China Tops US in Web population – What does it mean?

According to a report released by the China Internet Network Information Center (CNNIC), the number of internet users in China has reached 253 million by the end of June 2008. It’s almost the same as the whole US population (~304 million). The scary part is that 253 million is only 19.1% of the whole China population. If you look at the Internet penetration rate of other countries, like United States (72.3%), Japan (73.8%), South Korea (70.7%) and Hong Kong (69.5%), it is obvious that China has enormous growth potential for their Internet market. Imagine China’s Internet penetration rate increases to 70% – that is 910 million of Internet users, almost 4 times the current Internet market in the US.

While these numbers seem to be very promising, the Internet business environment in China is actually a bit complicated because there are significant differences between the US and China markets. Let’s look at the China market now.

Demographic structure

Compare to the US, the net population in China is very young – 68.6% of the web users are under 30 years old, while 70% are above 30 in the United States. Currently, the ratio of male to female is 57%:43%, closely related to the real China population. Based on the data from China State Statistics Bureau, the education level of male is higher than that of female but the gap is gradually being narrowed.

In terms of education level, 62.8% of them have high school or secondary school education and only 30% have Junior college or Bachelor’s degree. Not surprisingly, students is the largest group in the net population (30%) and more than half of the internet users (55%) are single.

How about income? 74% of the net users in China earns less than RMB 2,000 per month. That is US$292, an annual income of US$3,504.

After seeing these facts, I believe US Internet companies understand that in order to succeed in China, they need to adopt a totally different business model there. Needless to say, if you simply plan to translate your site to Chinese language and think you will have the same success in the US, it’s not possible for you to compete against the local leaders.

Internet Access

While most Chinese surf the web at home (74.1%), Internet cafes have become an important places for Internet access in recent years. More than 39% of the users have accessed the net at Internet cafes and most of them are youngsters with a high school and below education.

Unlike the US, mobile phone is a popular surfing equipment in China. Because of convenience, around 76 million people (~30% of total net population) have chosen to access the web through mobile phones. This number is expected to increase rapidly because 41% of the Chinese population, >530 million people, are already using mobile phones everyday. Despite the high cost, desktop PC still has the leading position among all equipments. Home is still the main place for users to get online. In addition, 87% of them have used desktop computers with broadband internet connection (China is the world’s No.1 broadband market).

Current Business Models

Below are the top online applications in China today:

1. Online Music
2. Instant Message
3. Online Video
4. Online News
5. Search Engine
6. Internet Games
7. E-mail

As we can see from this data, the China’s internet market focuses a lot on entertainment rather than the main applications in the western markets – information research, online shopping and e-mail communication. Currently, only 119 million Chinese are using e-mail, with the an application rate of 56.5%. In contrast, the e-mail application rate in the US is 91% and 82.1% in South Korea.

According to the report, the e-mail application rate in China is actually co-related to the education level. The higher the education level, the higher the email application rate is. For example, users with postgraduate and above education have a 94.2% rate. People with lower education mainly use instant messaging to communicate.

Because of this unique characteristic, virtual goods and micro-transactions have become the major money making products for internet companies in China. In the US, online advertising is the big revenue driver for businesses. However, because online shopping is not popular, the web advertising market in China is very small compared to US and Japan.

For example, in 2007, Tencent, the largest internet company in China with market capital of US$14.5B, had a revenue of $523 million and $224 million in operating profits. Online advertising only makes up 13% of their revenue. 87% comes from micro-transactions for digital goods, online games and mobile services. This special business model gives Tencent a huge operating margin (43%). In comparison, Yahoo’s operating margin is 10.4% and Google is around 30%.

In the online gaming areas, many games are designed on a “Free-To-Play” model. Players can access the free game at no cost, but need to pay for virtual products and services within the game.

Below is an interesting analysis I got it from TrendsSpotting.com. We can see the revenue breakdown of most of the major online companies in China.

The Reality in the Wild Wild West

So after all this positive data, does it mean that the China Internet market will easily become 4 times bigger than the US market in the near future? With the current US Internet market size, Americans have already produced huge corporations, like Google (Market Cap:$146B), Amazon.com ($34B), eBay ($32B), Yahoo ($27B)…etc. So China will produce corporations much bigger than those in the near future? Unfortunately, it is not as easy as the numbers suggest. China web companies still have to overcome several local obstacles in order to succeed in this competitive environment.

