alibaba.com, was particularly concerned that eBay would become a serious threat to
Alibaba. He then set up Taobao.com to rival eBay in China. By 2007, Taobao’s market
share burgeoned to 84%, while eBay was left with a meagre 8%. Based on Sun Zi’s Art
of War, this paper examines how Taobao surpassed giant eBay with resource
disadvantages in the fight for leadership in China’s intricate e-commerce market.

Key Topics: Sun Zi’s Art of War, War and Business Strategy, Market Entry Strategy,
Strategic Leadership, Competitive Advantages, Localisation of Strategy, Counter
Strategy, Competing against Giants.

1
Copyright © - Please do not reproduce without the explicit permission from the authors.
2
Lim Min Li Michelle is a graduating BBA student majoring in Management and Marketing from NUS Business
School.
3
Lee Khai Sheang is an Associate Professor at NUS Business School, email: bizleeks@nus.edu.sg.
4
All citations in this paper are attributed to Sun Zi and are taken from the book Sun Zi’s Art of War – An English
Translation by Lee Khai Sheang and Sim Siew Lien.

Page 1 of 13
Prior Knowledge of the Enemy

Sun Zi
(13.4) Prior knowledge cannot be obtained from the supernatural, cannot be based on

experience, cannot be calculated from astrology, but must be obtained from people,

those who know about the affairs of the enemy.

Alibaba.com, a business-to-business (B2B) online trading portal that helped small and medium

sized Chinese manufacturers connect with overseas buyers, was established in 1999 by Jack

Ma in his Hangzhou apartment. By year 2002, Alibaba was the leading B2B website in China,

and Ma quickly became a business legend locally – best known for his evolvement from a

humble college English teacher to one of China’s earliest internet pioneers. He set up the portal

after a US trip in the 1990s provided him exposure to the internet. When eBay was acquiring

EachNet in 2002, Ma saw eBay’s entrance as a threat to Alibaba, and set up Taobao to rival

eBay in China. Ma said: “We launched Taobao not to make money, but because in the US eBay

gets a lot of its revenues from small businesses. We knew that someday eBay would come in

our direction.” 1

However, with insufficient resources and limited knowledge about goliath eBay, Ma felt that

it was imperative to rope in Masayoshi Son, founder and CEO of Japan’s technology giant

Softbank. Together with Yahoo! Japan, Son’s Softbank drove eBay out of Japan in 20022.

While Son was already an investor in Alibaba then3, Ma convinced Son to further invest in

1
Refer to Luo and Feng (2010).
2
Refer to Bloomberg BusinessWeek (2001).
3
Refer to The New York Times (2010).

Page 2 of 13
Taobao, believing that Son could provide the much needed capital and knowledge about eBay4.

Referent to Sun Zi, Ma effectively obtained prior knowledge about eBay from Son (Sun Zi

(13.4)). This knowledge may have been key to crushing eBay, as Sun Zi advised on the

importance of knowing about the enemy - above and beyond self-knowledge (Sun Zi (3.12)).

Sun Zi
(3.12) So it is said: know the enemy and know oneself, never be in danger in a hundred

battles; know not the enemy, but know oneself, lose a battle for every won; know not

the enemy and know not oneself, be certain of danger in every battle.

Surreptitious Market Entry

Sun Zi
(1.7) War is based on deception. When able, feign disability; when using, feign

otherwise; when near, feign distance; and when distant, feign nearness.

Although the development and launch of Taobao was very much part of Ma and Alibaba’s

plans, it was executed in wide secrecy. Ma could have opted to sound the gongs in publicising

Taobao’s launch and its intentions to defeat eBay, but kept everything under wraps. In fact, the

association between Taobao and Alibaba was not made known, and even Alibaba’s employees

themselves were kept in the dark5. Although Taobao was launched in May 2003, it was not

until July 2003 that Ma officially acknowledged the association between both companies, and

4
Refer to Luo and Feng (2010).
5
Refer to Luo and Feng (2010).

Page 3 of 13
announced Alibaba’s infusion of US$12 million into Taobao. Ma only revealed the relationship

when he felt that Taobao was ready to battle eBay6.

