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Made in China

Made in China

Tech-savvy Chinese entrepreneurs have struck gold in the form of burgeoning websites copied from successful US models like Amazon and Google.

The key part of the story of the 21st Century, so far, is of China leaping into the front rank of economic performers, and there are few areas where the transformation is more obvious than in the development and application of technology. The pattern has been highlighted by Rebecca Fannin, author of a new book, Silicon Dragon: How China is Winning the Tech Race, which closely examines a dozen Chinese leading technology companies, and includes interviews with their founders. Fannin, also the international editor of the Hong Kong-based weekly magazine Asian Venture Capital Journal, finds a remarkable sense of energy as well as problems that will need to be overcome before the country's tech sector can fulfil its potential. She is careful to underline connections of the new wave of Chinese firms with the United States, noting that much of China's technology wave is underwritten by US venture capital, much of which flows through Silicon Valley.

Many Chinese entrepreneurs have spent time in the US; as returnees to China, they are often referred to as "sea turtles" (a play on words that sounds like "coming home" in Chinese).

"The 'in' thing among bright, young Chinese techies is to draw up a business plan, get financing, scale the start-up to sizeable revenues and profits, and then go public in the United States," Fannin told MIS on a recent visit to Australia. "There are a few who have listed in China, especially Hong Kong, but the gold standard is really seen as the Nasdaq or the New York Stock Exchange. There are already more than 65 companies trading on the Nasdaq and the New York Stock Exchange, and doing very well out of it."

The numbers game

Many of the tech entrepreneurs have not just borrowed the development plan from the US model - they have copied the whole business. One "copycat" (to use Fannin's term) is Peggy Yu, a co-founder and driving force of the Chinese online bookseller Dangdang.com, who applied the Amazon model of online book selling to China.

She was not the only one to try this trick: in 1999, five years after Amazon's founding, dozens of would-be clones sprang up in China, trying to take advantage of the country's burgeoning appetite for reading. Yu prospered by offering the widest possible selection of books (currently 200,000 titles), using marketing innovations such as steep discounts (important in a market where cheap pirated copies are rampant) and making the site as user-friendly as possible.

An injection of $US40 million ($43 million) of venture capital from the US and China was also crucial, giving the company a valuable breathing space when many competitors in China crashed in the wake of the US tech wreck of 2000.

Another advantage was the fact that Amazon fumbled its China venture after acquiring the Joyo site and then failing to support it properly (the Joyo site has recovered somewhat but is yet to make a profit).

At last count, Dangdang (which translates roughly as "worthy") had nearly 13 million registered customers, compared with Joyo's 11 million. Again, following Amazon's trail, Dangdang began to add general merchandise to its sales site in 2004, and now non-book items account for about 40 per cent of turnover, compared with 25 per cent for Joyo.

"Dangdang has faced some very Chinese problems," Fannin says. "First, credit cards have not really caught on in China, so Dangdang used money orders, which are very popular. More recently, they have added a cash-on-delivery service. Then there is the obstacle that the postal service in China is less than reliable, so Dangdang used couriers - bicycles - early on, and now cars.

"In many ways, Peggy Yu and Dangdang have benefited from being a few years behind the West in this area. They could cherry-pick from a lot of things that others had tested in very elaborate and expensive ways, and decide what to do and not do."

Fannin believes the next step for Dangdang could be an initial public offering (IPO), possibly timed to coincide with the Beijing Olympics.

Another example is Baidu (pronounced "Buy-do"), which has emerged as China's leading internet search engine. It is very closely based on Google - or at least it was in its early stages. Fannin points out that in its present incarnation, Baidu has new features that result in faster and more precise searches in Mandarin, as well as localised features such as instant messaging.

Since listing on Nasdaq in 2005, Baidu's value has spiralled upwards, giving its founder and chief executive officer Robin Li a net worth of $US645 million ($679 million). Like many of China's tech entrepreneurs, Li spent time in the US, where he not only saw the Google model, but also made important connections in the US venture capital market.

Although Baidu leads Google in China, the latter is coming up fast, pouring in investment funds and recruiting top-level technical talent. Baidu is also seeking to expand, having already moved into Japan.

Fannin profiles other Chinese companies based on US models - Jack Ma's Alibaba, derived from eBay with a touch of Yahoo!, and Joe Chen's Oak Pacific Interactive, which she says copies MySpace, YouTube, Facebook and Craigslist, for example - but she argues that each has added touches and features that distinguish them, to a degree, from the original.

