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China's Web Masters (Int'l Edition)


International -- Int'l Cover Story

China's Web Masters (int'l edition)

As a new class of entrepreneur rushes China onto the Internet, the impact on both the economy and society will be revolutionary

Perched on the edge of his seat and fiddling impatiently with his cellular phone, William Ding launches into a pitch that he has honed for potential investors. In rapid-fire Mandarin, the gangly 28-year-old explains how his Beijing-based Netease Systems Ltd. has emerged as one of China's leading Internet portals, with 2.9 million page-views per day. It already offers E-mail, discussion groups, personal Web pages, and links to 60 mainland publications. In early July, Netease leaped into actual electronic commerce, selling 110 PCs for $150,000 in one week in the country's first online auction. Afterward, Ding says, "people were still calling, saying they wanted more."

Anyone who assumes the Internet is still a novelty in China has been asleep at the mouse. The communist giant's state-owned factories and political system may seem frozen in another era. But when it comes to cyberindustry, China is moving at Net speed.

Encouraged by reformist leaders such as Premier Zhu Rongji, Internet use is growing explosively. Two years ago, only 640,000 Chinese were connected. Now more than 4 million are. By 2001, estimates International Data Corp., the online population should hit 27 million--about as many as in Japan. And while only $42 million in E-commerce transactions are expected this year, they could near $4 billion by 2003. Says IDC Asia Pacific analyst Pete Hitchen: "We foresee some pretty hairy jumps in online activity."

The impact will be revolutionary, both on China's economy and society. A new class of entrepreneur is emerging because the government is allowing the private sector wide latitude to develop Web business--remarkable for an industry Beijing regards as strategic. The rapid spread of E-commerce could transform China's stodgy retail and banking sectors. It also could boost efficiency of Chinese industry by allowing old-line factories to streamline their archaic supply chains. The Internet is crucial because "our traditional enterprises need information in order to compete," says Information Industry Ministry official Zhao Xiaofan. "Otherwise, they will lose out." And, of course, there are the political implications. As Web users proliferate, ordinary Chinese will gain access to foreign news and information.

The global implications are enormous, too. As the same Web-based enterprise resource planning software used in the West spreads to China, traders around the world could link directly with suppliers and retailers across the mainland, bypassing cumbersome middlemen. English will remain the lingua franca of global commerce. But as the Web reaches the mass market in China and elsewhere in Asia, Chinese could become the medium's most used language within five years, predicts Deloitte Consulting global telecom expert David Roddy. That would generate huge demand for programming, software, and services in Chinese text. The complexity of Chinese characters, meanwhile, will spur development of machine-translation and voice-activated software.

The Internet's big players know what is at stake in China and are gunning for dominance of portals, the gateways to the Net. Yahoo! Inc.'s English site has grabbed an early lead, accounting for 40% of all visits, says Sydney-based Internet research group www.consult. That's because most Chinese surfers prefer U.S. sites over the low-quality local fare.

But the scene is changing fast as more Chinese go online and crave sites that reflect local tastes. So Yahoo! started its own Chinese-language site last year. Despite the murky legal environment and bureaucratic hassles, packs of aggressive local upstarts are coming up quickly with alternative portals. Many have even secured investment from foreign heavyweights such as Intel, Dow Jones, Goldman Sachs, and America Online (table, page 28).U.S. LISTING. Foreign investors are hungering for China plays. On July 13, China.com Corp.--a Hong Kong-based portal with a small following on the mainland--raised $84 million as the first Chinese-language Internet company to float shares on the NASDAQ. The stock tripled, to $67, on the first day of trading, giving China.com a market value of $1.4 billion, before settling to around $45.

Other portals are racing to stay ahead. Market leader Sina.com, which targets Chinese Net surfers worldwide from its base in Sunnyvale, Calif., and offices in Beijing and Taipei, wants to go public within 12 months. Beijing-based Zhaodaola Internet is winning fans with its original content. Although it is backed by a venture-capital firm controlled by American televangelist Pat Robertson, it does not offer religious fare. Instead, it emphasizes news and entertainment. "Everyone in China would like to duplicate the tremendous success we have seen in the portal space in the U.S.," says Bill Waddell, chief executive of Zhaodaola, which means "found it" in Mandarin. "And everyone is hoping and betting that China will be the world's largest Internet population."

