FEATURE: Most Chinese Internet firms face bankruptcy, merger

Asian Economic News, May 8, 2000

BEIJING, May 5 Kyodo

The Chinese Internet revolution is in trouble almost before it has begun.

The local Internet population more than quadrupled during 1999 to 8.9 million users and is expected to double again this year, with some estimates ranging as high as 30 million. But the companies that have sprung up to cater to the growth are already under siege.

At an industry conference in Shanghai, experts said that in the past six months new commercially oriented Websites were being created almost hourly so that now China has more than 9,000 of them.

But, some of them predicted, at least 70% of them will have gone bankrupt or merged by the end of this year.

According to an analysis in the newspaper Zhongguo Baoxian Bao, speculative and spendthrift Internet companies are common, and more than half of them spend an estimated 60 to 80% of their funds on public relations and advertising. In addition, problems such as a lack of original thinking, simple cloning of a U.S. business model and disorganized management "are now demonstrating their negative effects," it said.

The government, by continually imposing new limitations on Internet service and content providers, has not been entirely supportive either.

The concept of e-commerce, regarded elsewhere as vital to Internet profit-making, only began to attract attention last year, with trading a miniscule 55 million yuan ($6.63 million).

A recent study by the Ministry of Information Industry found 1,100 Websites offering e-commerce, but among them they only achieved 0.018% of total retail sales last year. Prospects for this year are better -- 350 million yuan, but still barely 1% of retail sales.

Some Chinese Internet companies have already left the arena. In Beijing, only two of the city's 16 student-run startups have survived, while a Web search via several major search engines revealed 40 of the country's more than 200 online bookstores have perished.

According to industry insiders, only four categories of Chinese Internet companies will survive:

Internet companies that have built a barrier to entry for latecomers. Those who have done so include portal Websites such as Sina.com, Sohu.com and Netease.com, and the 8848.net and Alibaba.com e-commerce Web sites;

Websites that can help conventional companies reduce costs, increase their efficiency and create new value. Such Websites have a clear and realistic method for earning profits. These sites include business-to-business Websites that are now in vogue;

Websites that have been favored by large venture-capital investors. According to an official with the U.S. International Data Group, Internet companies that have money in their hands possess the prerequisite for succeeding. Sina.com is a prime example, having raised funds through an initial public offering on the Nasdaq last month. Sina had already attracted foreign venture capital, notably from Japan's IT giant Softbank Corp., which also has an alliance with the e-com firm Alibaba.com.

Internet companies that have transformed themselves after starting as a conventional business. Such companies have established brands, created marketing channels and possess rich managerial expertise and abundant funding. They are better positioned to withstand the test.

One senior industry expert believes Chinese Internet companies will inevitably follow the overseas trend of mergers with traditional media companies to survive and prosper.

"The Internet industry in China will follow the model of AOL and Time-Warner," Gong Yuguo, general manager of ChinaByte, a joint venture between News Corp. and the Peoples Daily, told the news service ChinaOnline. "They will combine with traditional media companies to gain access to content and distribution channels."

He said many of China's Internet companies were "really just gambling," with dreams of "becoming a millionaire overnight."

Gong likened the Internet to the real estate market of several years ago, saying many companies are hoping to get rich quick from the Internet. These companies, he said, are only interested in short returns, and were unconcerned if they made a profit or not.

Venture capitalists until recently had been eager to "throw money" at such "risk-takers" because of the strong international interest in the Chinese Internet market, so a "casino" atmosphere had prevailed. But a more cautious approach was now evident in recognition of the market's current instability.

The government has helped put a damper on foreign and domestic hopes for instant Web profits.

In early May, for example, it announced its fourth major Internet-related ban, prohibiting the online sale of imported audio and video products, and barring foreign-invested companies from selling all audiovisual materials so as to block the distribution of pirated, smuggled or otherwise illegal music and video products.

Last month, a wide-ranging ban on the use of foreign encryption and security products was imposed. Chinese news sites have also been banned from carrying unexamined foreign news reports.