Baidu, Tencent and Alibaba
China is the largest Internet market—when will the Far Eastern giants start making inroads here?
Even if China's online economy has developed in the same or a similar way to the West, there are still interesting independent developments. It is quite possible that the Chinese Internet giants will expand into Western markets in the longer term. It is therefore useful to familiarize yourself with the most important players today.
We say Google, the Chinese say Baidu. The Chinese search engine giant actually resembles its Western counterpart in many ways: in addition to search, it offers numerous other products, including a search service for MP3 music files and images as well as a weblog and encyclopaedia service. Like Google, Baidu was founded by two talented young entrepreneurs who had previously worked in the USA. Robin Li had already developed the search engine RankDex for the business news service IDD in the mid-1990s and used similar procedures to evaluate websites as the two Google founders did with their algorithm.
Both companies have comparable revenue models in online advertising, which can be booked for specific search terms and integrated into suitable search queries or on partner sites. Baidu advertises its offering with the argument that it can reach 95 percent of all Chinese Internet users. While Google is strongly driven by an engineering mindset, Baidu's focus is on product managers who are primarily oriented towards customer benefits. For the full year 2010, Baidu reported a turnover of almost 2 billion dollars, which corresponds to an increase of 78 percent compared to the previous year. Operating profit even multiplied by 147 percent to just under 600 million dollars.
Baidu has grown primarily because Google withdrew to Hong Kong in spring 2010 in order to avoid the requirements of the Chinese authorities, which demand that hits critical of the state be filtered out. As a result, Google's market share fell from 30 percent in 2009 to 26 percent, and it is expected that the Americans will continue to lose ground in China. However, Baidu is not happy about Google's withdrawal: not only are there accusations of abuse of its dominant position in the market, but a new competitor, Panguso, entered the scene in February. This search engine is a joint venture between the two state-owned companies China Mobile and the Xinhua news agency, although it remains to be seen how this offering will be received by the public.
Only those who know Tencent QQ can understand the Chinese Internet market. Unlike Baidu, Tencent is a purely Chinese phenomenon, the largest Internet company in China and the third largest in the world behind Google and Amazon. Founded in 1998, Tencent started out as an instant messaging service, and this feature remains important with its 636 million active users worldwide (as of September 2010). Since then, other services such as a comprehensive news portal, forums and chat rooms, blogs and micro-blogs, dating and, above all, games have been added. It is worth noting that Tencent is only financed to a very small extent (8 percent of revenue in 2009) by advertising. This is because Tencent is a master in the sale of additional services: more than three quarters of its income is generated on the Internet and the remaining 15 percent in the mobile sector.
This makes the Chinese a role model for online services in the West, which have gone as far as advertising revenue and no further in their search for revenue models. However, not all of the recipes for success from the East will be easy to adopt: Will virtual clothes and accessories for your own avatar (visual representative in online games or chat, for example) become a big hit here too? After all, the business with virtual goods is also booming in other Asian markets, as the examples of the two largest social networks in Japan, Gree and DeNA, show. Consequently, Tencent has introduced its own virtual currency, the Q coin. This is so popular that it has long since been accepted for payment in other online stores, which is why the Chinese central bank has raised concerns. But Tencent is also doing business in the real world thanks to the high profile of its QQ brand: merchandising articles such as bags, watches, clothes and penguins are sold as brand mascots in over 200 Q-Gen stores. Tencent has been expanding into foreign markets since 2008, creating an international version of its messaging portal and working with partners in Asia (India, Vietnam) and the USA (with America Online). Just like Facebook, the American competitor that cannot be reached in China, Tencent wants to open up its platform to third parties for the distribution of apps in future, as Tencent CEO Martin Lau recently revealed in an interview. Like Facebook, he also spoke of relying on user-specific (targeted) advertising in the future, which is not yet very well developed in China.
Blogging platforms are widespread in China and are offered by all the major portals, including Tencent, Sina, NetEase and Sohu. As access to Twitter is blocked in China, the country has its own counterparts, first and foremost the monster portal Sina with its Weibo service, which currently has over 100 million registered users. Recently, the Chinese have trumped their Western counterparts and added an instant messaging service as well as voicemail tweets and direct video uploads, further contemporary multimedia features. A public trial was also launched for location-based services with check-in functions. In promoting its services, Sina relies heavily on celebrities who are offered special accounts.
The eCommerce market in China is particularly hotly contested. Dangdang is the first, if not dominant, B2C player, founded in 1999 and one of the first websites to be financed by venture capital. Amazon took over Joyo.com in 2004, and 360buy.com came onto the scene at the same time. In the book market in particular, these three big players are engaged in a veritable price war: in the battle for market share, prices are being undercut without restraint. There is still no end in sight, as the war chests continue to be filled: Amazon is supported by its American parent company and Dangdang successfully went public on the New York Stock Exchange last December, while the American retail group Wal-Mart recently invested USD 500 million in 360buy.com and is also expected to go public.
Investors' optimism and companies' willingness to fight is understandable when one considers the forecasts of Credit Suisse, for example, which predicted a quadrupling of the Chinese e-commerce market by 2015 in a study published in January of this year. This market is then expected to be worth 311 billion dollars annually and therefore probably larger than the comparable US market. However, the lion's share of these transactions will continue to take place on the C2C portal Taobao, which currently handles 80 percent of Chinese e-commerce trade. Instead of setting up their own online stores, a number of major brands such as Procter & Gamble, Motorola, Nike and Adidas have preferred to sell their products on Taobao, which is particularly popular among young Chinese. Unlike its western counterpart, eBay, the vast majority of goods on Taobao are offered at fixed prices and are not auctioned. However, a special feature of Taobao comes into play here: buyers and sellers often communicate before the purchase via the site's built-in chat program called Ali¬WangWang. This is how customers are advised and prices negotiated. Payments are processed via the site's own online payment system AliPay. The project to bring buyers together in a dedicated social network to boost business with word-of-mouth promotions and targeted advertising is worthy of note. This huge online bazaar belongs to the realm of the billionaire and former teacher Jack Ma, who is often described as charismatic and elfish and who also owns the B2B platform Aliba¬ba.com, through which many export transactions are processed.
Background
At the end of last year, there were 457 million Internet users in China, an increase of 73.3 million within a year. Internet penetration is now 34.3% or 5.4% higher than in the previous year. In view of these growth rates, it is expected that a further 365 million Chinese will be online by the end of 2015. According to the Chinese Internet statistics published every six months, the number of mobile Internet users rose by 69.3 million to 303 million last year.
This makes China a very lucrative market for internet companies, but one that is heavily closed off due to government controls. This is one of the reasons why an independent online industry has been able to emerge, dominated by the three heavyweights Baidu, Tencent and Alibaba. If Twitter and Facebook had not been excluded from the market, it would hardly have been possible for one-hundred companies to develop to the extent that many of them are now successfully listed on the US stock exchange. Although they will still be able to grow extensively in their own markets, expansion abroad seems obvious, at least in the medium and longer term. Yu Yongfu, CEO of UC Technology, manufacturer of a web browser for mobile devices, recently put it in a nutshell: "If the USA is the center of the computer-based Internet, China will become the world leader in mobile Internet."








