How Internet Companies Can Succeed in China

Forbes: Helen H. Wang

When a bellman in a Shanghai hotel advised me to get a breakfast coupon from an online group-buying site for less than half the price, I knew that social commerce had gotten into the hearts and minds of Chinese consumers. It’s not surprising that thousands of group-buying websites sprung up in less than a year in China’s chaotic cyberspace. According to JP Morgan, the group buying market grew from zero to more than $150 million in 2010, and is expect to reach half a billion dollars in 2013.

Although crowded with thousands of players, China’s group buying market is dominated by the top 10 companies, with Lashou commanding a 14 percent market share. Other major players include QQ Tuan, Meituan, etc. Gaopeng, Groupon’s China arm, came in last out of 10 in terms of number of deals.

When Groupon first entered China early this year, I really thought it would have a chance to succeed. Group purchasing is a perfect fit for Chinese culture. Even before people in the West knew such a thing as group-buying, Chinese consumers had showed up at some car dealers in groups to demand deep discounts. China’s collective culture makes group purchasing behavior very natural. In addition, many Chinese are good bargainers. They would go out of their way to find a good deal.

The timing was perfect for Groupon, too. China’s Internet population is approaching half a billion and hundreds of millions of new consumers are entering the scene each year.

Yes, China’s Internet market is known as a hard nut to crack because of low barriers to entry and many copycats. Western companies such as eBay, Yahoo, and Google have suffered painful defeats in China. But I thought Groupon could make it if it got it right.

Alas, so far the situation doesn’t look so good for Gaopeng. It has made some of the same mistakes as other Western companies. For example, its early management team was composed mostly of foreigners who have no experience in China. Their insensitive ad during the Super Bowl reflects how poorly Groupon understands China.  Its partnership with Tencent, China’s largest Internet portal, seemed to have a troubled start with internal conflicts. Now Tencent has its own group-buying site, QQ Tuan. Although Ouyang Yun, Gaopeng COO, said QQ Tuan and Gaopeng have complimentary business models, the two companies look more like competitors than partners.

Gaopeng also faces tough competition from Lashou.com and other group-buying sites. Lashou is founded by a seasoned Chinese entrepreneur and backed by U.S. venture capital firms SGR and Milestones – both are experienced in Chinese technology ventures.  Its momentum is strong after raising $110 million in series C funding in April. So far, Lashou seems to have done everything right. It is expanding rapidly to 2nd and 3rd tier cities, setting up call centers and logistics, and enhancing customer services.

Gaopeng certainly has an uphill battle in China. Some analysts have already written it off to a fate similar to eBay, Yahoo, and Google (not in bad company, all world class organizations ;-) ).

However, China’s Internet market is too significant to give up. In less than a decade, China’s Internet users could reach as many as 750 million and China’s consumer market could reach $16 trillion. A burgeoning middle class has fueled a consumption boom. Retail marketplaces are spreading in urban areas like wildfire. E-commerce has been growing 60 percent per year in recent years.

In order to succeed in China, Western Internet companies need to study the China market carefully and understand Chinese culture. Here is some basic advice for companies that want to succeed in China:

  • Try to use local talent who understand the China market well. Ideally, the management team should be a combination of experienced Chinese and Western managers
  • Be flexible with your business model and adapt your products and services to Chinese consumers. The most common mistake that Western companies make is that they transport their business exactly as-is to China. But the China market is very different from that of Western countries. What works in your home country may not work in China. If necessary, you need to re-brand and re-position your products and services. You also have opportunities to create brand new product lines in China.
  • Focus on your competitive advantages and outperform competitors. In the Internet space, oftentimes the only competitive advantage Western companies have is stronger financial support. If you have more money to burn than Chinese competitors, spend it smartly and wisely. Sometimes, your strategy may be to secure a large customer base. Revenue will come later.
  • Train your employees, sales teams, service and support teams. Many Chinese employees don’t have enough skills for the workplace. It’s important to go the extra mile in training. At the end of the day, all things being equal, customers are more likely to return to the website that has superior customer service.
  • In the Internet space, another critical factor is speed of execution. The window of opportunity is only about one or two years. Whoever who can act fast and get there first will be the winner.

It is still not too late for Gaopeng to get back on track and succeed in China if they can implement the right strategies with focus and speed. Someone has to change the game. As Meg Whitman, eBay’s former CEO, said, whoever wins China wins the world.

