Bold Predictions For China Tech Over Next Decade

July 19th, 2010

The past decade have seen the rise of many Chinese Internet companies which have become wildly successful, and which most in the west are only now beginning to notice. These are companies with names like C-Trip, Shanda, Tencent, Alibaba, Taobao, Baidu just to name a few.

For the consumer-facing companies who benefited from China’s rapidly growing consumer spending power, this growth was unrivaled. They rode two waves to maximum advantage: the popularity of tech among Silicon Valley venture capitalists and private equity firms, and with the Chinese government; and with the rise of China’s urban middle class. In contrast to many American firms which really did invest in significant technology, many of these companies had less in terms of technology; preferring instead to spend their investment money on hiring people and building a human salesforce. C-Trip, the popular travel site, was mainly a call center with a website when it went public; Baidu built up a network of resellers which it bought out when it went public, and Alibaba has an aggressive salesforce to work with Chinese SMEs.

Over the next ten years, there will be dramatic changes. Here are some of the trends I see:

  • Growth in the economy will slow gradually at first, then will become more dramatic. The Chinese economy’s period of rapid growth has already passed its peak.
  • Slower growth means that income gaps will widen in the society, along with opportunity gaps for individuals. From a marketing point of view, segmentation becomes more important. Qualified lead-generation businesses will become lucrative.
  • As the economy slows, targeted advertising will become more important for the Chinese Internet. Advertising-based Internet models which did not work well in China previously but worked well in the west will be re-introduced into China. Successful companies will adapt them to the realities of the China market without trying to force a western model.
  • Because of the slower economy, real technology adaption will take place in medium- , and even small-sized, firms. These will focus on working with very large datasets and data mining, and will focus on describing the topology of the Chinese Internet in a way so that other businesses can use this data.
  • Lower disk space and bandwidth costs will mean that even though Chinese companies adopt more technology, their costs will be lower.
  • From a venture capitalist’s and private equity investors point of view, the biggest cost will be the founding team. The best teams will be few and far between, and will be much sought after. Compared to Silicon Valley and the rest of the world, Chinese Internet startups will still be more likely to be led by individual entrepreneurs than by founding teams in the western mold. This is a culture thing.
  • The trend to Chinese government preference for RMB funds and local investors over US- and western-based venture capital and private equity funds will pick up pace. The more unfavorable the economic environment becomes, the more dramatic action the Chinese government will take. This will cause some tension with the US, but the Chinese government will be willing to take the hit because domestic concerns for social harmony take precedence.
  • Some western venture capital and private equity firms are studying the possibility of Chinese IPO exits. Don’t hold your breath waiting for these to happen; they are likely to be few and far between.
  • Hong Kong will gain some advantage because it policies are different from Beijing’s and like China, smart entrepreneurs will look for opportunities in the long tail instead of the large consumer market.

China’s economic development so far is based on two assumptions which will come under pressure over the next decade. The first assumption is that rapid urbanization is a good thing, since that will lead to the development of an urban middle class. The challenge over the next ten years will be how to find jobs for that urban middle class, whose living costs have gone dramatically higher, while the global macro climate has dramatically worsened? This is already showing up in the rise of the ant people, educated white collar workers who cannot make it up all the way to the top of the pyramid. For the first time in its history, the belief that education is the path to success in Chinese society will be challenged.

The second assumption will be a shortage of blue-collar factory workers, which has already begun to show up in southern China in the form of strikes and slowdowns at foreign-owned factories. As China’s working population dramatically ages over the next decade, this situation will worsen. Technology can, to some extent, ameliorate the labor shortage, but it cannot generate demand.

During the next decade, we will find out if China can become rich, on a sustained basis, before it grows old.

If the Chinese government does not succeed, then China will head into a prolonged economic slump after 2020, which will be much like Japan’s, and further adding to what is likely to become a prolonged global economic depression. In addition, the workforce which starts working after that year will have to deal with a worsening environment and dues, in the form of non-performing loans (NPLs), from spending in the high-growth years.