The secrecy allowed Taobao to gain traction and grow without catching eBay’s attention to

quash it, before it is strong enough for the contest. This move is similar to what Sun Zi

suggested (Sun Zi (1.7)), where war is based on trickery and perceptions. Ma’s secrecy with

Taobao misled eBay into thinking that Alibaba was distant, and it was so effective that by 2004,

eBay continued its ignorance on Taobao as a potential competitor. In an interview with

Bloomberg, eBay’s senior vice president for international business William Cobb, only

mentioned watching 1Pai (a new joint-venture between Yahoo! and Chinese search portal

Sina 7 ). Cobb also exuded eBay’s complacency in the same interview, where he regarded

consumer-to-consumer internet services as eBay’s primary domain, and he did not believe that

Chinese competitors could match eBay in that8. Sun Zi cautioned against complacency (Sun Zi

(8.7)).

Sun Zi
(8.7) So in war, do not depend on the enemy’s not coming, but depend on anticipating

the enemy’s coming. Do not depend on the enemy’s not attacking, but depend on having

(developed a formidable position) that which cannot be attacked.

6
Refer to Luo and Feng (2010).
7
Refer to Bloomberg BusinessWeek (2004).
8
Refer to Bloomberg BusinessWeek (2004).

Page 4 of 13
Native Knowledge of Battle Terrain

Sun Zi
(7.5) He who does not know the schemes of other feudal lords cannot interact with ease.

He who does not know the characteristics of mountain forests, dangerous obstacles and

marshlands cannot lead troops. He who does not use native guides cannot gain benefits

from terrain.

With strong domestic competition, dissimilar market conditions, culture, and tight government

censorship, China’s internet industry has been infamously hard to enter and survive 9 .

Specifically in the early 2000s, China’s internet trade lacked the norms and laws to support

online exchange. There were also underdeveloped technological and financial infrastructures

to support e-commerce10. The terrain in China, therefore, is essentially diverse from that of the

United States, where eBay originated. eBay appointed a German high-ranking executive as

Chief Operating Officer (COO) and a US Chief Technology Officer (CTO) to head its Chinese

operations. None spoke Putonghua nor understood the Chinese market well. A layer of foreign

management sat above the local team in the Chinese office11. eBay China also inherited the

fee-based model from its parent company, which charges sellers transaction fees12.

Contrastingly, Taobao was headed by Sun Tongyu, one of Alibaba’s founders. Sun and Ma had

superior knowledge of the Chinese market and understood how Chinese buyers and sellers

9
Refer to The New York Times (2010).
10
Refer to Luo and Feng (2010).
11
Refer to So (2006).
12
Refer to Luo and Feng (2010).

Page 5 of 13
would respond to the pricing of online services 13 . They knew that many Chinese were

parsimonious, and were unlikely to pay for online services. Additionally, they recognised that

many Chinese were still untrusting of online exchange and were reluctant to trust strangers14.

With native knowledge of the terrain, Taobao launched with an entirely no-fee model, sustained

by advertising revenues15. While this may seem unsustainable at the outset, and even earned

Ma his nickname “Crazy Ma”16, their familiarity with the Chinese market paid off, and a survey

in 2005 showed that many eBay China users were migrating to Taobao due to the free services 17.

Conversely, eBay defended its fee structure in the years that followed, justifying that charges

were necessary to provide high quality service and arguing that “free is not a business model”18.

eBay later stopped charging transaction fees in 200619 when its market share fell to 29%20.

Nevertheless, it was too late to revive the ailing giant, and its market share dipped further in

2007 to an all-time low of 7.70% since 2003 (illustrated in Exhibit 1 below).

Market Share, eBay vs Taobao, 2003 to 2007

Taobao eBay

100.00% 83.60%
72.40%
80.00% 64.30%
58.60% 60%
60.00%
36.40%
40.00% 25.70% 29%

20.00% 7.20% 7.70%

0.00%
2003 2004 2005 2006 2007

Exhibit 1: Market Share of eBay and Taobao, 2003 to 200721

13
Refer to Luo and Feng (2010).
14
Refer to The Economist (2013).
15
Refer to Luo and Feng (2010).
16
Refer to Wang (2010).
17
Refer to Liu (2005).
18
Refer to Yeung (2005).
19
Refer to Lemon (2006).
20
Refer to Luo and Feng (2010).
21
Refer to Luo and Feng (2010).

Page 6 of 13
Likewise, to effectually address the problem of distrust amongst Chinese, Taobao’s parent

company Alibaba focused on the construction of an ecosystem for support in transactions.

