Making a Move on China’s Internet

Porter Erisman, VP for Chinese trading website Alibaba (China’s version of eBay) said recently, “The Internet is at the core of community. If you look at online communities in the West... in China it's like that but on steroids.” Numbers from a recent survey conducted by the research firm China Internet Network Information Centre (CNNIC) reinforce his thought; the Internet in China is growing and growing rapidly. China is currently the number two Internet market and it shows no signs of slowing down. All this growth means a large market, and where there is a market there are those that wish to conquer it. However, China’s Internet market does not present an easy victory, particularly for foreign companies unfamiliar with Chinese culture and regulations.

According to CNNIC’s survey the number of Internet users in China has reached 123 million. This represents a 19.4 percent growth since June 2005 and an increase from the previous year-on-year growth rate of 18.4 percent. The number of users accessing the Internet via broadband connections has also increased; at the end of June the number was 77 million, an increase of 45 per cent over June 2005. Demographically the, “CNNIC survey showed 82.3 per cent of people using the Internet in China are below 35 years old and almost 40 per cent of the Internet users are aged 18 to 24.” The number one activity according to the survey was shopping which was followed closely by blogging; 26 percent shopped online ‘frequently’ and 23.6 percent say they participate in blogging. All this growth is not going unnoticed, and both shopping and blogging reveal some of the challenges of dealing with the Internet in China.

According to the Wall Street Journal, “As China's Internet booms, homegrown businesses are often reaping the biggest rewards -- a departure from many other consumer industries in China where foreigners have dominated.” The success of domestic online businesses in China, the Journal suggests, is due to two challenges facing foreign companies trying to break into business on China’s Internet. Challenge number one is the need to adapt business models to the culture; the Chinese preference to pay cash-on-delivery for goods ordered online is a good example. In China, where credit cards are not the norm, businesses supporting cash-on-delivery can thrive, those that cannot can be left behind. This model flies in the face of Western dominated models and illustrates how local businesses can take root quickly. Dangdang a Chinese company catering to cash payments has been so successful that it thwarted a takeover from its foreign rival, Amazon.com Inc. Alibaba, a Chinese version of eBay, is another example. According to Alibaba’s VP, “eBay came here first. They had a four-year head start. The problem was that they never created a local product. Our team built something totally unique for China and surpassed eBay very quickly.” A second challenge facing foreign companies moving in on China’s Internet is that, “China's Internet regulators have made it difficult for foreigners to participate in Internet businesses.” The difficulties referred to include limits set on foreign ownership, and for companies providing content, adherence to Chinese censorship laws. Challenges or not, the market has so much potential that foreigners just can’t leave it alone.

One investor with sites on China is MySpace founder, Brad Greenspan. Greenspan announced this week that he has founded an investment group called BroadWebAsia which has taken stakes in 20 Chinese Internet companies that focus on entertainment and social networking. In an effort to navigate the difficult regulatory waters in China BroadWebAsia has focused on investing in already-established Chinese companies. Alluding to the challenges imposed by government regulations Greenspan said, “We're working with Chinese entities who have already thought out those issues.” But established foreign Internet companies want China’s business too, and they often find themselves challenged as much domestically as by China.

A recent report from New York-based Human Rights Watch accuses Google, Microsoft, Skype, and Yahoo!, of complicity with China’s censorship rules as the companies try to conquer China. Though this 141-page report which, “illustrates how various companies, including Yahoo!, Microsoft, Google and Skype, block terms they believe the Chinese government will want them to censor” was longer presented a more extensive and thorough litany of criticisms than most, it was far from the first attack on these and other companies making similar moves. CNNMoney says, “The report was the latest in a wave of criticism against Western Internet companies operating in China which are accused of compromising their principles by censoring searches and blog titles and blocking politically sensitive terms in order do to business in the world's number-two Internet market.”

As stated, the Internet market in China is not going away, nor foreign interest in it. Despite cultural differences, challenging regulations, and domestic criticisms the West is going to keep at it. For those with complaints Porter Erisman, Alibaba VP, has this to say, “People have blogs in China they can chat and say just about anything they want. The international critics are focused on the one per cent of things you can't do. But when you look at the 99 per cent of things you can do it's not even an ethical dilemma. You can pursue profit and do the right thing at the same time. They're not mutually exclusive.”