That is why this next decade is make-or-break for China.

Networked Authoritarianism in Perspective

June 20th, 2010

A short time ago, Rebecca MacKinnon wrote an excellent commentary on the Chinese government’s white paper on the Internet. In the government-published white paper, there was effusive praise for the Internet as a tool for social change under terms set by the party.

The important thing to understand is that the party will set the agenda of what is acceptable for Internet development, and the Internet will develop along those terms in China regardless of what others may say. From the party’s perspective, this is non-negotiable. Those who challenge this basic requirement, as did Google earlier this year, will be forced out, or will have to conform to those regulations.

The Internet white paper was the party’s way of saying:

  • Now we understand the Internet and its social ramifications
  • We do not believe it should be banned from China.
  • We believe that it should be controlled and managed in a direction which is suitable for China’s development under the leadership of the party.
  • We will not tolerate any deviance or interference, foreign or domestic, from these guidelines.

In the west, the Internet developed as a grass-roots tool of programmers and hackers, since it was based on several different technology protocols. For this reason, many in the west continue to think of the Internet as the ultimate anti-authoritarian tool. Those who look at the Internet from a political perspective and have their own agenda often emphasize this aspect of the Internet.

Before the Internet came to China, there was no unofficial media. This was why one of the first applications which took off in China was Tencent’s QQ, which was an instant messaging tool based on ICQ. Following this, games took off, led by Shanda. More recently, online video and twitter clones such as Sina’s Weibo have taken off.

It has taken some time for the party to realize that the Internet also offers an alternate, unofficial media, and is dangerous from the party perspective because it has the potential to let people spread information, and even more importantly, organize very quickly. It is this ability to organize quickly which represents the greatest threat to party rule, which is why huge amounts of funding have been directed to the online security apparatus. It is very clear that the party places special emphasis on real-time filtering of the Internet to prevent social disturbances from spreading quickly, and this is a large part of many companies’ operational costs.

From the party’s perspective, social change is necessary, and in some cases desirable, especially when it is directed at non-Chinese companies such as Foxconn and Honda. These high-profile, limited-scale events give the government negotiating leverage in dealing with non-Chinese entities, and directing social and economic policy. However, if they become widespread in society as a whole and spread out of control, there is a real danger to party authority. This is why all of these events have been small in scope, and have quickly died down after the issues were resolved.

This is a very sophisticated Chinese strategy which has the west, including individuals, investors and governments, over the barrel. On the one hand, many in the west hope that China will change and become a more open society. In fact, the party in China also knows that Chinese society must change and become more open, but it wants to set the terms and the agenda. Should investors go to China, which offers better returns than most other parts of the world, including the west? Or should they obey their consciences, and stay out of China? Looking at things now, I would say that most are more interested in their investment portfolios than their consciences.

As for those who exercise their consciences, there is another challenge. Are they for change from within the system, or do they support change from outside the system? Change from within the system means that there must be dialogue with the ruling party. History has shown us that for long stretches of time this dialogue will not bear fruit, and will be open to widespread criticism in the west, which is always demanding fast results and change in China. Or will the China critics push forward a hard line, that there can be no compromise with the party, and a new substitute must be found?

This lack of a viable substitute is what has prevented change in China. It’s easy to criticize the party on multiple issues; it’s much harder to find a better solution.

So far, I have not found anyone in the west take a clear stand on this crucial issue, except for Google, which moved its search engine operations to Hong Kong earlier this year.

“Exactly what is the attitude of the west with regard to change in China?”

This lack of open, honest dialogue on the key issue of meaningful strategy with China is what prevents many western companies from moving forward with China.

Unless western companies, the public and their governments reach some kind of consensus on what they support, and what their position on change in China is, there will always be misunderstandings and disappointments for the west in China.

What Happens To E-Commerce When Credit Cards Don’t Work?

