China and its one billion-plus population have long been the envy of the business community, ranging from huge international consumer goods companies to feisty entrepreneurs with an idea to sell or a niche to exploit. Nowhere is the potential for gain more evident than the lucrative Internet business. But for those who find it difficult just to navigate the Internet revolution in the U.S., understanding the Chinese market can be overwhelming. Experience from the Internet frontier can be invaluable. On Feb. 2, Wharton’s Global Chinese Business Initiative (GCBI) brought together three executives from three types of Internet companies: a community site, a portal and a business-to-business (B2B) e-commerce firm. Anthony Cheng is president and COO of
The three men, whose presence kicked off the GCBI’s East-West.Com Series on the Internet Revolution in Greater China, offered insights into an industry that is not only volatile but also faces unusual obstacles. These range from unpredictable government regulations and no online payment system to poor distribution channels and a population with little understanding of, or access to, computers. Yet each of the speakers chose to focus most on the opportunities that the Chinese market offers.
Cheng began by outlining Internet space in Greater China. Before he launched his firm in May 1999, the Chinese market had a number of portals, content providers and some niche sites, but lacked Chinese-language content. Cheng’s previous experience at McKinsey, and his instinct that community sites would be most financially viable, inspired him and a McKinsey colleague to develop the first bilingual community web site for the global Chinese.
Renren.com – named after the Chinese word for "everyone" – caters to the Chinese people and Chinese enthusiasts worldwide and intends to create a diversified international presence through a well-coordinated branding strategy. Featuring homepage space, email, chat forums and classifieds for its members, renren.com brings people together by serving as a catalyst for personal user content and providing an interactive community. Half of its users live in the People’s Republic of China, 20% live in Taiwan, 20% in Hong Kong and the rest in Europe and the U.S. The company, which has grown from 7 employees to 120 over the past nine months, recently raised $6 million in venture capital.
The inspiration behind VirtualChina.com was the growing number of Westerners interested in learning more about China. Founded in May 1999, VirtualChina.com is an English-language portal dedicated to breaking down barriers and stimulating exchange between China and the West. There’s a growing interest "not only from big companies but from small and medium-size companies who see a tremendous market potential but are constantly stopped from doing business because of" distance and language barriers, says CEO Farrall. As a news source and content provider, VirtualChina.com bridges these barriers by offering broad coverage of finance, culture and information technology, as well as access to business directories, investment guides and reference materials, he notes. Company headquarters are in New York, with branch offices in Beijing, Hong Kong and Shanghai.
Unlike the consumer-oriented sites described above, ChinaMallUSA.com links buyers and suppliers. According to Chyn, vice president and director, the site delivers value-added business information related to the Chinese market, a comprehensive database of company profiles and product offerings from Chinese suppliers. Established in 1997, ChinaMallUSA.com is one of the few companies licensed to conduct retail operations throughout China, notes Chyn.
As each panelist outlined core issues related to his business, a number of common themes emerged. Chyn and Cheng pointed out that management know-how is invaluable in China. Approximately "95% of those [companies] that hit around 30-50 people soon implode," Cheng says, mainly because they lack the management skills to maintain a continuing presence.
In addition, Internet companies, to be viable, need to develop sustainable operations through a strong revenue model. VirtualChina.com’s embedded transaction technology allows consumers to make most of their decisions about a purchase all at one site, says Farrall. This benefits the provider because "each time consumers click from different sites, the percentage chance of making a purchase drops dramatically." ChinaMallUSA.com gets most of its revenues from set fees charged to its member base.
Renren.com, says Cheng, intends to move almost exclusively into a sponsorship type of business model, away from its current model based on advertising revenue. For example, Oracle might choose to sponsor a special chat forum one night a week devoted to technology issues. Or renren.com could partner with a travel service and refer customers to that business, taking a small percentage of any transaction generated by the referral.
Even as they extolled the business opportunities in China, the three speakers also warned of market barriers, including a difficult infrastructure. Few Chinese, for example, use credit cards, although C.O.D. and other methods of payment are becoming more widely used. In addition, the regulatory uncertainty has dampened the enthusiasm of some Internet companies, especially since many Chinese laws are passed retroactively. "So it isn’t whether or not your firm’s existence and/or activities are against regulation so much as it is how far away from regulation they are," notes Cheng. Every three to six months, adds Farrall, a new regulation is brought out, with the result that conditions are constantly changing and in the process, sinking a number of Western companies.
Farrall cites two examples of failed initiatives: A joint news service venture between China Internet Corporation (now known as Chinadotcom) and U.S.-based PointCast was dissolved in 1997; and an agreement between Prodigy and Norinco, a company owned by the Chinese military, to create the next AOL, ultimately failed. Prodigy’s attempt to gain that foothold well before anyone else did not reap any rewards, says Farrall. "Prodigy is not even a name in Shanghai where it was originally based. The real problem here is that for a Westerner, there are so many barriers to getting into this market."
In the midst of cautionary tales about doing e-business in China, the three panelists also offered advice for those willing to make the effort:
Plan early. It can take up to two months to get an Internet Service Provider (ISP). Early partnerships also allow for co-marketing and co-development arrangements that can greatly enhance the site.
Stay flexible. Take the case of renren.com. Cheng says that the company had initially believed that all content could be written from its Hong Kong headquarters, but it was soon apparent that the best strategy was international content with "local flavor." Renren.com localized many of the operations so that there are now offices in Beijing and Shanghai, with two more planned for Singapore and Taiwan.
Leverage everything. Striking strategic partnerships and alliances makes the effort all the more impressive to potential investors, site users and new talent. Renren.com had help from its angel investors because of the experience these investors brought to the business.
Remain focused. A number of sites continue to experiment with different business models, hoping to find the perfect vehicle for propelling their operations skyward. Given the velocity at which e-business is now moving, says Cheng, "doing everything and testing everything is a waste of time."
Note: As part of its East-West.Com Series on the Internet in Greater China, the GCBI is sponsoring a second major presentation in late April 2000. For information, e-mail gcbi@wharton.upenn.edu or call 215.898.0017.
