Online commerce remains a relatively small market in China, but some of the world's leading Internet companies are betting that is about...

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BEIJING — Online commerce remains a relatively small market in China, but some of the world’s leading Internet companies are betting that is about to change.

The biggest Internet investment in China from a foreign company to date came yesterday from California-based Yahoo!, which is paying $1 billion in cash to take a 40 percent stake in China’s top e-commerce business, Alibaba.com.

Yahoo! will merge its China subsidiaries into Alibaba, which runs a Web site that matches foreign buyers with Chinese wholesale suppliers; plus the popular auction site Taobao.com, which competes with eBay’s Chinese subsidiary.

“This is Yahoo! getting much bigger in China,” Daniel Rosensweig, Yahoo!’s chief operating officer, said at a news conference in Beijing with Alibaba founder Jack Ma.

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Rosensweig said the alliance creates an entity with assets to compete across the full range of Internet businesses: online commerce, e-mail and search.

China is believed to have 100 million Web users, second only to the United States. Online commerce is still small, however, held back by low consumer spending in a country where urban incomes average $1,000 a year.

Consumer-to-consumer online auctions in China totaled about $500 million last year, while business-to-consumer sales were about $1 billion, according to Joe Tsai, Alibaba’s chief financial officer.

But Tsai said online sales are expected to grow 80 percent annually during the next three years.

This deal extends Yahoo!’s plan to break into Asian markets by connecting with strong local partners. Yahoo! and its partners are now major forces in online auctions in China, Japan, Taiwan and Hong Kong, said Porter Erisman, Alibaba vice president for international relations.

“This is really probably the knockout blow for eBay in China,” he said. “This is going to make it hard for eBay to win in Asia.”

eBay stays cool

eBay, which bought the Chinese auction-portal Eachnet for $180 million in 2003, rejected suggestions that the Yahoo!-Alibaba tie-up was a threat. Its share of China’s auction market is 65 percent, according to Shanghai iResearch. Taobao had 29 percent in 2004.

“It’s business as usual for us,” said eBay spokesman Hani Durzy in San Jose, Calif.

That sounded like careful posturing to Hoefer and Arnett analyst Martin Pyykkonen. He noted eBay CEO Meg Whitman predicted China would become the company’s biggest market in five years, so the Yahoo!-Alibaba alliance signifies “more than just a casual threat,” he said.

eBay is expected to invest about $100 million in China this year, Pyykkonen estimated.

The Yahoo!-Alibaba.combination will include 3721.com, a Chinese-language search engine Yahoo! bought last year for $120 million.

That will put it in competition with China’s most popular search engine, Baidu.com, whose initial stock offering in the United States last week set off a buying frenzy. Its share price soared more than 350 percent in its first day of trading before falling this week.

And the second-most-popular Chinese search site is operated by a familiar rival, Google, which ramped up operations there this week by authorizing three Chinese companies as resellers of ads for its China site. Google also owns 2.6 percent of Baidu.

With its 40 percent stake, Yahoo! clearly expects huge growth from Alibaba, whose revenue was $68 million last year. Advertisers and companies pay $5,000 to $10,000 per year for membership in its commercial online-auction service. It does not charge fees for individual auction listings, as eBay does.

Yahoo! said its stake will make it the biggest investor in Alibaba, which has 2,300 employees and is based in Hangzhou, southwest of Shanghai.

Yahoo! will have 35 percent voting rights. The new entity will have a four-member board led by Ma as chairman, with a second seat held by Alibaba and the others held by Yahoo! co-founder Jerry Yang and a representative of Softbank, a big Yahoo! investor.

Different master

Pyykkonen called that a departure for Yahoo! and CEO Terry Semel, because the company usually takes control of a partner’s operations when it spends this kind of money. The arrangement could cause friction, he said.

“Ma has a reputation for being a bit of a cowboy,” he said. “Terry Semel won’t be able to rein him in as easily.”

Alfred Tolle, head of Internet rival Lycos, which recently opened an office in Shanghai and launched a social networking site in China, said he believes Yahoo! overpaid for a 40 percent stake.

Tolle said the recent fascination with Chinese Internet companies reminds him of the dot-com boom in the United States a few years ago.

“It’s getting a little overheated in China,” he said, “a bit like 1999 or 2000.”

Associated Press reporter Michael Liedtke in San Francisco contributed to this report.