October 9th, 2008

During the past several years in China, I have spent a good deal of my time explaining to Americans that e-commerce solutions do not have to depend on credit cards. In many parts of the world, such as Germany and Japan, and in China, e-commerce is about building payment gateways to different banks using debit cards or other devices which connect directly to bank accounts.

This was how Paypal started in the US. It is also how Alipay, Yeepay and other solutions work in China. Tencent, a company with a market cap of US$80B, based in Shenzhen uses a subscription payment system which also deducts payments directly from users’ accounts.

As the global Ponzi scheme which started as the subprime credit crisis continues to unwind, defaults on credit cards in the US will shoot up.

In the near future, credit will be given out much more sparingly. American society will very quickly change from a credit-based society to a cash-based society for most transactions. But there will be plenty of honest people who will need to buy, and sometimes they will want to buy online. If they don’t have access to credit and credit cards, how will they buy?

When you think about it in these terms, many of the payment solutions developed in China look more interesting, not just for China, but adapted to suit the needs of Americans who no longer have credit. Most likely these won’t be Chinese companies, but American e-commerce firms who want to develop something suited for Americans and the American market.

So which American company would come out with a non-credit card based payment solution? My guess is that it would be the leading e-commerce company, Amazon. I’d bet they are working on it right now.

There Is No China Market

September 1st, 2008

One of my biggest complaints about western observers of China is the overly used term “China market”. In fact, there is no China market, just as there is no European market. While there is a European Union, which many Europeans complain about as some kind of bloated legislative bureaucratic monster, it would be silly for any marketer to think that there is anything like a European market on the ground. After all, what are you talking about? Are you talking about the UK, Germany, Belgium, Spain or Italy? Even within these national markets, there are vast social and cultural differences within the same country.

While China is ruled as a single nation from Beijing, the political, regional, social and cultural differences within China are just as big as in Europe. While many western observers see Beijing as authoritarian, the truth is that Beijing has to play a huge juggling act among its own provinces. Every time the center asks for something from the provinces, it has to offer the provinces something in return. In this respect, China is just like the US, Russia and other big countries. There is endless bargaining, trading and swapping of favors, most of which does not occur publicly and is not common knowledge.

These local differences even extend to Internet businesses. The two biggest and most successful companies which dominate in CPC advertising and micropayments are both based in Shenzhen, and are not in Beijing and Shanghai. They are Tencent and Xunlei. Tencent is the leader in charging for micropayment-based subscription services and is the leader with its popular instant messaging client, QQ. Tencent is publicly listed in Hong Kong, and analysts love the company’s business model. Xunlei is a leader in P2P distribution of video, and inserts ads into video content before sending them on their way through its network. Although it is still private, it is already profitable, and Google has invested in the company.

If you go to Beijing, the media landscape is dominated by Sina, Sohu and Netease, China’s leading portals. I think of these companies as being like Web 1.0 national newspapers; they are like the Wall Street Journal and New York Times in China for the Internet generation. Because media content is a politically sensitive area in China, they need to be close to the government, which is why they are in Beijing.

And Shanghai is where most of the gaming companies are. While Beijing is home to serious media and sports, Shanghai is much more entertainment oriented. In the twenties and thirties, Shanghai was the home for China’s film industry; and the talent for entertainment had strong roots in Shanghai. After 1949, many of the producers, directors and actors moved to Hong Kong, but with China’s opening up, many have returned to their old base in Shanghai.

Think about it. Why is it the case that two of the leading micropayments companies in China are based in Shenzhen? I believe that being in Shenzhen forced these two companies to be much more consumer-oriented since fewer VCs ventured there. The paucity of easy access to capital forced them to be creative. In their early days, they were able to get favorable rents, cheaper employees and lower their other costs because of favorable terms from the Shenzhen municipal government. Micropayments really started in desperation as a payment system for poor people who had no credit in a nation without a national credit-ranking system who did not have credit cards. Without money from VCs, these companies were forced to innovate, and had to come up with a solution which got money from consumers.

Getting paid by your users; what a neat idea!

