Dot-Bomb in China
Craig S. Smith New York Times Service
Saturday, July 7, 2001
Hopes the Internet Will Alter Economy Are Shrinking Along With the Industry
SHANGHAI A little more than a year ago, China's young Internet entrepreneurs were fending off investors, sniffing derisively at "dumb money" while browsing among potential "strategic partners" as they might over a market stall full of ripe melons.
But the Internet craze fizzled here as it did everywhere else, and those companies that are still around are having trouble giving themselves away. The reshaping of China's cumbersome economy that was promised by those fresh-faced entrepreneurs has been pushed back into an uncertain future.
"In terms of changing the world, people went to extremes," said Duncan Clark, a Beijing-based telecommunications consultant, who added that the Internet in China was being "absorbed into the traditional economy." That is not to say the Internet has not left its mark here, or that it is not continuing to develop. The craze woke the country up to the Internet's potential and broke the government's monopoly on information.
But expectations that the new medium will alter China's economy are shrinking along with the fledgling industry. While Internet use continues to climb in this country - about 30 million Chinese now have Internet access - Nasdaq's stock market slump, China's bureaucratic meddling and a shrinking pool of online advertisers have tempered enthusiasm for the so-called new economy.
Two weeks ago, Netease.com Inc., a Nasdaq-listed company that operates one of China's most popular Internet portals, conceded that talks with several prospective buyers had collapsed, even though its asking price was not much more than the value of its assets, which are mostly cash.
Last month, Dow Jones Co. and Intel Corp. both dumped their withered stakes in Sohu.com, another Nasdaq-listed Chinese Internet portal. Meanwhile, some Internet investment funds that had focused on China are closing down and returning money to investors.
With the dollars drying up, dozens of Internet companies have shut down, and others are slashing staffs to conserve cash. Web site ads that once seemed ubiquitous have nearly disappeared from city billboards and public buses.
Web site designers now ply their trade across the country, and many Chinese companies have put up Web sites to advertise their goods.
Managers at the Fenghuang Chemical Industry Factory in Hunan Province in central China, for example, said that 60 percent of their profit of several million dollars a year came from sales generated by ads for products such as glass-making chemicals that they post on a Chinese Trade Ministry Web site.
But true e-commerce has so far failed in this country, which does not yet have a consumer credit system to make on-line retailing or other electronic businesses viable. Online stock trading is in its infancy because of regulations that bar brokers from discounting commissions. Even application service providers - companies that sell online software for accounting and other services - have yet to take hold.
The industry's biggest disappointments have been the so-called portals, Web sites linking search engines, e-mail services, on-line shopping sites and news. They have drawn the most viewers from among China's Internet users and attracted the most cash from among foreign investors. But they have also lost the most money of all the country's Internet ventures.
Netease's debacle has not helped confidence in the sector.
The company raised $63 million when it sold stock on Nasdaq a year ago, implying a total market value of $465 million at the time. But losses mounted as advertisers abandoned the Internet, and, with little prospect for profit, Netease started shopping itself around to prospective buyers several months ago.
I-Cable Communications, owned by the Hong Kong-based conglomerate Wharf (Holdings) Ltd., showed the most interest. Then Netease announced that it may have booked revenue for the first quarter that it had not yet received, and it started an investigation into its accounting for last year.
Netease's chief executive, King Lai, resigned, as did the chief operating officer, Susan Chen, leaving the company's controlling shareholder, William Ding, with day-to-day management of the company. In the midst of the trouble, the deal with i-Cable fell through. Nonetheless, Mr. Ding said he was confident the company could enhance revenue by charging for services such as stock market information, messaging or games. He said the company earned 200,000 yuan ($24,100) in April from an online game it had recently introduced with the telephone company in Shanghai. But Netease continues to lose $2 million or more every month.
Many industry insiders said they still expected the existing portal companies to merge with each other or be acquired by a deep-pocketed player such as AOL Time Warner Inc. This month, AOL formed a joint venture with China's largest personal computer maker, Legend Holdings Ltd., promising to eventually spend $200 million to develop interactive Internet content.
But many people doubt that AOL will start buying Chinese Internet companies - a politically sensitive move - until after China joins the World Trade Organization and foreign ownership in domestic Web sites becomes legal.
Copyright © 2001 The International Herald Tribune |