For investors, a bigger payoff could come from business-to-business E-commerce. Alibaba.com, a portal based in the eastern city of Hangzhou that connects manufacturers to customers, has signed up 28,000 companies since its April launch. "China and Asia are the big suppliers to the world," says founder Jack Ma, 35, a former college English teacher. For revenue, Alibaba is relying on banner advertising and E-commerce transactions, although Ma won't say how well it is doing. The biggest users are factories in China and neighboring countries, and buyers are from as far away as Egypt and the U.S. Other entrepreneurs are preparing to sell books, clothes, and food to Chinese consumers.

Driving this growth are soaring sales of cheaper PCs and rapid expansion of China's telecom system. In the near future, new wireless technologies and TV set-top boxes will bring the Net to millions more Chinese in the country's interior. Beijing is encouraging Chinese to go online by slashing Internet access fees, which now run around $12 per month. Further cuts are expected. Also, the government is creating space for new entrants by breaking up state-owned China Telecom, which has stifled competition by gouging rival Net service providers (ISPs) for access to its Net backbone. So far this year, the cost to ISPs has dropped by 35%.

As it encourages development of Chinese content, Beijing is making it surprisingly easy for foreign companies. While they cannot own equity in mainland telecom operators, they can own majority control of Net companies such as Zhaodaola. And although Beijing jealously guards its monopoly on traditional print and broadcast media, it lets entrepreneurs publish on the Web.

Of course, Beijing is still leery of the Net's potential as a conduit for political dissent. Yet leaders figure a little loss of media control is worth the risk. "What's important is developing more content in Chinese and for Chinese," says ministry official Zhao. With exports and foreign investment sluggish, the government hopes consumer spending will boost its economy. E-commerce and information-technology startups could be new engines of growth. This won't happen if state companies hog cyberspace. "Bureaucrats can't keep pace because the Internet develops so fast," says Netease corporate development director Oliver Kwan. "They understand that."POLICE VISITS. All the same, Beijing raises many obstacles to a truly freewheeling Net culture. The government limits what Chinese Net users can see by telling them to block portals run by dissident and human-rights groups. It uses crude tactics to make portals censor themselves--including intimidating visits from the police. Determined surfers can get what they want by going through offshore services. But because Beijing bans imported encryption technology, state snoops can easily eavesdrop on traffic and arrest violators or seize their computers. That makes the Chinese Net unsafe for sensitive political topics and means that much commercial data isn't very secure either.

China's entrepreneurs make their compromises with the government to stay in the game. Take China.com, which has made the biggest splash with its recent stock offering. Rather than risk losing its market access, China.com says in its prospectus that it "stringently" edits content and therefore "may not be as interesting as other Web sites" that skirt PRC regulations. Its mainland site is dominated by the same official news found in state media.

China.com is a bit dull as a result, but that isn't slowing founder Peter Yip. A Hong Kong financier, he has built his China business the old-fashioned way--through guanxi, or connections. Yip forged a partnership with official Beijing news agency Xinhua and used it to attract such big-name investors as America Online Inc. and New World Development Co., a Hong Kong property giant. Yip's empire includes portals in Hong Kong, Taiwan, and the mainland as well as companies offering Web advertising, design, and consulting. Resentful rivals say he is better at making deals than running companies.

Yip is eager to prove the critics wrong. Hoping to replicate successful formulas from the U.S., he plans to plow the proceeds from the stock offering into sales, marketing, and new online shopping sites. Creating all these sites not only makes good business sense, Yip says, but also pleases Beijing. "There is a tremendous amount of culture in foreign languages and not enough in Chinese," he adds.PORN PROBLEMS. Other portals have similar ways of dealing with Big Brother. While many offer technology news from CNET Inc. and business news from Reuters Group or Dow Jones, the major portals stick to official sources when it comes to anything sensitive. "We won't get ourselves into trouble," says Daniel Chiang, chairman of Sina.com. As a result, Sina is trying to move away from hard news and develop sports content. "That will take a lot of heat off our back," says Chiang.

