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Wired China

Friday 4th August 2000

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Charles Zhang is China's latest youth idol. He's young, rich and successful. He's featured in the gossip magazines and when he goes to functions he's mobbed for his signature. Zhang isn't a pop star, a sportsman or a TV personality. He's not even - and remember this is China - a political hero, or someone with great revolutionary connections.

Zhang is an Internet entrepreneur. The company he runs, Sohu.com, is one of the three top portals in China, estimated in new stats from Asia Internet research company iamasia.com to receive over 10 million page views a day. When people ask for his autograph, he signs his business card.

Zhang, and other "Chuppies" (Chinese yuppies), are a new phenomenon in China - a phenomenon that breaks all the rules. These guys are young - in their 20s and 30s - in a country where promotion by seniority is still the norm and where "young", in political terms at least, means being in your late 50s. They have no Guanxi, or political connections, and don't need them. They don't pay bribes. They wear baseball caps and sweatshirts. And in a country where an annual salary of $US5000 a year is above average, many of them are stinking rich.

Take William Ding, 28, founder of one of the other top portals, Netease. Ding owns 68% of a company valued at almost $US500 billion, and due to list on Nasdaq just as Unlimited went to press. And Ding is "made in China" - he was educated at Chengdu Technical University, not one of the prestigious US universities that are still de rigueur among China's elite.

Equally successful is Jack Ma, 35, beaten up in the Cultural Revolution and a former English teacher and civil servant in the Ministry of Foreign Trade who's never worked outside China. Ma's trading site, Alibaba.com, has 200,000 companies worldwide on its books, counts Goldman Sachs and Softbank among backers which have jointly put in $US25 million, and has just hired Yahoo co-founder John Wu to be its chief technical officer.

Large target

Figures are always big in China. Internet numbers are no less mind-blowing. There were 12.3 million wired Chinese as of April this year, according to iamasia.com, compared to less than a million at the beginning of 1998. Even 12.3 million is only a penetration of around 1%, though the users tend to be influential. The number is estimated to rise to 20 million by the end of the year. Some forecasters predict up to 50 million people in China could be connected to the Internet by 2005, making China the second most wired country on earth, after the US. And still that would be less than a 4% Internet penetration.

There are 50,000 Chinese domain names and another 180,000 Web sites targeted at China but based in the US, largely for reasons of cost and speed of access.

But the exciting thing about the Internet revolution in China, says Beijing-based Internet consultant Duncan Clark, is that Internet growth is unplanned growth. In the ultimate government-controlled economy, there is no state plan for e-commerce, Clark says, and no Ministry for the Internet. That may not last - seven or eight ministries are belatedly trying to get in on the regulation game and Internet regulation is rapidly becoming "complex, contradictory, changing and crowded". But, Clark says, so far, government intervention has only had the effect of making the Internet wizards try harder. "The Internet loves a challenge," he told Unlimited during a recent visit to New Zealand courtesy of the Asia2000 Foundation. "Every time the Chinese government tries to intervene, it just encourages people to find a way around." When the government blocked the CNN site, Chinese sites started featuring convenient links to US-based proxy sites. Although the government initially tried to require companies to reveal the encryption codes they use to protect commercial secrets and online merchandising, under pressure from industry and foreign companies, the rules were quietly dropped.

The development of the Internet in China has taken many people by surprise - even the experts. Clark, founder and managing director of BDA China Ltd, arrived in China in 1994 as a telecommunications consultant, then drifted into the Internet arena in 1998 working with a Chinese ISP seeking foreign investment. The government blocked the investment, and Clark wasn't paid for his work, but suddenly, and unexpectedly, found himself in possession of some hot property - up-to-date research on the state of play of the Internet in China. His report came out at the same time as China.com went public and Clark sold several hundred thousand US dollars worth of copies. He recently sold a 10% stake in the consultancy to Hong Kong company Tech-

pacific.com for $US600,000. The money is targeted to build a Beijing-based incubator for Internet start-ups.

Clever chicks home to roost

What really sets the new Internet entrepreneurs apart from their industrial counterparts is the fact that they are largely building businesses on their own initiative, using brain power and technical skills, not connections or illegal activities. Though middle- and low-level government officials must be struggling hard to find a way to get in on the dot-com riches by regulating and then taking a cut, experts report the industry is relatively free from corruption, so far.