In China, many smart entrepreneurs go to second- and even third-tier cities so that they can get a local municipal government to support them. This is called finding a 靠山 or literally “a mountain to lean on”. After all, every city official wants to be able to say someday: “I helped set up Tencent (or Xunlei, or whatever.)” That would look good on their resume.

I’m always mystified that western-funded companies like to set up in Beijing and Shanghai; why don’t they strike out into other Chinese cities? Most of the time, I think it’s because their management are able to enjoy a level of living which is closer to what they would enjoy in the west. The problem is that because they are more like western cities than most Chinese cities, they give a skewed and sanitized view of what China is really like.

As a result, they unwittingly hand over the advantage to smart local Chinese companies. With the huge number of Internet companies in those two cities of Shanghai and Beijing, it’s almost impossible to find any Chinese government officials who can serve the role of mountains to lean on. And when you can find them, the cost of the mountains are much higher.

Excuse Me! How To Regulate Micropayments?

August 27th, 2008

In China, you know something has become big when the government starts worrying about how to regulate it. (Come to think of it, that’s the way it is with most governments, not just China’s.)

China’s central bank, the People’s Bank of China, has asked the Finance Department of People’s University in Beijing to come up with draft plans to regulate micropayments in China. (People’s University is traditionally the training ground for government officials.) Right now, micropayments occupy a gray area, which means that they are not technically legal or illegal. They just exist.

And they are unregulated. Right now, the Chinese government has no idea about how to regulate this market, which it obviously expects to grow substantially. Some have even grumbled that this new virtual economy will eventually grow in size to rival offline economies.

The most successful subscription micropayment based company in China is Tencent, which is based in Shenzhen and gets unofficial support from the Guangdong provincial government. (The Chinese have a saying: 天高皇帝远 which literally means “The skies are higher when the emperor is farther away.” Unfortunately for most western companies, they are not aware of and do not heed this very wise Chinese saying.) It has its own virtual currency, the QQ-Coin, which can be purchased one-way with Chinese yuan, but cannot be converted back into Chinese yuan. The company recently announced record earnings.

You get big, you get regulated.

Apple’s App Store Shows Early Financial Success for Devs

August 3rd, 2008

Several months ago I wrote about how Apple’s opening of the iPhone SDK and its App Store would create a whole new business ecosystem for application developers for that platform. Apple offers globally accessible hosting and payment clearance in return for a 30% cut of the app’s sales price.

Now, there are early signs that the strategy is paying off for some early application developers who have developed popular apps for the iPhone and iPod touch (which uses the same SDK as the iPhone) users. Eliza Block, who developed 2 Across, a word game for the iPhone platform, has reportedly cleared in the area of $2,000 a day according to this article.

The App Store is a new updated version of the shareware movement which took hold in the early 80s with the launch of the Apple Macintosh 128K. In those days, homebrew developers would develop games, apps and productivity tools which were distributed on floppy disks. (Remember those? If you do, you’re showing your age.) More often than not, these came with a message which went something like “If you liked this app, please show your appreciation by sending a contribution to this address.” More often than not, people just used the apps without sending money, although there were a few kind and generous souls who did.

Now, Apple has become the doorkeeper for these independent developers. There is no more reliance on the kindness of strangers; Apple takes care of global distribution and payment for new apps in return for 30% of the app’s sales price. For devs, the App Store is the perfect barometer for what’s hot and what’s not.

In contrast, Facebook and others have not been able to find the magic balance point between independent developers and their own corporate needs for revenue. When Facebook opened its platform to developers, it ended up enabling app developers to spam the FB audience, driving many away from Facebook. Now, with Facebook Connect, FB is trying to find that balance point.

Chinese social media companies are no better at finding the right balance between independent devs and their own need for revenue. While there has been talk about open systems in China, all of the competing business models in fact, are not open. Apple’s system is certainly not open. it’s just that Apple is willing to share in order to grow the pie.

