The China Vortex

I have been visiting Shenzhen for the past few days. The last time I was in Shenzhen was in 1999-2001, when the Internet bubble peaked.

This time around, the city has changed considerably since the last time I spent time here. Parts of the city are not recognizable, all in the good sense. There are many more skyscrapers than before, but somehow the city seems more refined and green than Shanghai and Beijing. When I was last here, the city had a grimy, grungy feel about it; no more. It takes pride in being the garden city of China, and in large parts, it is. The downtown area is clean, there are new and very modern shopping malls, and the people seem happy.

I have ridden several times on the Shenzhen Metro, it is very clean and modern. There is one line which roughly runs east-west; another line is under construction. Before, when I lived in Shenzhen, I would cross to Hong Kong every weekend. Now, I feel no need to do so; I can get everything I need in the city. Last night, I went out with a friend to a very nice and clean Japanese restaurant, owned by a Japanese, which had excellent fresh sashimi.

Real estate is still substantially cheaper, and many Hong Kong residents now keep their homes in Shenzhen, crossing the border every day when they go to work. Their children also go to Hong Kong schools, so when crossing customs in the morning and afternoon, there are often large groups of schoolchildren.

I went to a Starbucks once (there are many in Shenzhen; they first opened in the city in 2002), and in section of the cafe, I counted 25 persons and eight notebook computers in use. (In China, Starbucks offers free Wifi service.) If you work out the ratio, that means there were nearly three persons to every notebook computer in use, which is a very high ratio. I have not seen ratios this high in Shanghai, Beijing, or for that matter, in the US which is increasingly falling behind in many Internet usage statistics.

I have not checked any of the Internet cafes here, nor do I plan to. My own guess is that most Beijingers access the Internet from their offices, and the poor or 民工 access the Internet from Beijing’s low-priced Internet cafes since they cannot afford it at home. People in Shenzhen, for the most part, are comparatively well off since the city, which now has a population of 7-14 million mainly comes from other regions of China. (Over the years, the hukou system of individual registration has fallen into disuse, which is why the city government is no longer able to keep track of population.) If their usage of notebook computers in Starbucks is any indicator, they are also much more mobile.

Shenzhen is surrounded with factory satellite towns which employ many workers; most of these factories also supply food, housing and entertainment facilities to their employees. I’m sure that many of these factory workers now have broadband Internet access from their dormitory facilities.

Just to give you some indication of how common broadband is now, I am staying in a Home Inn (a Chinese chain of moderately-priced motels) which charge about US$25 a night. Broadband access is provided free of charge.

Shenzhen now has a very large and modern port and container facility which rivals Hong Kong in capacity.

I cannot help being impressed with Shenzhen’s and China’s development as a whole. In the late 70s, just when China’s reforms were starting and Shenzhen was just a fishing village, many refugees would try to swim across Mirs Bay to seek freedom in Hong Kong. Many of them drowned, and their bodies were washed up on the shores of Hong Kong, or Hong Kong held offshore islands.

Those days are gone.

The women in Shenzhen are fashionably dressed and wear makeup, and are more conscious of their looks than Beijingers. They also smile more readily, and look less self-conscious when they do. There is a lot of truth in the saying 天高皇帝远 (”The skies are higher when the emperor is far away”)

Definitely China is making progress. If the expressions on peoples’ faces are any indicator, China has come a long way.

Technorati Tags: Beijing, cafes, China, Hongkong, internet, port, shanghai, Shenzhen, Starbucks, wifi

In a previous article, I talked at some length about Jeremiah Owyang’s review of the current Internet situation in China, and what many Internet cafes are really like, and what is wrong with the current data about Internet usage in China.

In the article, I questioned the wisdom of Jeremiah’s visit only to Hong Kong and not to China. Specifically, I said:

I questioned the wisdom of going to Hong Kong to cover the Chinese Internet; to me it seemed like visiting Toronto to understand the UK market.