This new-found freedom and the possibility of huge money to be made is luring some of China's most innovative brains back from overseas. Take Eachnet founder Shao Yibo, one of the country's brightest youngsters (he won a national maths competition at age 12, and was awarded a full scholarship to Harvard at 17). Despite several high-flying offers to stay in the States, Yibo left the US straight after graduation, merely stopping off in Silicon Valley on the way home to pick up a few hundred thousand dollars of venture capital. Internet entrepreneurs also have a cockiness rarely possible for other business people in China. Asked by Time magazine about the fact that Internet technology is developing too fast for Chinese regulation to catch up, Jack Ma commented: "We never wait for the infrastructure to be ready. No rule is good news. Life is like a box of chocolates: you never know what you are going to get. Better just to move ahead."

But it's a wary cockiness. The government might find it hard, nay impossible, to pull the plug on the Internet in China, but it could make it hard for Internet companies to make money. Already a huge Internet fallout is being predicted as the thousands of Chinese dot-coms get whittled down to those that are going to survive. Best not to push the government into speeding the demise. Which is why Internet entrepreneurs like Tan Haiyin, chief operating officer of auction site Eachnet.com, are helping government regulators figure out where to go from here with Internet development.

Make no assumptions

Looking at China's Internet sector as relatively free of regulation and a potential cash cow would be a "very dangerous comment", says Peter Maire, head of Auckland-based Talon Technology, a company in the high-tech GPS-based navigational aids market. Talon has been in China for two years, is represented in six cities and is pondering an Internet-related joint venture with a Chinese entrepreneurial company, EVSoft. "Underneath, the Chinese are the super-capitalists of the world, but they've had 50 years under communism and things don't change just like that. You might say the government can't control the Internet. But you can be damn sure they know everything about what's going on. You can't assume they won't try to control it and there's no guarantee that if they see it running out of control they won't stamp on it."

Where the government has been most successful so far in suppressing the growth of Internet companies is by putting difficulties in the way of companies looking to raise foreign capital. While companies are allowed to list on Nasdaq, for example (portals Sina.com and Netease.com have already done so and Sohu.com was expected to list in July), the Ministry of Information Industry required the companies to separate off their content business from the financing vehicle business of the portals. It was partly a gesture of control, and partly an example of the government's extreme sensitivity to foreign investment in media.

Foreign companies looking at investing in a Chinese dot-com also face the usual risks of having the rules changed under them so that a potential profitable venture becomes a non-starter.

"The risks of investing in China are just this side of ridiculous," says Johnny Chan, partner in Techpacific, one of the growing number of venture-capital firms set up in Hong Kong to do just that. "But the potential rewards are enormous," he told Time.

Official high standard

Like so many aspects of Chinese life, the official reaction to the Internet is beset by contradictions.

On the one hand, the Internet terrifies Chinese officials. The country is still very much a one-party state, with the government fiercely determined to retain control over, as they put it, "the commanding heights of the economy and society". On the other hand, Chinese officials have shown more of a willingness to embrace technology than their counterparts in many other countries. Premier Zhu Rongji downloads the news from the Internet each day, and President Jiang Zemin's son worked for Hewlett-Packard in the US and is now overseeing Internet development in Shanghai. There are thousands of government Web sites, allowing the comrades to do anything from applying for a driving licence to commenting on the Shanghai district plan.

Don't expect to be able to flog your old systems to China, either - government departments are looking for leading-edge technology.

Christchurch-based communications company Tait has been selling its vehicle tracking systems to China's three million-strong Gong An civil police for some time, and has now introduced Internet-based software to the mix. Gong An is one of Tait's biggest customers and one of its most tech-savvy, with its own university doing research into areas including technology. The Chinese university team, for example, was able to make some clever enhancements rewriting the protocols for some of Tait's trunk radio technology to suit Gong An's particular needs - the only customer to do so.

"In New Zealand there is the misconception that a country like China is not as advanced as other countries. This is not correct," says Tait spokesman Andrew Trevelyan. "Their expectations are every bit as high as other customers and they are looking at high-tech solutions."

China's level of technological sophistication is daunting for New Zealand, agrees Talon Technology's Peter Maire. Vehicle-tracking and messaging systems are already in use in major Chinese cities, using an Internet backbone "as sophisticated as anything I've seen", says Maire. Just back from a trip to the country, Maire visited some "killer companies" in his own field and glimpsed some great locally made technology.