– Helen Wang is a consultant and author. Her new book The Chinese Dream: The Rise of the World’s Largest Middle Class and What It Means to You is top rated #3 on Amazon. Follow her on Twitter @hhwang

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Google’s Uphill Battle in China

While Google is considered too powerful in the United States – with “an online package of news, entertainment, blogs, and services drawn from all the world’s up-to-the-minute knowledge,” it is not in China.

According to iResearch, Google’s market share in China was only under 15%, down from about 25% earlier last year. Baidu, the Chinese search engine, has more than 69% of market share in China’s search-engine market. No double Baidu has an upper hand against Google in China because it has a deep understanding of Chinese users and their complex languages.

Most multinational companies found the China market is hard to crack. It took long time for multinationals to learn how to do business in China. The worst defeat was eBay – it shut down its China site last December and took a back seat in Tom Online, a Beijing based Internet portal that provides wireless value-added services with no experience in online auction business. Yahoo! had been in China for seven years. It finally threw itself to Alibaba, a local e-commerce company.

However, Google is not giving up. Recently, Google is joining China Mobile to launch a mobile-search-engine business. With more than 400 million cell phone users, China is the world’s largest cellphone market. Many industry observers are betting on the fact that Google is being favored among the business professionals – “in terms of future business development, Google does have a good base in China to grow on.”

The mobile search is critical for a country that has more than 400 million mobile phone users. But I don’t see why Baidu is not doing the same. In addition, how Alibaba comes to play a role in the search engine race is not clear. Google is definitely facing an uphill battle in China.

A Country of Young Netizens

In my previous post, I talked about the unofficial number of China’s Internet users estimated at 150 – 200 million. Yesterday’s Xinhua news revealed the new statistics from China Internet Network Information Centre (CNNIC): the number of Internet users in China has reached 123 million, representing a 19.4 per cent growth since June 2005.

This means, in a year or two, China will “officially” surpass the United States and become the number one country in term of Internet users.

While this sounds encouraging for people who want to tap into the Internet boom in China, a closer look at the numbers showed some signs of a problem: more than 80 percent of the Chinese netizens are below age 35, with 40 percent of them between age 18 – 24. The ratio of high school students is even higher, at 50 percent

As Lu Bowang, CNNIC senior consultant, said, “It may be a worrying phenomenon that the ratio of Internet users above 30 years old is dropping because the Internet economy is too much focused on entertainment and young users,”

I remember my friends in China complained about the silliness and mindlessness of the content on the Internet. Compared with the US, majority of people on the Internet in China are young people seeking entertainment and fun, versus professionals searching for information and knowledge.

I believe one of the reasons is because there is less outdoor space in China. After school, those kids, full of energy, don’t have many places to go. Sitting in front of computers and escaping into cyber space becomes a natural alternative.

As for business people, they usually have their secretaries, typically young girls, to surf the Internet for them for any business related information. No wonder this resulted in a country of young netizens!

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Chinese YouTube – Yoqoo

A new Internet video sharing site Yoqoo (??) was launched in Beijing last month. Similar to YouTube in the US, it allows users to generate short video clips and share online with their friends and families.

The founder is my friend – the former COO of Sohu Victor Koo! According to Victor, Yoqoo lets people to watch funny clips to relax themselves before they start their day at work or when they leave their offices in the evening. “That will be a new lifestyle,” Victor said.

Video sites that offer clip sharing are getting increasingly popular in the United States. For instance, YouTube has quickly become one of the most-viewed website, with users uploading 50,000 video clips per day. The video offerings of Google and Yahoo! have also generated a lot of traction.

What’s different about Yoqoo is it taps into the opportunity of the convergence of broadband Internet, 3G (third generation) mobile technology and traditional TV networks. With the country’s 400 million mobile phone users and 3G technology, Yoqoo will allow users to download video clips to their handsets.

As to business model, Yoqoo is targeting advertisements from TV companies and even film makers. It also expects some studios to post trailers at the site as part of their marketing strategy.

However, the question remains who would watch video clips and how to navigate the ocean of information overload. In my opinion, an aggregator site that can help users sort out useful and quality information will be critical.

It seems to me in the past when we talked about Internet, it was about text and pictures. Now it’s about audio and videos. User-generated content is the trend. As Yoqoo’s logo says: “?????” – the world is watching!