This has seemed to cause some consternation on Jeremiah’s part, who responded in on his blog:

I really enjoyed Paul’s additional commentary, although he questions why I would visit HK to cover mainland. Most of the people I talked to were from mainland, served mainland, or had their users in mainland, it was all tied.

A little clarification on my part: meeting with CEOs, analysts, entrepreneurs, investors, etc in HK is fine methodology for a 30K foot view, but it doesn’t work for me. Maybe I’m revealing my product management background here, but I actually like to see how users use a product, and extrapolate information and insights from that. That can only be done in on the ground in China.

CEOs, analysts, entrepreneurs and investors are all very bright and intelligent people full of strong opinions about what works and doesn’t work in China. Most of the time, they also have agendas, products and services to sell. This does not mean they are not telling the truth; they just want to present their companies in the best possible light. That is part of their job description.

It’s just that I think that it is my duty to tell my readers that there is more to China than meets the eye, and provide my view, not necessarily someone else’s spin. Sometimes it takes me time to digest the information and form my own conclusions; that is why blog only once or twice a week. Quality over quantity is what I strive for.

And that is why I went to some length to explain what the Chinese Internet cafes I have seen are really like. You see, I actually believe that it is important to walk into these Internet cafes and see what people are doing. To me, this is crucially important; this is what it’s all about. This is real spin-free information, which is usually hard to come by.

It gives me a feel for the environment in which people are living and operating with on the Internet in China.

I feel that this is what is missing from Jeremiah’s analysis by not visiting China, and that is what I tried to address in my posting. Hong Kong was ruled as a British crown colony from 1842 to 1997; Internet usage patterns there are vastly different from in China. Even within China there are vast differences based on geography and income.

I really thirst for that kind of boots on the ground analysis, which is why I have taken upon it to do it myself to present my readers with this kind of information. Economics is based on supply and demand, and if more people demand this kind of deeper analysis and are willing to pay for it, maybe, just maybe, the analysts, reporters, CEOs and ad agencies will provide it.

And to Jeremiah I would say: “Next time you come to China, let me know, and I’ll take you to visit some Internet cafes and we can talk about what people are really doing on the Internet. Then you can draw your own conclusions for your readers.”

UPDATE:
In this new posting from Ogilvy China Digital Watch, Kaiser Kuo quotes:

He also laments that marketing people never really interface with the people who understand the customers best: The employees, the recommenders, the distributors, the distributors, the influencers, tech support people, bloggers and the like. “We outsource our tech support to India.

I would say that this is the same problem with analysis of the Internet, especially the Chinese Internet. Sure you can get great sound bites, neat spreadsheets and all, but if it’s too far removed from the users, it is ultimately useless information. And unless it is grounded by checking with users, there is the very real danger that it will become dangerously wrong and irrelevant.

This is what is wrong with so much information about the China market, a subject I talked about in this article.

Do you feel the same way? Please feel free to comment below.

ANOTHER UPDATE:

The best stats and most useful quantitative and qualitative information come from people who have lived in China for some time. Kaiser Kuo and William Bao Bean are doing such an excellent job that I’m just going to link to them and their coverage of Adtech Beijing.

Kaiser has also added some useful commentary and perspective on my read of China’s Internet cafes.

TIP:If you have a serious interest in Chinese online media, you should subscribe to Ogilvy China Digital Watch.

Technorati Tags: analysis, cafes, China, internet, jeremiah-owyang, usage

In my previous post, I talked about the dark side of China’s Internet cafes. I was surprised at how quickly I got responses to the posting; there were more than six comments in less than two hours.