Apple and Steve Jobs have successfully put themselves at the juncture of technology, business and hardware, and are willing to share a larger cut in order to drive up sales of a very attractive new hardware platform. With growing earnings from hardware sales, Apple can afford to be generous with devs, and is effectively subsidizing a new business ecosystem. By making some independent developers financially successful with App Store and getting that word out, they do something none of their competition have been able to do yet.

The question for Chinese companies such as Tencent is whether they are willing to use their high corporate earnings to subsidize their own independent developers’ business ecosystem as Apple has, and share some of the revenue in order to grow the pie for everyone? Or do they still think that they can own the whole pie? Tangos Chan says that they still believe that they can own the whole pie.

But Tangos believes that this will change in the future. In the meantime, more independent devs will gravitate to developing for the iPhone platform. It’s better to open up sooner while there is still interest in their platform because opening up later means that they will have to be that much more generous in order to attract developers away from Apple’s platform.

After all, that’s where the money is. And I’m sure that Steve loves how his competitors’ moves help his platform.

What more could he ask for?

Chinese Government’s CSRC To Fund Managers: No Bad News

July 29th, 2008

The Chinese government’s watchdog for equities, the CSRC (China Securities Regulatory Commission) has issued an edict to local fund managers that they are not to issue any pessimistic reports about equities during the Olympics in Beijing.

My question is “Why bother?”

The Shanghai market has been down 50% in the first half of the year, and what started out as a subprime mortgage problem in the US has now morphed into a banking problem with more US banks at risk.

In the meantime, Pony Ma, CEO of Tencent has joined in the chorus with Alibaba’s Jack Ma to talk about hard times ahead. The Chinese government has signaled that the rise of the yuan against the dollar will slow down, with a very public discussion in the People’s Daily. The signs of economic deceleration are everywhere.

When there is so much public discussion about upcoming economic challenges in the Chinese and western media, what good could possibly come from telling local fund managers not to say anything bad which might upset the Chinese equities markets? While many western observers of China see this as a sign of an authoritarian regime, for many Chinese, it looks more like desperation. Instead of allaying fears, it makes those who are still in the market fear the worst, and think that the government is trying to suppress even worse news, which in turn will fuel the rumor mill and make the market even more volatile.

In short, this looks more like a desperation move than a well-thought policy move. Instead of helping the market, it’s likely to make things worse.

This is what happens when politics interfere in the markets.

Is Twitter the American QQ?

April 7th, 2008

Unless you have been living under a rock for the past six months, you have probably heard of Twitter. Developed with Ruby on Rails, it has now hit the big time, with many companies offering client versions of Twitter, so that you don’t have to keep the Twitter web page open to record your deepest thoughts, which you can share with your community/ies.

Technically speaking, there is not a whole lot of difference between Twitter and many other IM clients, including Tencent’s QQ, the immensely popular Chinese IM client. If there is any difference, it is that Twitter makes it possible for dispersed communities to keep track of each others’ activities. In contrast, the IM clients are mainly Web 1.0 tools which enable people to find and contact each other to meet offline. QQ, for instance, is a great enabler for that popular activity which we shall call “dating” in China.

The difference between Twitter and the Web 1.0 IM clients is not so much in the technology, as in the way people handle relationships. Put simply, the lines between offline and online relationships are blurring, and in many cases, more people spend more time online than they do offline. For this reason, their online communities are gaining value, and in a few cases, are assuming primary value, while their offline relationships become secondary.

This was not the case for most of the Web 1.0 IM clients.

From the business perspective, this means that businesses will have to pay even more attention to what is going on online, as I have mentioned in my previous post.

In China, many people do not have email addresses, instead they rely on QQ ID numbers to identify each other. Walk into any Chinese working area (including Starbucks and any other area which provides free Wifi) and chances are you will see that almost every screen has a QQ or Windows IM client window open.

And they are using it for business, not just personal gossip.

So, the ultimate test of whether Twitter becomes the American QQ is whether American’s use it for business, not just social chatting.

If that happens, the American Internet will suddenly look a lot more like the Chinese Internet.