First of all, the unfavorable urban-rural ratio. There are 767 million people living in the China rural area now. That is 57.7% of the total population. Among the net population, 25% of the internet users are living in rural areas, which means they are probably earning a lot less than RMB 2,000 (US$ 292) per month because people in villages usually have lower education level and lower income. This will be a great challenge faced by companies who want to develop the e-commerce and online advertising market in China.

Also, at this moment, every home Internet-connected PC is shared by 2.7 users in average. This means the Internet users may not be able to use the Internet whenever they want. So they are not maximizing the value of the Internet yet.

According to BBC, the whole China’s Internet economy has generated US$5.9 billion in revenue in 2007, while US companies pulled in US$21.2 billion just in online advertising revenue. Even though China companies have an unusual business model in virtual goods and micro-transaction, it seems most of the money are just going to the big local players in China now. Smaller local firms probably couldn’t get a big slice from the small US$5.9 billion market. Tencent alone is projected to earn around US$1 billion in 2008. And you still have other major sites, like Baidu, NetEase, Sina, Sohu, Alibaba…etc.

Another problem is the Great Firewall of China (GFW). Internet censorship in China is well known around the world. It is the government’s effort to neutralize critical online opinion. While I understand the purpose of this system, this will also limit the growth of the China Internet market. They even have virtual cops, JingJing and ChaCha, walk, bike or drive across your screen every 20 minutes to ask Internet users to stay away from illegal content and bad websites. I have to say this is actually a pretty innovative idea. Never heard something like this before.

Future Trend

Younger Target Customers: The Internet market in China is currently dominated by youngsters. Influenced by the one-child policy, local adolescents like to form virtual friendships using Instant Messaging. Their main purpose of getting online is to look for entertainment. This group of users tend to use more Bulletin boards and less emails, probably because IM and BBS are more suitable for leisure chats. So I suggest companies should develop a style and culture more like Disney or Facebook but not LinkedIn.

Learn from Asian Countries: Since teenagers like to consume trendy and branded goods, companies should keep up with the latest trend of the Internet Consumer market in countries, like Japan and South Korea. These three Asian countries have very similar culture and value. More importantly, the internet industry in Japan and South Korea is more well developed than China. China can definitely look up to them.

Mobile Internet Content: 41% of the whole population in China are mobile phone users. That is 533 million people!!! Downloading ring tones on cellphones is already very popular among users. For example, there was a popular ring tone generated over $10M in sales of download few years ago. More and more people will access the Internet through their cell phones. So Mobile Value-Added Services will be a very important business model in the future.

Innovative Technology: In the past, Chinese startups often liked to copy the Silicon Valley models. However, in order to be the major leaders on the Internet, Chinese companies have to be creative and to develop their own brands and new technology.

Open the Market: As the education level of local users increases, the Chinese government will have less control on the Internet. However, China’s Internet is still highly internally referential, with fewer than 6% of China’s websites linking to outside the country. Local firms still have a huge home court advantage at this moment. To improve the condition of the industry, users and businesses have to look beyond the local market for opportunities.

Payment System: A trusting online payment system, which can avoid fraud, can facilitate the growth of the local e-commerce market. However, there is still no ONE dominating payment system, like Paypal, has established in China yet.

Advertising Market: Although the China online ad market is still tiny, it has a YoY revenue increase of 72.5% in 2008. This area is expected to grow rapidly in the near future. Before that, web companies have to educate local businesses about the true value of online advertising because a lot of them still don’t understand the importance of this new digital media. With a healthy ad market, it will encourage people to start more online ventures, create competition and provide better services.

Affiliate Programs: Affiliate program has a crucial role in the US Internet ecosystem. Affiliate Marketing not only help businesses to generate sales lead but also find and retain new customers. Each affiliate partners is an extra sales person working for the advertisers on the Internet. Most importantly, the advertisers only have to pay for the marketing costs if they got additional revenue from these programs. Right now, the affiliate marketing industry in China is still not well developed yet.

Niche and Targeted Market: Since the market in China is so big, it is really hard to compete with the local leaders directly. Startups should focus on a smaller targeted market in the beginning. Wealthier cities with higher education level, like Beijing, Shanghai and Guangzhou, will be good starting points. After all, the net population in these three cities is more than 49 million people, which is already larger than the whole South Korea online market!

The China Internet has its own unique culture and characteristics. Companies have to adapt these differences to fit in and don’t try to ignore them. It is a very difficult task to accomplish but if your company can rise to the challenge, this will be a once-in-a-lifetime opportunity for you to be succeed in the biggest market in the future world.

