The $100 Drink of Water
The Gold Rush is on in China. Companies are running to China faster than gold miners headed out to California back in the 1800’s. In late 1849, the California Gold Rush was in full swing. Because of poor planning, many western-bound 49ers were unprepared for the hot, dry deserts of Nevada. A few sharp businessmen in California knew this and took advantage of the situation. They traveled eastward with barrels of water. Extremely thirsty, many 49ers paid $1, $5, even $100 for a glass of precious water. For those about to start panning for gold in China, a brief history lesson should help prevent you from paying $100 for that glass of water.
Let’s first put things in perspective. China’s Internet has experienced exponential growth over the past 4-5 years, but it has not always been that way. In 1995 there were only 50,000 Internet accounts throughout China. Even when the U.S. Internet bubble reached its climax in 2000, there were only 17 million Internet users in China. Not to mention there were no online payment solutions, and few value-added services Netizens are willing to pay for.
Over the next 5 years however the Internet growth in China was explosive. By the end of September 2001, the number of Internet users soared to more than 54 million, with over 20 million computers connected to the Internet. Business volume in the country’s Internet industry totaled 7 billion yuan ($845 million), including 4.69 billion yuan ($566 million) from Internet service and 530 million yuan ($64 million) from online advertising and online shopping. This year according to a CNNIC report in July, the number of Internet users in China has nearly doubled to 103 million, and 45.6 million computers across China have been linked to the Internet, with broadband users accounting for half of that figure.
Despite the rapid growth of Internet user base, China’s Internet industry revenue grew by 50% from 2001, reached 11.3 billion yuan ($1.36 billion), significantly lower than the % growth of the user base. This indicates that Chinese Internet users are slow to adopt the habit of paying for Internet related services. Most Netizens still view the Internet as an information source rather than a service center.
During the past decade, a number of Chinese Internet companies have achieved massive success. Among them, Sina, Sohu, Netease, Baidu, and most recently Alibaba, who just received $1 billion in funding from Yahoo. As there are many success stories in China’s Internet boom, there were also many disappointments. At the peak of the Internet boom in 2000, there were at least 20 Internet companies in China who had set their goal of an IPO in overseas stock markets; only Sina, Sohu, and Netease realized that dream.
Furthermore, due to China’s unique market condition, multinational corporations must face daunting challenges in order to succeed in China; take Yahoo! China as a typical example. When Yahoo entered the China Internet market in 1999, it quickly found it could not gain sufficient traction by applying the same business model it exploited so successfully in the U.S. to its China business, watching native portals such as Sina and Netease dominate the market. Earlier this year, Yahoo! paid $1 billion to acquire a 40% stake in Alibaba, and handed its China operation to the company all together. This enormous investment clearly indicates that Yahoo! has accepted its previous failure to establish a market leadership position in China, and is pursuing alternate means to exploit the continuing boom.
Why have Sina, Sohu, Netease, Baidu and Alibaba achieved prominent success in China, while others, like multinational giant Yahoo! have failed? Following are a few points to consider as you begin to plot your rule of the Internet in China. If you are interested in learning more about China’s Internet industry, dos and don’ts about doing business in China please read my periodic column and join the China Internet Industry discussion forum at http://www.i-fortune.net/forum.
The Great Wall was not built in a day
Don’t expect instant success. Many large multinational companies expect to buy their way into the China market, and neglect to spend sufficient time and effort to understand the market and focus on creating value over the long term. Without creating value for its customers, no business can sustain itself. The Great Wall was not built by one ruler or even one dynasty, rather built over many generations spanning hundreds of years, and it is still standing today 2000 years later. You make the most profit when you deliver value according the needs of the marketplace. Companies that can best recognize and address those needs will be the ones to succeed both in the short term and over the long haul.
Up close and personal
You may have heard the word “Guanxi”; it’s the Chinese word for “relationship”. In practice, the meaning goes much deeper than simple relationships; as described in Wikipedia, it is “the basic force that holds the personalised networks of influence”, akin to social capital. In China, people are more likely to engage and follow through in business relationships where Guanxi has been cultivated over time. Without investing significant time and effort in developing good Guanxi with your customers and business partners in China, you will not succeed in maintaining those business relationships long term, and may find yourself left out or left behind when it matters most. Whereas this may be true in western society to a lesser degree, in China without Guanxi you are “cun bu nan xing”, meaning you can’t walk an inch far. So you’ve got to get up close and personal, and open yourself up and really mix with the locals.
Adaptation vs. Application
What do all successful Chinese Internet companies have in common? Most are founded and managed by western-.educated Chinese returnees. While it is not a prerequisite to be a western-educated Chinese returnee to build a successful company in China, it does hold some truth that these leaders have substantial advantages over both Chinese local managers who have not studied or worked in western business, and those foreign managers who have not lived in China for a significant amount of time. Many foreign managers have unsuccessfully attempted to apply western management practices and business models to China without local knowledge and experience. Western-educated Chinese returnees have the best of both worlds: the vital local knowledge of Chinese cultural, social, and economic environments, systems, and customs, and can adapt western practices and technologies to the local market economy as needed in order to excel.
According to Morgan Stanley CIO David Darst, "The single most important success factor in the Chinese IPOs is that the CEO is an Overseas ChineseReturnee". Considering doing business in China? Team up with a qualified western-educated Chinese returnee to increase your chance of success.
Jennifer Zhang is the founder and CEO of i-fortune.net. i-fortune.net is a global performance-oriented interactive marketing solutions company, helping marketers increase online leads and sales in China and U.S. markets. Jennifer was born and raised in China, educated in the U.S., and earned an MBA degree from Santa Clara University. She speaks fluent Mandarin and knows the Chinese culture intimately.