Understanding the Chinese Hockey Stick

February 3rd, 2008

baidu.jpeg

One of the things past experience has taught me that while it is possible to guess that some business will take off in China, it is almost impossible to tell when. The most common scenario is that for many years, a western business will devote its people and resources to making its business popular with Chinese, it will not show results. Frustrated, it will depart China with nothing to show for its hard work and investment. (This happened frequently in the eighties and nineties; now it is much more rare.)

This rule does not just apply to business; it even applies to Chinese government policy. For years, the Chinese government actively urged the Chinese people to travel more; it even increased the number of public holidays, creating the Golden Week holiday around the May Day holiday in the late 90s to get Chinese to travel more, and spend some of their savings. For years, the policy yielded no solid results.

But later it worked, and beginning this year, the May Golden Week holiday will be abolished. Put simply, it’s no longer needed. Chinese now travel freely, are willing to spend their savings, and the incentive is now no longer needed.

The same phenomenon occurred in the auto industry. For years, local Chinese automakers were unable to get Chinese to spend money on automobiles; most of their production went to taxis and to Chinese government ministries and officials. These habits changed suddenly with the SARS crisis in 2003. All of a sudden, Chinese were afraid to take public transport and started buying cars. And unlike in the west, they paid for their cars in cash.

This trend, which started in 2003, has continued to this day. Now, if a young man in China’s cities wants to get married, more and more young brides are expecting an apartment and car to go with their husband-to-be. Today, in Beijing, 1,000 new cars are being added daily to the city’s traffic woes.

This creates a phenomenon which I call the “Chinese hockey stick”. In simple terms, this means that “It is likely that a new business/service/product will take off in China, but it is hard to say when.” This can be endlessly frustrating for businesses which need to plan their expenditures on an annual or quarterly basis. When are they going to see some of their investment money come back? Country heads need to tell their head offices when the hockey stick will finally take off, and more often than not, it is very hard, if not impossible, to tell.

Part of my rationale for the Chinese hockey stick is that Chinese consumer spending patterns will track more closely to the spending habits of their Asian neighbors in South Korea, Japan, Hong Kong and Taiwan, than to the west, as Chinese society becomes more prosperous. If you want to understand how Chinese spending habits are likely to develop, take a close look at these places. You will learn a lot. In culture and language, these places are closer to how Chinese think, act and behave than the societies of North American and the EU.

Most frequently, the businesses which are able to time the rise of the hockey stick are local Chinese entrepreneurs. Unlike western companies which try to sell their foreign-designed products in China; these Chinese entrepreneurs stand in the wings, just waiting to swoop in at just the right moment. Unlike western corporations, these companies do not have the big budgets of western companies, but their knowledge of their countrymen’s thinking and spending habits more than compensates for this. This is why many leading Chinese Internet companies such as Tencent, Baidu and Sohu have been able to prosper, while their much larger and richer western competitors have been unable to gain traction.

With the dramatic growth of the Chinese consumer market in the past five years, you would think that western observers would learn to be quiet instead of sticking their necks out and betting against the spending power of Chinese consumers.

Apparently not.

David Wolf’s Silicon Hutong has pointed to an article by Donald dePalma in which he claims that China’s buyers account for only 1.1% of what he calls “online GDP”. Unfortunately, he does not explain his methodology as to how he gathered his numbers.

In the west, the Internet led to the creation of some whole new businesses, with Amazon and Google being the best examples. In China, many Internet companies are front-ends for established brick and mortar businesses. For many Chinese consumers, the Internet is like a shop window; when they buy, they still prefer to buy from a person in a store.

These fundamental differences in consumer spending habits make me question the value of even measuring something like “online GDP”. And as David Wolf alludes to, the eGDP is a static number; it does not capture or reflect trends. It is like trying to understand a movie storyline from a still photo.

That’s why I’ll stick with my analogy for the Chinese hockey stick, at least for the time being.