Now, I would like to talk about a business opportunity in China’s Internet cafes. One of the biggest problems with Internet cafes is the uneven quality of the management; most are terribly managed, some are managed pretty well. Overall, the well-managed cafes suffer from the poor image problem associated with the whole industry. In a comment following my post, Fons Tuinstra says that the numbers of people going to Internet cafes are falling sharply, citing CNNIC figures. I suspect that this is because of a combination of factors:

• Educated Chinese families don’t like them because of their bad reputation
• With laptop computer prices coming down to 7,000-8,000 yuan for a fully equipped notebook, prices are coming with the range of most urban Chinese
• With monthly DSL prices between 100-200 yuan; broadband access is now affordable

In spite of all this, the Internet cafe still has attraction as a social and recreation area for young people who are looking for places to meet which don’t cost too much.

So why hasn’t someone come in with a roll-up strategy, buying up the good Internet cafes, offering professional management and a franchise package, and turning the whole thing into a franchise like Starbucks, McDonald’s or KFC? After all, that is how Ray Kroc started with McDonald’s in the 50s in the US.

These Internet cafes should offer clean well-lit areas which are frequently cleaned, fresh food and drink, clean bathrooms and a good overall experience. Just think of what could be done if a Chinese Internet cafe experience could be as good as an Apple store! Yes, prices would be higher but it would attract a much better demographic group. And a better demographic would make for a better advertising market.

Events could be planned for the stores educating people about online buying and selling, and to demo new products and services. Game contests could be held in a much better environment than are available now.

If I were an advertiser, I would really love to reach this demographic group. They would be upwardly mobile, not like the permanent urban underclass we now see in so many Internet cafes.

In short, make the Internet cafe a place where Chinese parents would not be ashamed of letting their child go to, and a place where the child could tell his parents he is at, without having to lie or admit to shamefully.

This would help to clean up the image of an industry which badly needs to improve its image. It would even make sense for an advertising company to get into it, as the advertising opportunities in a wholesome Internet cafe franchise are huge. I can think of several companies which should seriously consider doing an Internet cafe franchise in China:

• Focus Media
• Baidu
• Tencent
• Google
• Starbucks
• McDonald’s
• KFC

And now, here’s the company I’d really like to see do a Internet cafe franchise in China because it really knows about making cool stuff and it understands lifestyle marketing. If they did it, and did it right, they would own the Chinese Internet cafe experience.

Now wouldn’t that be something! You saw it here first.

I can always wish…

Technorati Tags: advertising, Apple, baidu, business, cafes, China, Chinese, data, demographic, game, google, internet, management, market, marketing, mobile, online, tencent, US, usa, yuan

Jeremiah Owyang has published a good report for beginners who know nothing about China’s internet market. I questioned the wisdom of going to Hong Kong to cover the Chinese Internet; to me it seemed like visiting Toronto to understand the UK market. However, he does have some good takeaways for people just starting out in China and who do not read,write or speak Chinese.

I am going to dig a little deeper. Christine Lu of the China Business Network has mentioned to me that her audience is mainly for new people just starting out with China; I’m going to dig deeper and point out some real issues behind the current numbers tossed about re China. Tangos Chen has an excellent follow-up posting which is well worth a read.

All the reports which have so far covered China have been based on impressing non-Chinese with the huge numbers of China’s online population. This provides a very incomplete picture of China’s Internet users, especially those who go to Internet cafes. Most of these people go to play games and communicate with each other using QQ.

An awful lot is posted about China’s large online gaming population accessing the games from China’s Internet cafes. I suspect that a lot of the people who write these articles have never even been inside one in China. I would like to tell you about my first-hand experiences.

I am now in Beijing, and I have been to several Internet cafes here. Several months ago I also went to several in Shanghai.

Let me tell you something about these Internet cafes and their users. For the most part, these Internet cafes are shitholes and firetraps. And the people who go there are young, single, low-income males. They do not bring their dates there. The places are smoky, dingy and poorly lit. They sell some basic food and beverages in the front, and also charge people a fee to sleep overnight on the dirty, bug-infested, stained futons which pass for couches. If you want a truly terrible experience, visit their bathrooms.

