(FORTUNE Magazine) – CHINESE INTERNET ENTREPRENEUR Jack Ma is a small man with elfin features. It's easier to imagine a stiff wind blowing him across the surface of West Lake, the main tourist attraction in his hometown of Hangzhou, than to picture him blocking the global expansion drive of an online juggernaut like eBay. And yet that's just what Ma, CEO of a little-known B2B auction site called Alibaba.com, is doing. "We were scared," Ma says of his reaction in March 2002 when eBay paid $30 million for a 33% stake in EachNet, China's first and largest online trading site for consumers. Ma now calls eBay "a lot weaker than we thought."

Last year, just weeks after eBay spent $150 million to acquire the remaining 67% of EachNet, Ma put Alibaba.com in direct competition by launching a rival consumer site called Taobao.com (Chinese for "digging for treasure"). Ma, a former English teacher who has been hailed by many as the father of China's Internet since he registered China's first website in 1995, insists eBay will prove no match for Taobao's local savvy and superior customer service--and no user fees. eBay, he says, may be the "shark in the ocean, but we are the crocodile in the Yangtze River."

The water these sharp-toothed creatures inhabit will soon be far wider. China has more than 80 million Internet users, making it the world's second-largest Internet population after the U.S. But eBay CEO Meg Whitman thinks the number of Chinese Netizens could soar to 500 million, which over the next ten to 15 years would make China eBay's biggest market.

Whitman's determination to succeed in China reflects painful lessons learned in Japan, where in 2000 eBay rolled out its site five months after Yahoo. Unable to convert users, in 2002 Whitman closed eBay's Japanese site and withdrew. That failure added urgency to the search for opportunities elsewhere in Asia. In late 2000, Whitman dispatched aide Stephanie Tilenius to scout the Chinese landscape. Tilenius recommended Shanghai-based EachNet, led by CEO Shao Yibo, as the most attractive partner. Shao, a Shanghai native who graduated from Harvard Business School and worked at Boston Consulting Group, in fact had fashioned the site in eBay's image. Whitman met Shao just after the Sept. 11 terrorist attacks. Unable to get a flight back to the U.S. from Tokyo, she and Tilenius decided to fly to China instead.

Unlike eBay in the U.S., which was profitable from the outset, EachNet has yet to make money. Whitman is nevertheless encouraged by the fact that EachNet made a smooth transition to the eBay model of charging fees to sellers. Wang Yue, an analyst with iResearch in Beijing, estimates that items sold on EachNet now account for about 70% of the total value of goods purchased online by Chinese consumers. With the EachNet acquisition, he says, "eBay has clearly become China's market leader."

Taobao, however, is gaining fast. Ma boasts that his site has more than 2.2 million registered users--several times that of eBay China--and far more product listings. Ma's strategy calls for ramping up volume quickly: The site doesn't charge users, and Ma has promised that it will remain free for the next three years. ("Free isn't a business model," Shao scoffs, noting that by charging sellers, the number of listed items plunged, but the ratio of completed transactions to total products listed jumped to 50% from 10%.) Ma touts the benefit of not being tied to the platform of an international partner, which leaves him free to tailor Taobao to the preferences of Chinese users. And Ma has succeeded in China before: His Alibaba sites, which cater to importers and exporters, now claim five million registered users, trading merchandise with a gross value of more than $6 billion a year. While Taobao loses money, he says Alibaba turned a small profit last year and will earn at least $45 million in 2004. He can also tap an $82 million investment from a consortium led by Japan's Softbank Investments.

Whitman may be willing to spend even more. As she puts it, "We are now a very large company with a lot of capability to make strategic investments. We're ready to do whatever it takes." -- Clay Chandler