Additional Resources

China Internet Network Information Center (CNNIC)

Virtual Goods: the next big business model (TechCrunch)

For Chinese IM Portal Tencent, The Money Is In Micro-Transactions (TechCrunch)

China’s Internet User Base Is Growing Faster Than Mobile (Seeking Alpha)

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There is an article in NY Times today talking about how Las Vegas benefits from a booming Chinese/Asia economy and a weak US dollar.

The writer believes international tourism is increasing because the US dollar is on sale. Also, “wealthy Asian players are risking — and losing — money in record numbers inside the city’s most exclusive V.I.P. lounges”. I totally agree with this point as I always know that Chinese like to gambling (or lose money). Chinese love to dream about winning BIG in the lottery or casino. I am lucky that I don’t have this trait at this moment. When can we understand that most lottery winners will declare bankruptcy eventually?

I am really surprised The Venetian is adding another 3,200 suites in Las Vegas after building one of the biggest casinos in Macau. I wonder how well they have controlled their cost on these projects. The world economy is not very stable at this moment and the stock market in China is not healthy either. Many of them are just wealthy on paper. What will happen if the stock market crashes in China after Beijing Olympic?

Anyway, based on this example, we can understand the huge potential of the online gambling market in Asia. Online gambling is always one of the most profitable categories in the Internet. But, of course, it will take forever to get approval from the government. Let’s see who will be the first-mover in this market.

It is sad when you read something like this in a famous magazine. In the article, they rated the IPO of Blackstone Group as one of the Worst Business Deals of 2007.

Before the IPO, everyone in the industry knew that the founders of Blackstone wanted to cash out from the highest point of the private equity hype. But, apparently, the Chinese Government or the one who recommended this deal (Antony Leung) thought it was a good deal. It is hard to believe a government is chasing some trendy investment products… They really thought that Private Equity firms can leverage all their deals forever? Come on…

The Chinese government invested $3 billion in this deal and Blackstone’s stock price has already dropped around 35%. I believe this quote on TIME magazine summarize the whole incident very well: “A classic case of selling at the top to the suckers”… what can you say…Of course, you are only a loser if you don’t try it again. Hopefully, they have learned a very valuable lesson this time.

Just reading this news: “Tokyo Seeking a Top Niche in Global Finance” on New York Times recently.

The author talks about how Japanese took apart US products, like cars and TVs, to learn how to make them better. Now Japanese want to use the same formula to develop their financial industry.

To be honest, I bet many young folks in this generation think that cars and TVs are actually invented by the Japanese because the quality of their products are superior than those in US. It’s amazing that they are so successful that no one really cares about who the original pioneers of those products are. But, actually, Japanese is not the only one who has overtaken the forerunner in the hisotry of business. Microsoft Windows > Mac OS, Internet Explorer > Netscape, Google > Overture/Yahoo, Toyota > GM/ Ford…etc. According to the article, Japanese is not doing a good job on this project currently.

No matter what the outcome of this project is, I really admire the way they have approached this problem. At this moment, Chinese is pretty well known of copying stuffs (e.g. we can copy the whole Disneyland in Beijing). By the time they learn how to STEAL something from other countries, the country will become a real power house in the world. However, at this moment, I can’t see any promising companies doing that. For example, for Lenovo, besides changing the IBM logo of their laptop, what did they do to improve their products? They acquired the PC and laptop division of IBM because of the branding value but now they decided to change the logo back to Lenovo. I agree that they have to do this in the future but not right now because Lenovo is still not a household name in the US. Hopefully, they don’t have to change the logo back to IBM in the future…

I really like the following quote in the article, “if Japan did not open its markets, it will just be a small Asian country”. This can definitely apply to Hong Kong and China. After living in the US for 5 years, I realize DIVERSITY is one of the most important reasons contributing to their economical success. So if other countries want to duplicate the success of the United States, they better find out how to attract talent from all over the world. It’s not a secret. It’s a reality. If we can’t do that, no matter how hardworking we think we are, we have no way to emulate the US success.

I always have a question in my mind: “Why do so few Chinese companies reach the top of the global business world?” In my definition, a great global corporation should be able to do more than just making profits. “Profit is like oxygen, food, water, and blood for the body; they are not the POINT of life” (Jim Collins). A great global corporation should have a purpose beyond profit, for example, 3M (innovation), GE (improving the quality of life), Sony (to elevate the Japanese culture and national status), P&G (product excellence), IKEA (good design and function at low prices), Disney (to bring happiness)…etc.