These are dirty decrepit places in every way; they are just filthy. If fire safety laws were actually enforced, they would be shut down. And the people who spend their day playing games are, in my opinion, China’s new urban permanent underclass. Why do they go to Internet cafes? Because most of them are from outside Beijing and Shanghai, and the Internet cafe is the cheapest place to go to. They can get by spending 20-30 yuan (US$5-6) a day, including food, drink, games and a place to sleep.

The characters are sad characters; if they were living in England 150 years ago, Charles Dickens would be writing about them. From the Chinese perspective, although games and the Internet are highly addictive, Internet cafes serve a useful purpose. Otherwise these people would be on the street, unemployed. The Internet cafe today in China is what gin and beer was to England’s working class in the mid-19th century when Karl Marx was writing Das Kapital about the evils of class exploitation.

Now, if you were an advertiser, would you want to reach this audience? It all depends.

If these people were working their way up the social ladder, got better jobs, made more money and spent less time playing games and socializing at the Internet cafes, then yes, there would be some value in reaching this audience. On the other hand, if these people are a permanent underclass who have very little money to spend, then the answer would have to be no.

I have made an interesting observation from a personal experience. Earlier this year I visited Chongqing for the first time, and went to an Internet cafe downtown. It was on the ground floor of a an office building (unlike in Beijing and Shanghai, which are in upper floors or basements). It had windows you could actually see in and out of. It was clean, had fresh air, and carried fresh food and drinks. Unlike Beijing and Shanghai, it was divided into smoking and non-smoking areas. The highest fee for a booth was 4 yuan an hour, and there were several people paying that amount at 11AM in the morning, when I visited. I could tell that it was cleaned and maintained on a daily basis. I would not have been ashamed of going into this Internet cafe, unlike in Beijing or Shanghai.

For this reason, I am much more impressed with Internet cafe users in Chongqing than I am with Internet cafe users in Beijing and Shanghai, which are basically awful.

The trouble with the reports about China’s market is that they don’t go deep enough; they just present very basic number information, enough to make the marketing and bizdev types get excited about China, but not enough to ask hard questions which provide insights into user behavior, so that advertisers can really take a deeper look at Chinese audiences, because there is not one; there are many.

Here are some questions I would ask and like to see answered in a report, and advertisers contemplating targeting China’s Internet cafe users should also ask:

• Please explain your methodology for data gathering.
• What cities and provinces do you gather data from?
• How do you scrub your data to make sure that it is as close to factually correct as possible?
• What is their average income divided by city/region/provinces?
• What kind of jobs do they have divided by city/region/provinces?
• How many hours do they spend online per day divided by city/region/provinces?
• Can you show me the amount of churn of Internet users over time? (This is one of those rare situations where high churn is a good thing; you want these people to make their way up the social ladder.)
• What games and activities do they spend their time on?
• Define the difference between hardcore and casual gamers over time.
• How much money do they spend every month divided by city/region/province?
• What do they spend their money on, divided by city/region/province?

I always find this kind of information much more useful than the “Wow, China has a lot of people!” level of coverage; I find this information, for example, very helpful in understanding the Chinese mobile market and its users better.

I’d like it if the publishers of Ogilvy China Digital Watch
or CiC or some other agency could commission a report like this, and make it widely available on the Internet.

I suspect that the hard-core gamers are basically a bunch of losers, but the casual gaming market has good potential for advertisers.

It is time for advertising departments to start slicing and dicing the Chinese audience on demographic and psychographic profiles, and finding out the education/economic profiles of different audiences. Forget the big numbers about China; let’s get our hands dirty and start looking for insightful information which will really help advertisers, consultants and everyone else.

Enough China hype already; it’s time to dig deeper and get down to business and start making money for our clients.

Technorati Tags: advertising, Beijing, bizdev, cafes, China, demographic, gaming, internet, jeremiah-owyang, marketing, mobile, profiles, psychographics, qq, shanghai