Alibaba introduced Alipay, a payment system with an escrow function. Through this system,

sellers are assured of payment, and it eliminated the fears of non-payment from buyers. Another

initiative included an independent verification service where third parties examine claims from

sellers to verify the authenticity of the claims. The cost was borne by sellers, but it increased

buyers’ confidence in the items they were purchasing22. Further, Taobao allowed its buyers and

sellers to communicate through an instant messaging service, Aliwangwang 23 , while eBay

typically discouraged buyers from interacting directly with sellers to avoid offline transactions

that skipped transaction fee payments24. Industry insiders believed that this liberal form of

communication facilitated Taobao’s image as an informal and friendly portal in comparison to

eBay China25.

Analogous to what Sun Zi emphasised, it is advantageous to gain benefits from the native

knowledge of the battle terrain (Sun Zi (7.5)). Ma and Sun saw what eBay’s foreign

management failed to see, and was better able to meet the needs of the Chinese population.

Jack Ma echoed Sun Zi’s standpoint with a comment in 2005: “eBay may be a shark in the

ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose – but if we

fight in the river, we win26.”

22
Refer to The Economist (2013).
23
Refer to the Little Red Book (2009).
24
Refer to Luo and Feng (2010).
25
Refer to Luo and Feng (2010).
26
Refer to Luo and Feng (2010).

Page 7 of 13
Innumerable Variations above Terrain Understanding

Sun Zi
(8.3) So the general who knows well the advantages of innumerable variations is he

who is proficient in warfare; the general who knows not well the advantages of

innumerable variations, though he may know the terrain, cannot exploit terrain to his

advantage.

eBay adopted an aggressive marketing strategy. It invested heavily in its marketing campaigns

in China and signed exclusive contracts with nearly all leading Chinese websites. Under

contract conditions, the websites were prohibited from advertising for eBay’s competitors27.

The agreements were aimed at dominating the major online channels, and prevented

competitors from gaining mainstream exposure on the internet28. eBay was able to employ such

a hard-hitting approach because of the availability of financial resources. In addition, eBay

pumped in another $100 million to build the Chinese operations, and spread its advertisements

offline on buses and subway platforms29.

Taobao, on the other hand, was vastly affected by this onslaught. Coupled with the lack of

financial firepower, it was an adversity for the much smaller firm, who badly needed general

awareness and promotion at that point in time30. Instead of lamenting on the lack of supplies,

or giving up, Ma fought back ingeniously. He and his team switched to using the “ants” method.

27
Refer to Luo and Feng (2010).
28
Refer to Luo and Feng (2010).
29
Refer to Wang (2010).
30
Refer to Luo and Feng (2010).

Page 8 of 13
In China, there were large numbers of computer bulletin board services (BBS), commonly

known as online forums. The Taobao team posted thousands of messages on these forums to

introduce the portal to internet users, an effective and guerrilla way of reaching out to its target

market31. Additionally, Taobao, whose name means “digging for treasures” in Putonghua, also

gained significant attention through a smart play of words in its campaign messages32. Ma said:

“eBay may have deep pockets, but we will cut a hole in their pocket” 33. Ma and his team

displayed innumerable variations in fighting the marketing war with resource disadvantages,

and this, along with native knowledge about the Chinese terrain, allowed Taobao to emerge

victorious (Sun Zi (8.3)). Ma had also shown his ability to adapt his strategy according to his

enemy’s moves, a key to out-manoeuvring the enemy (Sun Zi (6.18)).

Sun Zi
(6.18) Terrain shapes how water flows; so vary the strategy according to the enemy to

achieve victory.

The Power of Flexibility

Sun Zi
(2.5) The expert in war conscripts an army but once, never transports provisions

repeatedly, obtains initial supplies at home, but replenishes provisions from the enemy;

thus provisions are always sufficient.

31
Refer to Luo and Feng (2010).
32
Refer to Wang (2010).
33
Refer to Luo and Feng (2010).

Page 9 of 13
After the acquisition of EachNet, eBay’s then CEO Meg Whitman envisaged a unified eBay

site. In support of the vision, eBay’s Chinese servers were shifted and maintained in San Jose,

California, and as a result, eBay traffic would have to flow to and from both countries34. While

the overall intention of amalgamation was decent, it created a mass of problems for eBay China.

The overseas internet pipes could not cope with all the traffic generated, causing slow loading

speeds on the eBay China portal35. Because of the overseas source of traffic, it was further

subject to heavy scrutiny from Chinese government filters, widely known as “The Great

Firewall of China”, further slowing down the eBay website36. To add on, eBay global servers

were typically maintained on Thursdays at midnight in Silicon Valley, in preparation for peak

traffic on Fridays in the United States. However, that timing would be Friday afternoon in

China37.