I bet most Chinese big companies have their own ideology and core values in their business culture; however, they don’t have the ability to show them to the people around the world. In the list of “The 100 Top Brands 2006“, there are only 10 Asian companies on the list, 7 from Japan and 3 from Korea.

I never had any doubt that Chinese know how to earn money. If we take a look of “The World’s Billionaires list“, you can easily find many Chineses on the list. For instance, there are 17 Hong Kong billionaires but none of their businesses are really famous in the world. Although Li Ka Shing is the No.10 richest people, I wonder how many Americans have ever heard of his companies “Cheung Kong Holdings” and “Hutchison Whampoa”, which is on the Fortune Global 500 list. I understand the industries of his companies are not so common but still, if you said you are a global corporation, at least I should see them in the Fortune magazine from time to time, right? Some people, if they are lucky, may hear of “Li & Fung” and “Esprit” but you can’t compare them with companies like Toyota, Canon, Samsung, Sony…etc. Does that mean Chinese don’t have the ability to succeed in the global economy? This is probably not the reason as I have seen so many Chinese playing important roles in many US huge corporations. Then why?

Cultural Difference

One of the reasons for this phenomenon is that those companies place their main emphasis on profits. The primary objective of those Chinese companies is to help the owner and shareholders earn more money. That’s the instinct of Chinese: working hard and making more profits. Therefore, it’s very hard to find out the ideology of a Chinese company. Without that, we don’t know why that company exists in the first place. Some of the Chinese real estate companies said that their goal is to build a comfortable home for their customers. However, when you look at their brands or their promotional materials, you can never have that feeling. On the other hand, you can easily find out the objective and vision of a US company on magazines, newspapers or internet. For example, when you look at Disney, I am sure everyone will feel that the company wants to bring us happiness. Since many Chinese companies didn’t put much effort into preserving their core ideology, they usually can’t build up a good global brand. In other words, they cannot build up a motivating factor in the company besides money.

Hong Kong people always feel a great sense of pride for their entrepreneurial spirit because of their past success in 80’s and 90’s. Nonetheless, if you look at the age of those Hong Kong billionaires, you know that there are no new bloods following their successful path. Moreover, most of the Hong Kong big corporations are family-run businesses. Once the founder retires or past away, the successor usually cannot maintain the same good performance. In my opinion, only a brand with a great business culture can help a global company last forever.

After I read a Guy Kawasaki’s article “How to Kick Silicon Valley’s Butt“. I find out more reasons why Chinese companies didn’t succeed.

Education

I totally agree with Guy that engineers are very important to a country or a city success. They are the one who will really build new products and think about new ideas. Similar to Jack Welch, Guy Kawasaki also thinks that MBA is not very important as most of MBAs only “care about how to get interviews at multi-nationals and consulting firms”. In Hong Kong, the education system is really bad. It overemphasizes the result of exams and doesn’t care whether the students really learn the materials or not. I have never heard about anything related to innovation or creativity while I was studying in Hong Kong. But in the US, most teachers really care whether you understand the materials and they encourage innovative solutions. One of the professors of Jim Collins once said, “The best students are those who never quite believe their professors.” I bet many of the Chinese teachers won’t agree with that.

Immigration

Many Chinese are afraid of competition. When Hong Kong first introduced to import experts and skilled workers from Mainland China few years ago, many people are so afraid and worry that they will lose their jobs but not many people will think about how to improve so as to be more competitive in the new environment. In the US, when you apply for a job, you always compete against people from 50 states AND countries around the world. That’s really TRUE competition. The United States is so successful mostly because of immigration. In the past, people in the US are all immigrates. They brought in different points of view and new ideas to improve the whole society. The situation is the same in American businesses. Most US big corporations put great emphasis on diversity. It’s impossible for you to find a big corporation that only hires white employees. US corporations always want to hire the best and brightest, disregarding nationality. Competition and diversity constantly help you to improve. Why do you avoid them?

Heroes

Youngsters need role models. Like Guy said: Kids need heroes, so that they can say, “When I grow up, I am going to be the next Steve Jobs.” However, if you want to start your business in Hong Kong, the only role model is Li Ka Shing. It has been the same person in the past 20 or 30 years. Something is WRONG here. Do you agree? But in the US, you have all kinds of different role model, Bill Gates (richest), Steve Jobs (innovation), Warren Buffett (intelligent & thrifty), Larry Page & Sergey Brin (make money without doing evil)…etc. When you ask HK youngsters that why they want to be the next Li Ka Shing, they will just answer you, “em…because he is the richest guy in the country”…is it a good and healthy answer for the next generation?

