Not that it matters: "Beneath the Buzz The buzz surrounding China's Internet prospects is drowning
out talk of obstacles.
By CONNIE LING
THE WALL STREET JOURNAL INTERACTIVE EDITION
HONG KONG -- Want to know where the buzz was in Asia's online
world this year? Look no farther than the Nasdaq Stock Market -- and
the symbol CHINA.
That symbol belongs to portal-site operator
Chinadotcom Corp., which had one of the
most sought-after initial public offerings this
year and has seen its shares climb to nearly six
times its initial IPO price. Never mind that the portal operator hasn't been
all that successful in running portals, particularly in its key market, China.
Never mind that its financial losses continue to widen. And never mind that
it will be faced with even more competition in China once foreigners are
allowed to invest directly in the Internet sector.
Most investors aren't hearing any of that -- they're distracted by two
magical words in close proximity: "China" and "Internet."
It's been a year of phenomenal growth for Asia's Internet industry, with the
number of online users surging and dot-com companies sprouting left and
right. But despite all this activity, much of the attention has been fixed
squarely on China, from Chinadotcom's IPO to the drama over whether or
not foreign investors would be allowed to invest in Chinese Internet
ventures.
The numbers explain why the spotlight has remained on China: Although
less than 1% of China's population is online, that translates to more than
four million people, giving it one of the region's biggest Internet
populations. Meanwhile, market-research firm International Data Corp.
thinks China will have the region's fastest-developing Internet market in the
next five years measured by both online population and e-commerce
spending.
But those numbers don't tell the whole story -- and may, in fact, miss the
point. A large part of the infrastructure needed for a healthy Internet
economy remains missing in China. Internet connections are slow in most
of the nation, per-capita income is still low, there's a lack of efficient
banking and distribution systems, and government regulations remain
confusing and capricious.
"There are definitely a lot of dreamers out there," says Duncan Clark,
partner at consulting firm BDA (China) Ltd. He has a simple, if unpopular
message for those expecting to find millions of millions of Chinese online
buying things next year: "Sorry -- this is not going to happen."
A Host of Obstacles
The sheer size of the China market doesn't guarantee that all comers will
get a piece of the pie, Mr. Clark warns. The same rules for starting an
Internet venture in the U.S. apply to starting one in China, he says -- such
as not entering an area that's already crowded. Despite that caveat, he
says, investors and entrepreneurs continue to dive into Internet niches that
are already overcrowded in China, such as portal sites.
Moreover, there are a number of obstacles that need to be addressed
before certain aspects of the Internet economy, most notably e-commerce,
will take off in China. A fundamental problem is that personal-computer
prices are too high for many households: Even low-end PCs can cost more
than three months' salary for an average college graduate.
Unfortunately, that isn't all. The legal,
banking and telecommunication
systems simply aren't developed
enough for many online retailers to
take advantage of the large market,
says Leroy Kung, managing director
of iMerchants Ltd., a Hong Kong
e-commerce solutions provider.
Credit cards, for instance, are rarely
used and the nonconvertibility of the
local currency means that a proper
settlement system for foreign credit
cards is lacking. Distribution and
delivery systems are also a concern, given the enormous size of the
country.
Yet despite these obstacles, venture-capital money has poured into China
in the last year, coming from large institutional investors such as Goldman
Sachs & Co. as well as angel investors such as TV evangelist Pat
Robertson. That flow of venture-capital money is expected to increase as
more U.S. investors turn their attention to emerging Internet markets. For
example, Boston information-technology publishing and management
company International Data Group, which has invested $100 million in 55
high-tech Chinese companies since 1993, has announced plans to invest
$1 billion in the country's Internet-related companies by 2005, making
China its primary investment target for the next few years.
"There is a lot more money out there than there are quality Internet
companies" in China, says Steve Chiu, a director with Beijing-based
recruitment Web site Zhaopin.com (www.zhaopin.com), which recently
received several million dollars from a Silicon Valley-based venture-capital
firm.
That equation has made it much easier for Internet start-ups of all stripes to
obtain funding, despite the Chinese government's long-standing ban on
foreign investment in the Internet sector. For example, a team of investors
led by Goldman Sachs recently invested $5 million in Chinese Internet
company Alibaba.com (www.alibaba.com), which hooks up
manufacturers and customers online, despite founder Jack Ma's frank
admission that "we are going to make money -- but we just haven't figured
out how yet."
But will the premium associated with China's Internet industry and Chinese
Internet plays such as China.com go away as the market matures and
China opens its door to more foreign involvement?
Pete Hitchen, an Internet analyst with market-research firm International
Data Corp. Asia Pacific, doesn't think so. "China has this magical spell on
U.S. investors," he says. "And it isn't likely to go away."
Again, the numbers -- and the hopes for the future they symbolize -- are
often more compelling than the problems. China, of course, is the world's
most populous country, yet it's still a very underdeveloped market:
According to IDC, by 2003 just 2.5% of China's population will have
Internet access.
One Barrier Lifted
One recent bit of uncertainty regarding the Chinese market, at least, is now
more resolved.
China has had a longstanding ban on foreign investment in
telecommunications-related fields, but for a long time it wasn't clear if that
ban covered Internet investments. Then, in September, Minister of
Information Industry Wu Jichuan openly declared foreign funding in
Internet companies illegal, frightening entrepreneurs world-wide and jolting
China's nascent industry.
Those fears have since been eased. Under concessions China made last
month to join the World Trade Organization, foreign investments in Internet
companies will be considered legal. But those investments will still be
capped: Foreign investors will be allowed to hold a 49% stake in Internet
companies, including content providers, and increase their stakes to 50%
in two years.
That means foreign investors and entrepreneurs eyeing the Chinese market
will still need to find local partners and investors. In addition, analysts warn
that the ever-changing regulatory environment in China still poses great
barriers to the Internet's growth there.
Despite such growing pains, companies such as Chinadotcom, with its
good government connections and its U.S. stock listing, should continue to
appeal to investors. And as part of that equation, the premium should
remain for Chinese Internet plays, even though it won't always be justified.
Investors will still be much more willing to take risks when it comes to
China, says BDA's Mr. Clark -- and until real casualties are reported,
dreamers will continue to flock to the market." |