Apart from the technical difficulties, the centralisation also prolonged the decision process in

eBay China. In a 2006 interview with the South China Morning Post, the former head of

strategic planning at eBay China, Charles Shen, mentioned that the unification bogged down

its operations. The addition of a new feature could take quarters to complete, while Taobao was

more flexible in responding to the needs of its users38. Bo Shao, one of the founders of EachNet

concurred with Shen. He blasted the complexity of eBay’s global platform and exclaimed that

a nine week decision in EachNet in the past became a nine month decision in eBay China39.

Taobao did not face these problems as it was a small company with lesser bureaucracy and its

34
Refer to Mitchell (2010).
35
Refer to Mitchell (2010).
36
Refer to Crow (2009).
37
Refer to Luo and Feng (2010).
38
Refer to So (2006).
39
Refer to Luo and Feng (2010).

Page 10 of 13
servers were in China40. Congruent to the theory proposed by Sun Zi (Sun Zi (2.5)), the expert

at warfare never transports provisions repeatedly. As illustrated, the recurrent transportation

caused eBay China to be less responsive than Ma’s Taobao. eBay also erratically ran out of

supplies (page loading speeds, decision making powers) when it urgently needed them to fight

against the nippy Taobao. The sluggishness similarly resulted in eBay entering the battleground

almost always last, and according to Sun Zi (Sun Zi (6.1)), eBay was sure to toil.

Sun Zi
(6.1) He who reaches the battleground first and awaits the enemy idles; he who reaches

the battleground last and hurries unto battle toils. So the expert in battle leads the

enemy but is not led.

Conclusion

Sun Zi
(2.12) The general who understands war is the master of the fate of the people and the

state.

At the core of Taobao’s success in toppling giant eBay in China, one man played a

quintessential role – Jack Ma. He demonstrated nonpareil understanding of war strategies,

evident from the many triumphant factors discussed above. It was he who saw the need for

40
Refer to Luo and Feng (2010).

Page 11 of 13
prior knowledge of the enemy (Sun Zi (3.12)), for protection during Taobao’s infancy stages

(Sun Zi (1.7)), who knew the Chinese terrain like the back of his hand (Sun Zi (7.5)), who

found innumerable variations to the giant’s actions (Sun Zi (8.3)) and who led the enemy but

is not led himself (Sun Zi (6.1)). Taobao was so successful that eBay shut its Chinese website

and entered into a joint venture with a Chinese company instead41. This case exemplifies the

fundamental need for business leaders to understand war strategies and apply them to attain

success; because when war strategies are sufficiently appreciated and deployed, even giants

can usurped by minnows.

References
Information, upon which this article was based, was derived from the following published

sources:

 Alibaba: The World’s Greatest Bazaar. (2013). The Economist. Print Edition.

 Bradsher, K and French, H. eBay Takes on Partner and Closes Its China Site. (2006).

The International Herald Tribune. Finance. Pg. 10.

 China Social Media: Taobao.com. (2009). Little Red Book.

 Crow, D. Facebook Tries To Climb The Great Firewall of China. (2009). City A.M.

 Hof, R.D. eBay’s Patient Bid on China. (2004). Bloomberg BusinessWeek Magazine.

 How Yahoo! Japan Beat eBay At Its Own Game. (2001). Bloomberg BusinessWeek

Magazine.

 Lee, K.S. and Sim, S.L. (2010). Sun Zi’s Art of War: An English Translation, Dexen.biz.

41
Refer to Bradsher and French (2006).

Page 12 of 13
 Lemon, S. eBay Decides ‘Free’ Is a Business Model. (2006). InfoWorld. Technology

Business.

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But Local Competition is at Its Heels. (2005). San Francisco Chronicle.

 Luo, X.Q. and Feng, M. (2010). Taobao vs. EBay China. Stanford Graduate School of

Business.

 Mitchell, R. eBay’s Lost Years. (2010). The Bay Citizen.

 So, S. Ebay Ousting as Market Leader Blamed on Culture Clash. (2006). South China

Morning Post. Business. Pg. 12.

 Tech Innovator in Japan Sets Its Sights On China. (2010). New York Times Dealbook.

 Wang, H. How eBay failed in China. (2010). Forbes.

 Yeung, F. eBay Lectures Taobao That Free Is Not a Business Model. (2005). South

China Morning Post. Business. Pg. 3.

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