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China’s Cyber-Savvy and Pragmatic Youth

Chinese youth is an interesting, vibrant and cyber-savvy sector of Chinese demographics that is shaping the future of China.

Yesterday’s Seeking Alpha article says, eighty percent of Chinese youth in urban areas between the ages of 18 and 25 are active bloggers. That is approximately 50 million bloggers! They blog on a variety of topics, ranging from celebrities to sports to lifestyle. They discuss on topics such as what clothing to buy, what music to listen to, and what movies to watch.

These days, young people don’t care about political issues. They care about being cool and getting ahead. They are pragmatic, driven and extremely international-minded that set them apart from their parents.

Chinese youth also forms a major class of consumers. There are about 15 million undergraduate students in Chinese universities. They are increasingly keen on buying iPod music players, fashionable cosmetics and clothing, as well as other famous name-brand goods.

The number of Chinese college students is expected to grow to 30 million by 2010. These young adults are products of the controversial “one-child” policy. Chinese parents, wishing the best for their only child, are willing to foot every bill for their children during college years to ensure their success.

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e-Commerce Momentum in China

In my previous posts, I talked about the challenges of e-commerce in China, and the competition between local Chinese e-commerce site Alibaba / TaoBao and global online auction site eBay China / EachNet. Six months later, the competitive landscape has changed dramatically. e-Commerce is clearly picking up momentum in China.

The latest China Internet Network Information Center (CNNIC) data revealed that TaoBao had a 67.3 percent share of China’s customer-to-customer (C2C) market in terms of user numbers by the end of March, while eBay China had only 29.1 percent market share. The most popular transactions in China’s C2C market were for clothes, cosmetics, computers, cell phones and home appliances.

According to , founder, chairman and CEO of Alibaba, that owns TaoBao which has now over 15 million users, the most critical factor for TaoBao being successful at C2C e-commerce in China is its payment system AliPay, the PayPal equivalent in China.

One of the key issues that hindered e-commerce in China in the past is the under-developed payment systems that resulted in the settlement risk – the risk of ensuring the goods are delivered and payments are made between buyers and sellers. AliPay, different from other payment systems in the market, solves this problem by escrowing cash until the goods are delivered. In a way, AliPay acts as a temporary bank between buyers and sellers. In the meantime, it increases the liquidity in the TaoBao marketplace. AliPay is a key driver of the company’s success and e-commerce in China.

Ambitious Ma is also aiming to make Alibaba the No. 1 search engine in China, taking on and . He plans to take Alibaba IPO in the near future. His vision is to make his company one of the world’s top three most powerful Internet companies and a Global Fortune 500 company a decade from now.

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China’s Internet Users

According to some estimation, China has about 150 – 200 million Internet users, contradicting with the official number of 111 millions. That means China’s Internet users may have very well surpassed the United States (154 million). While this may be a shocking news to some people, it’s not shocking to me. Overtime, I have heard from many of my friends that official data is under-estimated and actual numbers are much higher.

However, what’s real shocking is the amount of time Chinese spent online. Chinese Internet users spend on average15.9 hours per week, while Yahoo!, with the largest user community in this country, can only get its users stick around less than one hour per week. That’s 1.765 billion hours per week online in China, compared with 129 million hours per week online in the U.S.

So, what are Chinese doing by spending so much time online? Apparently, people log onto the Internet surfing the news, chatting with friends and families, etc. Although there is certain degree of censorship, the Internet is still a place where the media is relatively free. According to the CNNIC, 67.9% of online use in China is spent devouring news. By contrast, only 3% of Yahoo!’s U.S. traffic clicks over to news.

Another important fact is that there are 400 million cell phone users in China, and 80% of them have the mobile phones with the capacity connecting to the Internet. With the roll-out of 3G, there will be more mobile Internet access. I would expect China will lead the innovations in mobile search, which includes search for news, local business listings, entertainment, shopping, etc.

Update: eMarketer has more detailed analysis about China’s Internet users with comparison of the data from several sources. However, I do believe the under-estimation of China’s Internet users.

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Internet and Democracy

Last week, there were many criticisms about , , , and other technology companies’ submission to the Chinese government’s request to censor the information on the Internet. It has become a public concern that these companies are doing business there at the peril of human rights.