Understanding China’s Youth Through Tencent’s QQ: A New Must-Read Report

January 26th, 2008

qq.gif

As China becomes more developed and sophisticated, more westerners are coming to China to understand the reasons for its success. I don’t believe that the Chinese success can be fully ascribed to China’s rising wealth and development; a good deal also has to deal with how western countries have screwed up in their politics and policies.

In the kingdom of the blind, the one-eyed man is king. Right now, China is the one-eyed man.

Setting this aside, there are areas where China’s growth is remarkable.

In a recent blog posting, Henry Jenkins of MIT shows how much more willing Chinese youth are to live their lives out and share their behavior with complete strangers in a manner American youth are not yet willing to. Here are some of the statistics (mostly in percentages) of what he has observed:

# Almost five times as many Chinese as American respondents said they have a parallel life online (61 percent vs. 13 percent).

# More than twice as many Chinese respondents agreed that “I have experimented with how I present myself online” (69 percent vs. 28 percent of Americans).

# More than half the Chinese sample (51 percent) said they have adopted a completely different persona in some of their online interactions, compared with only 17 percent of Americans.

# Fewer than a third of Americans (30 percent) said the Internet helps their social life, but more than three-quarters of Chinese respondents (77 percent) agreed that “The Internet helps me make friends.”

# Chinese respondents were also more likely than Americans to say they have expressed personal opinions or written about themselves online (72 percent vs. 56 percent). And they have expressed themselves more strongly online than they generally do in person (52 percent vs. 43 percent of Americans).

# Chinese respondents were almost twice as likely as Americans to agree that it’s good to be able to express honest opinions anonymously online (79 percent vs. 42 percent) and to agree that online they are free to do and say things they would not do or say offline (73 percent vs. 32 percent).

Some of the differences can be accounted for because, until recently, Chinese played relatively few games using game consoles, an area American youth have long had free access and exposure to. Instead, they play games in the Internet cafe, which offers an online and offline social experience which has not existed until very recently on the Microsoft and Sony platforms, and which has been addressed very well with Nintendo’s Wii.

These statistics do not tell us much about China on their own; I frequently insist that if one is to really understand what makes China’s Internet different it is necessary to dig deeper and look at its development at least from the application level. If one were to make even the most cursory look at users in any Internet cafe in China, one would find that most if not all, would have an instant messaging (IM) window open and are chatting with their friends while they are playing an online game. Lately I have noticed that in the Starbucks I frequent near Guomao in Beijing (Starbucks in China often offers free WiFi, compared with the US which charges users a daily subscription through its partnership with T-Mobile; go figure), many office types often have an IM window open even when they are busily working through their Excel spreadsheets.

For this reason, I particularly welcome the recent report by Plus8Star on Tencent’s QQ which started as a simple IM client and has now metamorphosized into China’s largest online company, and which has more than than 270M users in China. Basically, it has become what AOL would have become if it had been able to pull everything off with its acquisition of ICQ in 1998. In fact, the first version of QQ was called OICQ, standing for “open ICQ”; in its early days the company approached AOL seeking to become its China partner; it was brushed off. Now the company is listed on the Hong Kong stock exchange and has a market cap of US$11.4B.

The report is available in a free downloadable PDF version; the full version costs US$3,000. The greatest value of this report for those coming into China is that it provides valuable context and answers the “how” and “why” China’s Internet has developed the way it has.

Too much of the time, western observers claim that China’s Internet has changed the way it has because of Chinese government control and policy; not enough is mentioned about the business reasons why local competitors have succeeded why western companies have failed. This reports does a good job of plugging that hole in most peoples’ knowledge.

The title of the report sums it up: “Inside QQ: Learning from China’s leading online community”. An especially helpful page is page 23 of the report “Why do global giants fail in China?”. There have been billions of dollars which have been expended, and mistakes have been repeated over and over again in their quest for western dominance of the Chinese consumer market. I’m amazed that it continues to this day. This page alone is worth the price of the whole report; just read it.

If you are a business person anxious to break into the Chinese consmer market, or are just interested in learning more about the Chinese Internet, this report is a must-read.