Entrepreneurial Spirit Pervades China's Internet

14.05.2007 Like so many domains in China, the internet as well is an enormousgrowth market. So far only 10 percent of China's population isconnected to the World Wide Web. Nevertheless, Chinese cyberspace has already spawned a variety of major corporations, most of which have an edge on their foreign rivals.

Google, Yahoo, eBay or Amazon - in the global market place called the internet, almost all of today's best-known brands come from the UnitedStates. But on the fast-moving World Wide Web, nothing is chiseled in stone, not even American pre-eminence. It is very well possible that someday the global community will encounter brands that today are still largely unknown in the western world. A few names such as Baidu,Alibaba, Sina, Linktone, Sohu, Shanda and Netease already bear noting.All of these companies have something in common: they are alreadyheavyweights in their markets, they serve several million customers,and boast market capitalizations in excess of USD 1 billion in somecases. And they all operate out of China.

The market is growing in leaps and bounds
That's no coincidence, because today China, with 123 million internet users, is already the world's second-largest online market after theUS. And its potential is enormous when one considers that so far only10 percent of the country's roughly 1.3 billion residents own an internet connection. "That number will practically double by 2010,"estimates Wallace Cheung of Credit Suisse Equity Research. E-commercein China is still in an early stage of development, Mr. Cheung says.Consequently, gold rush fever pervades the Chinese online businessindustry similar to the way it did in the US in the late 1990s. And just like during the previous dot-com boom, innovative minds in today'sChina have been living out highly adventurous and, in most cases,success stories.

A tale from 1,001 nights
One prominent internet pioneer is Jack Ma, a 43-year-old self-made man from the eastern Chinese city of Hangzhou, who many are already callingthe Bill Gates of China. In 1999, the former English teacher foundedAlibaba.com, a worldwide online marketplace for suppliers andpurchasers. Today the portal has more than 3 million registered users in more than 200 countries and records more than 20,000 transactionseach day. Alibaba is not an anomaly in the Chinese internet landscape.Other segments of the Web are also firmly in local hands today. The major global players have not yet found a way to gain supremacy in the Chinese market. Even the almighty search engine Google has to settle for number two status in China behind top dog Baidu, which currentlycommands a market share of 63 percent. Google's share of the Chineseinternet search market is a mere 19 percent and slipping.

Baidu heads the pack
It seems an irony of fate that the story of the founding of Baidu has striking parallels with Google's history. Like Google, Baidu originatedfrom the initiative of two young men. But instead of Larry Page andSergey Brin, the protagonists at Baidu are named Robin Li and Eric Xu,two young Chinese men who had studied in the US and also began their careers there before returning to China with an idea and a suitcasefull of startup capital to turn their dream into a reality in 2000. Ittook just four years for Baidu to establish itself as the marketleader. And its initial public offering on the NASDAQ on August 5,2005, was very reminiscent of the boom years in the dot-com industry:on their first day of trading, shares of Baidu rocketed from an IPO price of USD 27 to the USD 122 mark.

Almost all roads lead to Sina
Today the company employs approximately 700 personnel, and with amarket capitalization of USD 3.5 billion, is considered one of theheavyweights in the Chinese online industry. The website Sina.cn also undeniably merits this distinction, because what Baidu is to online searching, Sina is to online news. With traffic from 230 million registered users worldwide and 500 million page views per day, Sina isactually the best-known internet brand among Chinese speakers aroundthe world. Whether for politics, financial news, sports orentertainment, Sina holds first place in every category, with marketshares of 30 percent or more.

Olympic Games open up growth opportunities
For Charles Chao, the CEO of Sina since May 2006, this preeminence is based primarily on a single factor: high-quality content. "We worktogether with around 2,000 media firms," Mr. Chao said during apresentation last March at the Asian Investment Conference. But unlikemost of the world's other Web portals, Sina does not fill its web pages solely with externally purchased content, Mr. Chao emphasized. "Threeyears ago we decided to build up our own editorial department in orderto produce more of our content ourselves." Today, for example, Sina does the bulk of its sports reporting itself with the aim of putting the portal into the best possible position a year ahead of the BeijingOlympic Games.

The arrows are pointing up
The bottom line is that this attractive content has enabled Sina to capture a growing number of advertisers. The ad business currently accounts for around 63 percent of Sina's revenues, and that figure ison the rise. As in most presentations by Chinese CEOs, the arrows on Charles Chao's slides mostly point upward, regardless of whether they are depicting past developments or future prospects. And as so often happens, the optimistic outlooks contain a kernel of fundamental logic called pent-up demand. Mr. Chao's reckoning goes like this: "Total advertising expenditures in China account for just 1.3 percent of thecountry's GDP, compared with 2.2 percent in the US. And only 1.7percent of Chinese ad spending flows to the internet, compared with 4.5percent in the US." Taking this calculation and combining it with the1.15 billion Chinese who do not yet have access to the internet, one doesn't need rose-colored glasses to see the tremendous potential.

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