The eBay of China: Eachnet: a Shanghai online auction firm set out to imitate eBay. In June, eBay bought it.

From his 25th-floor corner office overlooking Nanjing Road's famous neon-lit shopping malls and fanciful skyscrapers, Bo Shao runs an online auction business that could someday outpace even its role model, eBay. "If we realize our dream, we could have the biggest online trading marketplace, period," says Shao, 29, chairman and CEO of Eachnet, which was founded in Shanghai four years ago.

Maybe that's a bit of an exaggeration, but he is on to something. At Eachnet, some 140 employees--who are all shareholders--sit in rows of cubicles decorated with stuffed teddy bears, posters, stamps and other favored top sellers on the site. It looks a lot like the setup at the eBay corporate campus in San Jose, even down to the primary color scheme of the logo. Cell phones ring intermittently with irritating musical themes and managers pop into Shao's office to chat about the next project meeting. The mood is upbeat, fun and productive-like at eBay, but with some Chinese flavors.

Eachnet is likely to look a lot more like eBay now that eBay owns the Chinese company. In June, eBay plunked down $150 million to complete the acquisition, having paid $30 million in March 2002 for a 33 percent chunk of the company. The transaction is expected to close during the third quarter of this year.

International growth is hot at eBay. International revenues climbed by 173 percent, to $356.5 million, last year, outpacing overall growth of 62 percent, to $1.2 billion. Of the 26 markets that eBay has entered over the past three years, China is the one that seems paramount. CEO Meg Whitman served on Eachnet's board before making the acquisition and travels to Shanghai regularly.

Who would think that an American Internet-based company could find a market in China? But Chinese consumers are eagerly snatching up computers, cellphones, fashions and even cars and Western-style villas as the country's middle-class population swells beyond 100 million. Dimly lit Internet cafes in the bustling cities of Shanghai, Beijing and Shenzhen are packed with young chain-smokers, checking their email, playing interactive games and shopping online. Currently numbering 48 million, online Chinese users should grow to 200 million within five years, according to research group International Data Corp.

Currently, Eachnet has 4 million users in China--a fraction of eBay's 62 million in the U.S.--but that 4 million gives it a commanding 85 percent market share of online auctions in China, Shao says. Revenues are growing at the rate of 10 times per year, he adds, and are estimated by IDC at $1.8 million.

Eachnet is growing fast because it offers a convenient shopping option not often found in China. Shopping in China is done mostly at the thousands of morn-and-pop stores that line dusty rural streets and Shanghai alleyways rather than in vast shopping malls common to the U.S. While Shanghai does have fashionable malls with clothing and cosmetics boutiques, these tend to be in trendy, touristy areas. There are few general merchandise stores like Wal-Mart.

Because the retail business is so cutthroat in the U.S., eBay does not bother trying to compete with retailers but rather specializes in surplus inventory, hard-to-find items and used or outdated merchandise. With only limited retailing competition so far in the few fashionable malls that have sprung up in major coastal cities, Eachnet offers a far broader mix of goods on its site. It is a virtual one-stop shopping marketplace tot clothes, computers, cell phones and other goods.

Even though the promise is there, it would be comforting to know that Eachnet is profitable, it isn't yet. Shao, an optimist like most entrepreneurs, declines to give a timetable for reaching profitability. He says his focus is on steady, high growth. "The bigger the fruit, the higher you have to climb," he says, referring to the challenges and opportunities that Eachnet faces.

Certainly Shao has achieved things far beyond his dreams when he returned to China and started his own business alter earning a Harvard MBA and working at Boston Consulting Group. Convinced by some research he had done for a client that a business like eBay would work in China, he raised $400,000 from friends to start Eachnet in August 1999. He later picked up $27 million in two rounds of venture capital financing. "It's humbling to see the deep knowledge and understanding that eBay brings to the online auction business," says Brian Doyle, a partner at Provident Capital Management in Hong Kong and one of the original venture capitalists behind Eachnet. "The eBay model works well in China."

Shao acknowledges he has learned a lot from eBay and says he regularly adapts parts of the eBay business model that he thinks "might work in China." Like eBay, Eachnet charges sellers a small fee to list items and a separate fee once the transaction is complete (although Eachnet initially offered its services for free for fear of driving off China's cost-conscious consumers). Eachnet also has copied eBay's seller feedback program, where buyers rate sellers on product quality, order processing and delivery. Other similar features include the ability to conduct trades at fixed prices, rather than through bids. Shao proudly says Eachnet introduced fixed-price trading before eBay.

But Shao has had to customize other parts of eBay's business strategy because they just wouldn't work in China. For instance, payment couldn't be arranged by credit card like it is with eBay because most Chinese don't trust plastic as a secure form of payment. Registration of sellers also couldn't be done with credit cards like it is in the United States. And when Eachnet started, the postal service couldn't be relied on. The company worked through each of these obstacles.

In the past, buyers and sellers met personally at designated city centers and exchanged goods for cash. Today, most transactions are handled by wire transfers through the postal savings bank, and trades can take place between cities. And an improved Chinese postal service is now used for deliveries that take a standard two to three days. To solve the registration process for sellers on the site, Eachnet used national identity cards instead of credit cards for confirmation. For Meg Whitman and eBay, these are valuable lessons for cracking a potentially huge online marketplace.