Mainland Internet plays swim against the tide
2001-07-09
Terms and Conditions
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" like so many ripe melons.
But the Internet craze fizzled here, as it did everywhere, and those companies that are still around are now having trouble giving themselves away.
The reshaping of China's cumbersome economy that was promised by fresh-faced Internet entrepreneurs has been scaled back into an uncertain future.
"In terms of changing the world, people went to extremes," said Duncan Clark, a Beijing-based telecommunications consultant, adding that the Internet in China was now 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 plugged a generation into the global online world. Most profoundly, it broke the government's monopoly on information.
But expectations for how 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 has tempered enthusiasm for the so-called new economy.
Many Internet companies that were once hotly sought-after now find themselves investment pariahs.
Two weeks ago, NetEase.com, 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 price tag was not much more than the value of its assets, which are mostly cash.
And last month, Dow Jones and Intel both dumped their withered stakes in Sohu.com, another Nasdaq-listed Chinese Internet portal. Meanwhile, some Internet investment funds focused on China are closing their doors 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. Some Internet companies are even branching into offline businesses to supplement dwindling revenue. China's would-be eBay, an online auctioneer called Eachnet.com, has bought a mobile telephone distributor in Shanghai.
"China is a developing economy and a lot of the infrastructure isn't in place to support a business model invented in the West," said Tony Zhang, chief executive of Chinanow.com, an entertainment and information company that he described as operating on "life support" while it shifts to a less Internet -dependent business plan.
An army of 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 the Hunan province of central China, for example, said that 60 per cent of their profit now comes from sales generated by ads for products like 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 online retailing or other e-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.
About half of the people with Internet access, meanwhile, log on through Internet cafes or other public venues, making them unlikely candidates for online economic activity. Many of the rest are teenagers chatting online from home.
The industry's biggest disappointments have been the so-called portals, Web sites linking together search engines, e-mail services, online 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.
"I think there's a structural problem for all of these companies," said Mr Clark.
"Within each of them there is a profitable company, but it may be one-tenth the size of the current company."
Netease's debacle has not helped confidence in the sector.
The company raised US$ 63 million (HK$ 491 million) when it sold stock on Nasdaq a year ago, implying a total market value of US$ 465 million at the time. But losses mounted as advertisers abandoned the Internet and, with little prospect for profits, Netease started shopping itself around to prospective buyers several months ago.
Hong Kong's i-Cable Communications, owned by local conglomerate Wharf Holdings, 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 launched 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.
Mr Ding tried to sound upbeat in a telephone conversation last week, saying he was confident the company could boost revenue by charging China's Internet users for online services like stock market information, messaging services or games. He said the company had earned 200,000 yuan (HK$ 187,000) in April from an online game that it recently introduced with the telephone company in Shanghai. But Netease continues to lose US$ 2 million or more every month.
Many industry insiders said they still expect the existing portal companies to merge with each other or be acquired by a deep pocketed player like AOL Time Warner, which could absorb losses while developing enough proprietary content to try switching to a fee-based service.
Earlier this month, AOL formed a joint venture with China's largest personal computer maker, Legend Holdings, promising the venture would eventually spend US$ 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 has joined the World Trade Organisation and foreign ownership in domestic Web sites becomes legal.
Even then, it is unlikely the new medium will fundamentally change China's vast economy very soon.
"The Internet is becoming just another business tool in the traditional economy," said Mr Zhang. |