As a native Chinese, I completely understand these concerns and critics. However, I have to agree that the presence of American companies in China provides much greater benefit to the Chinese people. It will help democracy in the long run.

For a country that has three-thousand years of history in feudalism, democracy is a gradual and long term process. It won’t happen overnight. It’s a matter of changing people’s hearts and mindsets rather than changing the government and system.

Economic progress, technology advancement, and globalization are all part of this process. The State Department’s proposal to form a “Global Internet Freedom” task force to address censorship issues at the international level is one step closer toward that end.

I believe democracy in China as well as in other parts of the world is not only imminent, but also inevitable.

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The Crown Jewel of the Internet

“Search is the crown jewel of the Chinese Internet market.” Thus came China’s search engine war, fueled by the outpouring money from foreign investors and the overwhelming number of competitors in the market.

Shortly after Baidu’s phenomenal IPO last August, , managing director of Draper Fisher Jurvetson, which invested $10 million for 28 percent stake in Baidu, said: “the war is already over, Baidu owns the market.”

Well, maybe not yet. Recent survey results by Keynote Systems, an Internet performance authority, show that Chinese users prefer Google to Baidu. According to Keynote, Google won the highest user ratings in 11 of 13 categories including general search, news search and image search, while Baidu came first only in music search.

This shouldn’t be a surprise. Even at Baidu’s IPO frenzy, CNNIC data revealed Google beats Baidu in traffic share for individuals 25 years old and up with higher education. People who use tend to be professionals with higher income, and they use Google to search for information and knowledge. On the other hand, the majority of people who use as their primary search engine use it to search for downloadable music.

In my , I talked about local players having an upper hand against their global counterparts because of their intimate customer knowledge. So far, foreign Internet companies don’t have a good record of success in China. Yahoo!, for example, entered the market early and bled money for years, but couldn’t overtake the dominant Chinese portals.

There are certainly plenty of reasons that Google may be humbled in the China Internet market.

“History has shown us again and again,” Sohu’s CEO Charles Zhang said bluntly, “just like Yahoo! failed, Google will fail. I don’t worry about Google – it’s not even on my radar screen. To us, it’s only Baidu.”

History may or may not repeat itself. I bet Google is on Charles Zhang’s radar screen now. The competitive landscape is changing quickly. Who will be the final winner of the crown jewel of the Chinese Internet market still remains to be seen.

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Taobao vs. eBay China

Most people in this country have never heard of Taobao – an online aution site owned by Alibaba in China (See my ).

On the other side of the globe, the situation is very different. Sitting in the hotels in Beijing and Shanghai, I noticed the ads about Taobao popping up on TVs almost every 15 minutes. Since its name “??” means “digging for treasures” in Chinese, it gets a lot of attention very cleverly.

Fierce competition between eBay EachNet (eBay China) and Alibaba / Taobao is apparent (see ). analysts estimated Taobao’s market share increased from 9% to 40% in 2004. For the first quarter of 2005, eBay EachNet reported 100 million in gross merchandising value while Taobao reported 120 million.

I believe that understanding the customers’ preferences and tastes gives the local players an upper hand against their global counterparts. Taking Taobao and eBay EachNet as an example:

  1. With most users not sophisticated for auction, auction accounts only 10% of Taobao’s listings, while eBay EachNet has about 40% of its listings for auction.
  2. Taobao offers free listings. As a result, its listings reached 10 million in September of 2005, almost 10 times more than eBay EachNet’s.
  3. Taobao also offers longer listing periods (14 days) and let customers extend for one more period automatically. eBay EachNet does not have this flexibility.
  4. Taobao’s listings appear to be more customer-centric while eBay EachNet’s listings more product-centric. For example, Taobao’s listings are organized into several categories, such as “Men,” “Women,” etc., while eBay EachNet sticks to its “global platform” grouping users into “Buyers” and “Sellers.”
  5. Taobao has higher customer satisfaction than eBay EachNet. According iResearch, the user satisfaction level was 77% for Taobao versus 62% for eBay EachNet.

I have to say I am impressed with Taobao’s performance. I remember only about a year ago, I was having a conversation with a senior executive of Alibaba at its headquarter in , I couldn’t help asking:”Aren’t you afraid that eBay will buy you out?” To my surprise, the answer was:”No, we will buy eBay.”

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