China to Transform eCommerce Global Economy in the New Millenium

February 4, 2005
With a combination of cheap labor, high technology, and a vast consumer base the stage is set for China to become the largest ecommerce market in the world. But how will China fare in the market with the rest of the world with such a restrictive government? Will they be open enough to allow foreign businesses to pass behind the Great Firewall of China?

In an attempt to search for the answers to these questions let’s start with what China has going for it. By the end of 2004, China had 94 million internet users (43 million broadband) out of a population of 1.3 billion or 7.2 percent of the overall population. While just a tiny percent, last year the number of internet users in China rose 18.2 percent. If China’s current rate of growth continues they will have well over 200 million internet users in just 5 years. Sean Hargrave has also reported that China may well become the world's biggest online market within two years with two thirds of users expected to buy something online this year. The numbers alone should be enough to make success on some level inevitable.

In the China Tech News Perry Wu compiled an already growing list of American investors in Chinese ecommerce opportunities. Amazon recently bought a stake in, one of China’s online booksellers and Barry Diller’s IAC took a controlling stake in eLong, a top Chinese online travel site. Even Yahoo and Google have expanded into the Chinese market in search and auction sites. Meanwhile NASDAQ, NYSE, and lots of banks and funds made hundreds of millions last year from the Chinese technology companies' public offerings. Also, although the U.S. Department of Homeland Security may still nix the deal for fear of Chinese industrial espionage, IBM also sold its personal computer division to Chinese company Lenovo.

So what’s not to love for an internet services company, big or small, ready to move into what will soon be the biggest market on the planet?

To start with, the Chinese government can be extremely sensitive over Communist ideology and fearful of exposing its people to Western culture. A massive bureaucracy of an entirely different culture and radically different language can also present problems. These issues can often be worked through or around with the right personnel and adequate capital investment (read; lawyers and money), but even for those with as much money and as many lawyers as money can buy nothing is certain.

For example, a signed and sealed Microsoft contract to supply the Beijing council with software was recently put on hold while the government mulls new rules to help local software companies compete.

Chinese police block I.P. addresses of objectionable web sites at the routers and search the web for objectionable words and phrases, fifteen percent of which are sexual, while the rest are political. Emails containing them simply disappear and search engine requests go unanswered with no error message. Among objectionable words are; Christian, democracy, and Hu Jintao.

Google was shut down because of its cache feature but was eventually able to return with a cache removed version.

Xinhua, the Chinese new agency recently reported a ban on the game Sims 2 among others which was enacted to promote a healthy environment for children. There are stiff penalties for retailers selling the game.

Foreign companies doing business in China must be well prepared to play by Chinese rules which means they may change at a moments notice at the whim of a Chinese official.

Business in many Asian countries is done in an “Old Boys Club” or hierarchical style that often leaves the little guy out in the cold. For example, Perry Wu reported that over a small contractual technicality China Mobile banned Sohu’s, among others, messaging services for a full year. All the shares of the Chinese listed portals fell on the news. Charles Zhang, the CEO of Sohu, tried to soft-sell the suspension saying it wouldn’t have a much real impact but the stocks prices tumbled none-the-less, Sohu losing 11 percent. All service providers are required to bill users via China Mobile's platform as well as sharing their revenue with the carrier. Thus, China Mobile is in effect in a governing position.

The key is to insert yourself as highly as possible in the hierarchy by offering a highly prized service or technology or to find a highly respected patron by doing beneficial business with them. If you are treated unfairly by a Chinese business competitor with more clout inside the government you may have little recourse other than to cry in your beer.

Software piracy is also very prevalent all over Asia with little government intervention. Software, even including Beta versions of Longhorn can be found at any shopping mall from Bangkok to Hong Kong for about $1.50 depending on your bargaining skills.

In the end, the sheer numbers of Chinese internet users should be the key to unlocking the puzzle. The internet has to some extent and will most certainly continue having a liberalizing effect on the Chinese government as they begin to reap more and more profits from international ecommerce. This should leave room for smaller companies to capture niche markets such as translation and intermediary services and larger companies with enough upfront investment money to solve the legal, linguistic, and other cultural intricacies involved in providing goods and services in the Chinese market. One thing is for sure, China is coming and the companies that don’t look ahead to take advantage of it are going to get left behind.

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