"Within three years, China's internet population is likely to pass that of the US," Fannin says. "At the moment, there are 185 million web users in the US, compared with 162 million in China.

"By 2010, more than 227 million people in China will have internet access, and the US figure will be around 196 million. It's a numbers game.

"Most of these companies are looking primarily at the China market. Yes, the fact that they are based on US models could raise legal problems if they seek to move into the US, although there have not been any signs of that yet.

"I think that when they start to really look overseas, a likely pathway will be the Chinese-speaking communities in other countries. Globally considered, that is a huge market and an obvious avenue for development, but broadly speaking I would say that it is still a few years away."

While the "copycats" are doing well, Fannin points out that China's tech boom has spawned a host of companies based on home-grown innovation.

Several of the most successful companies are linked to the astonishing growth in the number of mobile phones. At present, China has the world's largest number of mobile phones, over 500 million, far outnumbering landlines.

One of the most interesting companies in the field is ¿Oriental Wisdom, headed by Liu Yingkui. The company is onto a big future tech trend: not selling phones themselves but focusing on the business applications that allow phones to be used for marketing, distribution and customer service. The key offering has been financial services, from advertisements for banks, insurance firms and mutual fund companies, to news and tips on sharemarket investing, real estate and the broad economy.

Fannin says Oriental Wisdom is still a relatively small company, but has a first-mover advantage and market leadership in a specialised niche. Its financial targets for 2008 are $US20 million in revenue and $US3.3 million in profit.

Another company taking advantage of the mobile phone boom is Charles Wang's PingCo, which has brought subscription chatting, dating, video downloads and game playing to phone mini-screens.

Texting has become so popular in China that the term "ping me" now means "send me a message". Market analysts estimate about 126 million Chinese use instant messaging, some sending several dozen a day.

Fannin says Wang plans to lead his subscribers into paid premium services, then generate further revenue by selling client lists to marketers, who can use the information to target specific groups of users.

The big problem for PingCo and Oriental Wisdom is the dominance of state-owned giant China Mobile, which has 300 million customers. But, so far, China Mobile has been slow to respond to new challenges, and the dynamism of the technology means that new niches are constantly appearing.

A different style of innovator is Maxthon, run by Jeff Chen, which has developed a customisable Chinese internet browser. The browser can easily perform a wealth of functions with a tiny gesture on the mouse, including capturing and saving web pages as files, zoom-in on pages, block ads and boost speeds for downloads.

"My personal favourite," Fannin says, "is an undo command that lets you go back to a page that was closed accidentally. Microsoft didn't come out with similar features until Internet Explorer version 7, 18 months after Maxthon."

She also points out that Maxthon is one of the first Chinese tech firms to have truly gone global. About one-third of its users live in the US and Europe, and the browser is available in 20 languages. Key parts of the underlying code have been developed by online programmers around the world working with open-source software.

But even while Chinese tech entrepreneurs are building their businesses, there are significant dangers looming.

"A key issue, especially for global expansion, is a shortage of management depth," Fannin says. "There are some very good people at the C-level, but not much in the second tier. It's a serious constraint."

A second concern is the weakness of laws on the protection of intellectual property (or, more specifically, the lax enforcement of laws). Weak intellectual property protection can, in fact, sometimes be an advantage in the early stages of economic development, but it becomes a problem as the technology sector grows, undermining the value of R&D expenditure and making it difficult for companies to properly profit from their breakthroughs.

There is also the issue of dependence on capital from foreign sources, mainly the US. To some degree, this ties the fate of Chinese entrepreneurial tech firms to the US economy.

Tech standing

A new study by the US Georgia Institute of Technology shows that, in important areas, China has caught up with - and overtaken - the rest of the world in its ability to develop new technology, turn these developments into products and services, and then bring them to market. The study ranks 33 nations relative to one another on each nation's recent success in exporting high technology products; it gives China a "technological standing" of 82.8 (out of 100), compared with 76.1 for the US, 66.8 for Germany and 66.0 for Japan.

In comparison, Australia scored 53.5, Malaysia 58.3, Singapore 63.0 and New Zealand 54.1. A decade ago, China's score was just 22.5, while the US peaked in 1999 with a score of 95.4.

The authors of the study are quick to point out its limitations, noting that Australia's relatively low score, for example, relates to the fact that its technology-based goods are niche-orientated rather than broad-based. Nevertheless, the figures relating to China are telling, especially given that the country's broad economic growth is likely to continue for at least several more years.

Fairfax Business Media

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