The eBay of the East: Inside Taobao, China's Online Marketplace

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Taobao, China's leading e-commerce site has everything, including secondhand Chanel shopping bags

In 2005, when the scrappy Chinese e-commerce company Taobao was locked in battle with eBay for control of the lucrative China market, Jack Ma, the former English teacher who founded Taobao parentcompany Alibaba, confidently predicted that victory would be his: "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 win."

He was not only right, he underestimated his company's potential. Taobao (which means "searching for treasure" in Mandarin) isn't a mere crocodile today, it's a Tyrannosaurus Rex. Or a mutant creature from another planet hell-bent on global domination. Point is, it's big — very big. Just eight years after its launch, Taobao has 370 million registered users across its three main platforms — more than the entire population of the United States. Taobao Marketplace (the site most similar to eBay) virtually owns the country's online consumer-to-consumer business, with a 90% market share, while Taobao Mall, a separate site where brands like Gap and Uniqlo sell directly to consumers, has captured close to 50% of the B2C market — nearly triple its nearestcompetitor. Taobao's gross merchandise volume (total value of all goods sold) last year reached an estimated $60 billion — double its 2009 volume and topping eBay's $53 billion.

According to Alexa, a Web tracking firm, is the third-most visited site in China and the 15th-most visited site in the world — smack between Yahoo! Japan and Google India. (eBay is No. 22.) Goldman Sachs predicts the company will make $716 million in pre-tax earnings and be worth $14.3 billion in 2013, which is impressive considering it makes the majority of its revenue from advertising — unlike eBay, it doesn't charge listing or transaction fees in its C2C business. One of the main reasons that eBay didn't succeed in China was that Taobao offered a similar, or, perhaps, superior, service for free.

Though Taobao is tops in China, it's hit something of a rough patch. It seems the bigger the firm gets, the more trouble it has trying to control what's actually being sold on its sites. Given the ubiquity of counterfeits and illegally made goods in China, this is a serious problem.

Take the trade in illicit drugs and other medical supplies, for instance. Last month, the China Daily, a state-run newspaper, reported that vendors on Taobao were selling dried and ground human placenta, a popular ingredient in traditional Chinese medicine, in violation of federallaw. Months earlier, a scandal erupted when mothers were found selling excess breast milk for upwards of $16 per bag on the site. Fertility drugs have turned up on Taobao, as have diet pills containing tapeworm eggs. In each case, Taobao said it didn't condone such sales and it shut down the vendors as soon as they were discovered.

Counterfeit goods, though, are an even bigger problem — and not just for Taobao. According to a survey conducted last year by the website, nearly 95% of Chinese Internet users believe that counterfeit goods are "running wild" online. And on Taobao, foreign brands are beginning to take notice now that they've started setting up shops in the Taobao Mall. In July, three Swiss watchmakers resorted to litigation: Omega, Longines and Rado sued Taobao in Beijing for failing to stop the sale of knockoff watches in Taobao Marketplace. The companies said Taobao should ban listings of their watchespriced at under RMB 7,500 ($1,180); a search on Tuesday turned up a number of Omega watches priced at about half that amount.

Taobao Marketplace maintains it is serious about stamping out counterfeits, but with 800 million products listed on the site at any given time, the task is difficult, says Florence Shih, an Alibaba spokeswoman. The site has keyword filters that prevent sellers from postingbanned items and price filters meant to weed out luxury goods offered at incredibly low prices. The company also has teams who scan the site and manually take down listings in violation of Taobao policies. Earlier this year, it launched an online reporting system that allows brands to submit product listings they believe to be fakes. In 2010, the company removed 14 million listings for intellectual property infringement, and in the first half of this year, it deleted 47 million listings, Shih says. Alibaba has also established funds totaling more than RMB 1.2 billion ($188 million) to pay compensation if consumers receive counterfeit goods — buyers may be eligible to receive three times the price of the item in the Marketplace and five times the price in the Mall. And the company shuts down the stores of those who repeatedly violate the rules. "We do the best that we can," she says. "This is a bigger society problem. Counterfeit goods don't simply exist on Taobao Marketplace."

Wang Hai, a well-known Chinese consumer rights advocate, isn't sold. Two years ago, he submitted a report to the government accusing the company of allowing some online stores to operate illegally and infringing on buyers' rights by concealing the real identities of its sellers. Nothing has changed since then, he tells TIME. "There is no guarantee of the quality and authenticity of products. Neither Taobao nor consumers are certain of sellers' locations. Nor do regulatory authorities know where sellers are. So Taobao sellers escape from any form of supervision," he says. "Consumers rely on luck or the sellers' sense of morality."

The fact that Taobao continues to grow suggests that many consumers are willing to take a chance — especially if the price is right. Christina Wang, a 26-year-old in Shanghai who spends about $150 per month on Taobao, says the key is to search for sellers with good customer feedback and be prepared to deal with small quality issues. "I might be tricked (with a fake), but the possibility is quite low if you know what you're doing," she says. She avoids big-ticket clothing items in case they may be counterfeit — as well as anything edible. "I don't trust them that much on food items."