China: Let the E-Commerce Games Begin

Published: May 24, 2000 in Knowledge@Emory

Companies worried that the recent NASDAQ turbulence might signal a bursting of the Internet bubble in the U.S. should set their e-commerce sights on a more global market. And nowhere are the opportunities greater than in China, considered by some to be the fastest-growing Internet market in the world.

As Ming-Jer Chen, founding director of Wharton's Global Chinese Business Initiative, told an April 26 gathering of executives from Greater China's top Internet companies, venture capitalists, software developers and telecom firms, "in China, the game has just begun."

The convergence of the new economy and traditional business "is much faster in the Chinese context because, for example, overseas Chinese businesses tend to be family businesses, which are cash rich and thus can more easily invest in the Internet," Chen said. "Also, the whole product cycle, moving from portal to B2C to B2B, has taken five years in the U.S. but only about nine months in Asia. By learning from the U.S. experience, the Chinese have been able to significantly shorten the e-commerce life cycle."

What all this means for multinational companies attempting to enter the Chinese market, however, is another issue. If doing business in China is indeed a game, then it is one whose ground rules are subject to change at any time. As forum participants noted during a series of panel exchanges, Chinese officials are known for seemingly arbitrary and unpredictable behavior when it comes to regulations governing business ventures, tax obligations for e-commerce transactions and the rights of foreign investors in Chinese companies.

In addition, competing in the Internet game is difficult in a country where many people don't have phone or cable lines, where delivery services such as UPS don't exist, and where finance companies, insurance companies, credit card companies and other components of doing business are in short supply. Meanwhile, language and cultural barriers — including a reliance on trust and personal relationships rather than legal documents — remain strong.

Even in these areas, however, progress is evident. Some of the financial infrastructure problems, for example, are being solved by newly emerging — and popular - credit card companies, noted several forum participants. "China has transformed itself overnight," said Andrew Miller, senior vice president, sales and marketing, at Chinadotcom. "Twenty years ago you had to apply at least 24 hours in advance to make an overseas call from the local post office. Today there are over 10 million Internet users and cell phones are ubiquitous." Analysts expect China to have 25 million Internet users by 2001.

The question of managerial depth is also significant for Chinese Internet executives, noted Chen. "In the U.S. Internet economy, companies that are successful, like AOL and Yahoo, are those that have transformed themselves into professionally managed enterprises and developed very strong management teams. In China, this is a huge challenge. Whether or not an Internet business can take off in China has 10% to do with the business model and 90% to do with execution. It's critical that Chinese companies focus on getting managerial talent, be willing to share power and information with professional managers, and emphasize global recruiting."

Lee Wang, vice president of Alibaba.com, agreed. "Recruiting and retaining people are extremely important in our industry," he noted. "We find that our biggest competition is not coming from other Internet companies but from the people themselves. They all want to go out and start their own businesses." The CEO of a Chinese Internet company, added Chinadotcom's Miller, "must be part financial manager, part cultural evangelist. One of the CEO's key challenges is getting everyone actively involved with achieving the overall financial goals of the company."

Among those Internet firms attending "The eRevolution in Greater China Business" forum were: Alibaba.com, AsiAlliance, AsiaTech Ventures, Broadmedia, Inc., Chinadotcom, ChinaVest, Inc., Chinesebooks.com, Click2Asia.com, Core Solutions, Ltd., Eachnet.com, Rebound.com, renren.com, Sina.com and Sparkice.com.

During panel discussions, participants pointed out certain aspects of China's business landscape that don't exist in the U.S. They noted, for example, that in China, where private business is almost exclusively small enterprises, B2B actually means B2B2B2B2B. The Internet company sells to a company that sells to another company that sells to another company and so forth. It works, but it presents formidable supply chain management challenges.

Panelists also noted the tendency of many westerners to underestimate competitiveness in China. They see the country as a sleepy backwater with state-owned enterprises making shoes that don't fit, or products that have inferior quality and second-rate technology. On the contrary, several executives pointed out, significant software breakthroughs are coming out of Beijing, Shanghai and Taipei, and the competition is intense.

At the same time, all China business is local. Shanghai doesn't sell to Beijing. So companies must build their Internet business city by city, and plan for the time when Shanghai does sell to Beijing. As Bruce Thompson, senior operations manager for Asia — Microsoft Corp., said, "Companies doing business in Asia shouldn't expect to duplicate the North American model. They should be prepared to localize, and invest more in infrastructure."

Several participants also suggested that Western-based Internet companies partner with someone locally. That goes for raising money as well. "The most important asset an investor brings to the table is not capital, but strategic and operational expertise — as well as potential relationships," said Michael Robinson, CEO of renren.com. "Chinese investors bring much less capital, but can bring valuable contacts for technology partnerships and relationships in China." Added Hurst Lin, co-founder and U.S. general manager of SINA.com: "American venture capital firms make other investors much more comfortable with your business. They act as a stamp of credibility. The advantage of Chinese money is that they understand the structure of the Greater China area much better, so they are more patient, and don't get nervous as quickly when the company encounters delays or setbacks."

Chen thinks the downturn in the U.S. technology sector will encourage more American investors to turn to Asia. "The investments will be much more selective because of bad experiences in the U.S. over the last few months. But money will go into that region because of the opportunities perceived there." Not that it will be an easy sell, panel participants noted. "Many Asian CEOs will need to do some extra work in the fundraising process in order to receive money from U.S. investors, mainly because knowledge of Asia in the U.S. is not as great," said Doug Woodring, executive vice president, Rebound.com. "Investors often need to be brought up to the learning curve in order to have the appetite for an Asian investment."

On the question of financing a China Internet Business through an IPO, renren's Robinson noted: "For small companies, one important benefit to going public is that it gives you currency for acquisitions — that is, shares. Competition is so fierce that you can't build everything organically, but you have to grow very fast… To do acquisitions you need to have publicly traded stock so that you can use it as currency."

Panelists also had recommendations to alleviate the problem of overzealous or arbitrary regulators. For example, if a local official decides to impose burdensome regulations on an Internet business, the best way to persuade him to change his mind is to describe how the business benefits his district, the local economy and China as a whole.

The Forum briefly addressed another area that will have some impact on the eRevolution in Asia: China's admission into the World Trade Organization. With Congress planning to vote on this issue the week of May 22, business groups — who see huge market potential in opening up trade with a country of 1.2 billion potential consumers - are pushing for China's acceptance. In November, the Clinton administration concluded a seven-year negotiation on a bilateral market access agreement between China and the U.S. which sets forth the terms for China's accession to the WTO. Under that agreement, for example, U.S. and other foreign companies can own up to 49% of Chinese Internet companies in the first year after China joins the WTO, and up to 50% the second year.

Several people at the Forum agreed that entrance into the WTO will increase price transparency, but will not radically alter the business environment. Changes, they said, will most likely be incremental.

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