A Different Look at Mistakes

Many famous people always said schools discourage you to make mistakes. But in Asia, the situation is even worse. Everyone dislikes mistakes, no matter they are parents, relatives, teachers, friends, schoolmates or bosses. Failure can create massive successes in the future but it seems not many Chineses have learned that lesson.

I just read the following in Fortune magazine:

A vice president recently committed an error that cost Google several million dollars. When she walked a cross the street to inform Larry Page, Google’s co-founder and unofficial thought leader, Page accepted her apology. And he said, “I am so glad you made this mistake. Because I want to run a company where we are moving too quickly and doing too much, not being too cautious and doing too little. If we don’t have any of these mistakes, we’re just not taking enough risk.”

If this happens in a Chinese company, I can say 90% you will be fired.

Dream and Vision

Many Chinese youngsters are afraid of dreaming. If you tell people you want to start a business, many people will just advise you to find a stable job. Or even if people already built up a business, many Chinese entrepreneurs will be satisfied to be a local small company. Why? I couldn’t find an absolute answer but I can say Chineses are good at finding excuses. They will find a million reasons to convice themselves not to do something but won’t spend any time to find out how they can achieve the goal. They will say that the local market size is so small or the China economy is just starting to grow, what do you expect? It is so sad that their vision is so narrow. They never look at the successful stories in other countries. I believe a lot of people never heard of any Finnish companies before Nokia thrives. So why none of the Chinese company can represent China, Taiwan or even Hong Kong? Also, many people don’t understand the power of a dream. They think that dream only appears in novels, comics and movies. This is probably due to lack of successful Heros in the local economy. Most of the Chinese companies on the Fortune Global 500 list are still government operating corporations. It’s almost impossible to find a business hero from all of them. Even you can find one. That hero can never say something like “I build this company because of my dream”…

Conclusion
If we look at the list of visionary companies in the book “Built to Last”, you will find that most of the visionary companies are on the list of the Global Top 100 Brands 2006. If Chinese wants to build a long lasting global company, branding is a must. We should not only learn the technical skills from other countries. We also have to learn their entrepreneurial spirit and managerial skills. I really think that Chinese don’t always have to be hard-working employees or managers. They can be a hard-working entrepreneur, too. Anyway, all the things I have talked about here are reasons for the past failure. We should look forward and not use them as excuses. The future of Chinese companies is still on our hands. The sky’s the limit!

After years of pressure from the U.S. government, China finally revalued its currency. Although Yuan only rises for 2%, creating a limited economic impact, this move can definitely ease the tension with the U.S., while these two countries are still having problems in the areas of intellectual property and textile production.

This news surprises me a lot. I am not surprised by the move but surprise that it happens so suddenly. But according to analysts at Citigroup, the Chinese government has always said that they would do this when no one was expecting it.

I believe Americans will love this “first baby step” because they always think that the Chinese undervalued currency makes Chinese goods look cheaper. Right now, even though the changed rate is not large, people are pleased that the Chinese government is finally willing to “change”. As a Chinese, I really think this is a huge step for this conservative country.

But how would this affect the world economy?

Good side

It makes the U.S. goods look better because they are cheaper now. Thus the U.S. manufacturers will be happy about this, as they always believe China is doing business unfairly. It will also stop the relationship between China and the US growing worse after the issue of import quotas on textile shipments this year.

Bad side

According to Andy Xie, the head of the Asia/Pacific economics team in Morgan Stanley, China’s export sector will suffer because of this move. Since most factories in China are working for other global companies, which have their own brands and distribution channels, the export sector has a very low profit margin. After China’s currency to become a strong currency, the profit of this industry will decrease.

Market Reaction

For Hong Kong citizen, this news didn’t cause a sensation. However, people feel more optimistic about Chinese companies now causing their stock prices raise.

Conclusion

At this moment, we still don’t know the effect of the appreciation of Yuan. It depends on how the market reacts and how the china government responses. Most experts don’t believe any big movement would happen within a short period under the control of the Chinese government. But, anyway, this move will be a very important step for China itself and a very good political gift before the China’s President visits the US in September.

References:

• China: Increasing Currency Flexibility (Andy Xie, Morgan Stanley)
• China revalues yuan, pleases Washington (Reuters)
• Move Strengthens White House Hand; Congress Vows Pressure (WSJ.com)
• FAQ: China’s Yuan Revaluation (WSJ.com)