Some content providers have experienced first-hand the limits of Beijing's patience. In January, the public security bureau raided Sohu, China's fourth most popular portal, because users could view illegal pornographic sites. Clearing its databases of taboo sites took two weeks. "It was quite an effort," says Sohu Chief Executive Charles Zhang.

Still, some Internet upstarts push the envelope of what's acceptable. Netbig.com, a two-month-old portal in Shenzhen, wants to be the top site for China's newly affluent youth. So it has organized a loose network of reporters at major campuses and publishes its own ranking of universities. Old hat for the U.S., but a radical departure for China, where timid official media rarely air criticism of state institutions. Except for political information, "the Internet in China is relatively free," says Netbig co-founder Ming Liu, 28. "By comparison, the traditional media are still under heavy regulation."

Yet Liu, a Duke University PhD in economics who once worked for the Federal Reserve in Washington, isn't just interested in tweaking Beijing's mandarins. He and his partners are using services to build a big customer base. Besides its campus news, Netbig carries material on how to prepare for Chinese entrance exams, to study overseas, or even to emigrate. Netbig also features less weighty information, such as fashion advice and dating tips. The strategy is to make money eventually on E-commerce. A channel where new parents can buy baby food, clothes, and books online is in the works. "The whole society is changing," Liu explains.GREAT LEAP. Making money isn't easy. With Web advertising still minuscule--just $2 million in 1998--sites must rely on retail sales for revenue. But credit cards are scarce in China. So in its July computer auction, Ding's Netease let customers pay cash on delivery for their PCs. The system worked. Now he's planning auctions for DVD players and digital cameras. Industry executives hope consumers will soon buy goods with debit cards and online bank accounts.

As the portals develop the market, some players are preparing more specialized sites. In Beijing, California native Fritz Demopoulos has launched a Chinese-language sports site, Shawei.com. Demopoulos, 31, worked for News Corp.'s Beijing office before founding Shawei, which has a staff of 17. His aim is to recreate ESPN's Web site, which offers soccer news and chat sessions--and then sell sports tickets and clothing online. "As the market matures with a broader demographic, we are going to see people interested in more things," he says.

While the mass market is still in its early days, other entrepreneurs are experimenting with business-to-business models. Alibaba's English and Chinese sites feature Bizman Club, a bulletin board for companies that buy and sell everything from toys and sporting goods to textiles and chemicals. It gets around 125,000 page views per day. "We need doll stroller. We need them very urgently," says a page by a Shanghai company in Alibaba's doll section. Meanwhile, state-owned China Tuhsu Jinchi Import & Export Co. of Nanjing is hawking its porcelain dolls. "We would like to cooperate with all friends for a bright future," says its announcement.

The Net's success could breed its own problems. As it grows more lucrative, bureaucrats may not be able to keep their hands off. Beijing is usually happy to accept foreigners' investment dollars at first. Then it often changes the rules to the advantage of state-run rivals once a sector gets hot. The same could happen with the Internet. Online affiliates of China Telecom, the People's Daily newspaper, and China Central Television have been laggards but are starting to wake up to the potential windfall.LEGAL LIMBO. China's backward legal system poses other big risks. While Beijing has so far given winking approval to content providers, it has yet to spell out exactly what is legal and what is not. Every business in China must have a license, but the government hasn't established any rules for licensing Internet content providers. So entrepreneurs are taking their chances, hoping that they will get approval should the government change its policy. "The whole legal basis for these companies is screwy," says Duncan Clark, a partner of Shanghai-based BDA China, an Internet consulting firm.

Many Web providers are hedging their bets. Zhaodaola, for example, is accumulating a fistful of business licenses in related sectors, such as software development, network services, IT consulting, and trading. "You have to cover your bases," explains Zhaodaola's Waddell. "You don't know where the wind will blow."

For now, the wind is favorable indeed. Liu, Netbig's co-founder, thinks that soon the industry will be too established for the government to ruin. The police have twice visited Netbig after its ratings irked university officials. But the company is still running. "Once things get started," he says, "it is more difficult to shut us down." Entrepreneurs throughout the Chinese Internet world are betting heavily he is right.By Bruce Einhorn in Hong Kong, with Dexter Roberts in BeijingReturn to top


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