China has its own equivalent of the PalmPilot, for example, which sells for far less than its US competitor, but has some "awesome design and engineering". Not surprisingly, the Chinese government is also keen for its own high-tech companies to use the country's market muscle to make money overseas.

Third-generation revolution

Take mobile phone technology. By the end of the year China is expected to have the second largest number of mobile phones in the world after the US - an estimated 70 million users. About two million subscribers sign on each month and 98% of the phones are digital. But it's the fact that mobile phone ownership is significantly higher than PC ownership (70 million versus 20 million) that creates an astonishing technological potential for China.

The sooner someone develops Web-enabled mobile phone technology, the sooner China's non-PC-owning population can be connected to the Internet. But it's even more in China's interests to develop that technology itself, or at least make and sell the phones.

Chinese companies missed out on second-generation mobile phone technology - most of the phones being used there at present are foreign brands - and China's leaders are hoping not to make the same mistake again. Researchers have already developed a Chinese standard for a third-generation mobile with multimedia capabilities, and that standard has been accepted overseas. "If China adopts its own technology, there will be a natural advantage for Chinese vendors," Clark says. "Plus, if they can win in the export market, it's a great thing for foreign exchange."

The new Chinese entrepreneurs hope the Internet will allow China to draw level with the West. "This is the first time we see a way we Chinese can catch up," says Alibaba.com's Jack Ma. "Just like the auto industry defined the Japanese economy - if you can catch the wave, you can move the whole country forward."

China is wired, and can only get more wired. The battle ahead will be over how many people benefit, who they are and how much money they make.



CHINA'S 10 BEST NEW MARKETS

SO FAR, NEW Zealand companies have been slow to get in on the dot-com scene in China. Tait Communications recently started selling Internet-based vehicle-tracking systems to China's civil police, Talon Technology is considering a joint venture with private-sector Chinese company EVSoft to do Internet-based car navigation systems, and children's book and educational material publisher Wendy Pye is developing a Web site in China as part of an English language teaching programme. China's risky, and the language problems make it difficult for software companies, Web designers and others to make inroads. But there are opportunities, Beijing-based Internet consultant Duncan Clark says. Here are 10 of them:

Bandwidth growth
There's a huge hunger for bandwidth. The Internet is slow at present, though getting faster. Moreover, China's online population will double this year to 18 million, the number of privately owned Chinese domain names has doubled in the past year to 50,000 and the price of getting connected has quartered since 1997. Switch and router companies like Cisco and Nortel are reaping the dividends, as are operators such as China Telecom and those offering bandwidth trans-Pacific.

Access networks
Huge investments are being made in broadband pipes criss-crossing China and the Pacific. These pipes have to overcome the "last mile" of access - particularly to small and medium-sized companies and homes. Technologies like DSL and wireless local loop are set to boom.

System integration
Setting up and maintaining the networks is keeping Nasdaq-listed AsiaInfo in the flow of big revenues.

Billing
Software to reliably bill customers for fixed, mobile, data and mobile Internet services is going to be big business.

Convergence
Wireless solutions for the Internet are going to be hot (see main story). Opportunities for short message (SMS) services are first up, with wireless application protocol (WAP) services to follow as bandwidth improves. How about content providers for mobile phone stock trading, or even mobile phone karaoke?

ASPs
Software piracy is a huge problem in China. With improved bandwidth and ever more sophisticated demands for services, the concept of allowing companies to rent access to business software hosted elsewhere has a powerful appeal.

Encryption
For e-commerce to thrive, China needs foreign technology - adjusted to suit local regulations - to provide secure platforms for trade.

Voice recognition
Typing Chinese character input by keyboard requires multiple strokes to spell out the character using the Roman alphabet (or "pinyin" system), then selecting the right character from a pop-up list. Voice input would represent a time-saving revolution.

E-Consulting
"Whatever the government tries to do, the genie is out of the bottle," says Clark about China's Netrepreneurs. But all entrepreneurs need support in the form of fencing, legal, growth, human resources and marketing management. As in the West, the new buzzword is "clicks and mortar" (or "bricks and mouse" as they refer to it in China).

Incubators
Matching the wealth of human talent in China with venture capital, office space and access to professional services will help nurture the dot-com revolution.

For more ideas contact Duncan Clark on bdaco@shanghai.cngb.com or www.bdaco.com



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