China: The Web's next frontier?

From the stately courtyards of the Forbidden City to the time-worn steps of the Great Wall, the buzzing and chirping of mobile telephones leave little doubt that the wireless craze is growing rapidly in the world's most populous country.

U.S. businesses seeking new areas for e-commerce growth may be compelled to explore the Chinese market, where mobile phone usage is soaring and Internet connections are also on the rise among the nation's 1.3 billion residents.

But right now, companies will find that mobile commerce is almost negligible and that standard e-commerce is just getting started in China, where cultural, logistical, regulatory, technical and other challenges mean they can't expect to do business the same way they do at home.

How soon e-commerce will ramp up in the wired and wireless worlds remained an open question at last week's Online China 2001 conference here, sponsored by the Singapore office of Worldwide Business Research Ltd. Predictions ranged from one to three years.

"The biggest problem is basically payment and delivery," said Stefan Kohlmeyer, managing director at BOL China, the online arm of Shanghai Bertelsmann. Setting up a mail-order book club in 1997 for a customer base unaccustomed to buying goods unseen and untouched prepared BOL for the difficulties ahead, he said.

Credit cards aren't a prevalent means of payment in China. Debit cards are used, but they're not the preferred choice. "The majority still prefer to buy anything with cash," said Vivian Zhao, e-business director at GE (China) Co. in Beijing. "That's the traditional way."

So BOL recognized that it had to adapt. For deliveries of online purchases, which it began offering in December, BOL primarily uses the same cash-on-delivery network it set up for its book club in seven major Chinese cities.

"It's not cost-effective, but it's very customer-friendly and, of course, the customer is coming first," said Kohlmeyer.

Sohu.com, one of the most popular information portals in China, has been finding that its delivery system can work from a financial standpoint, at least on a limited scale. The Beijing-based firm started selling the hottest books and CDs on a trial basis this year, targeting Internet users in Beijing who are under 30 years of age, according to company officials.

So far, only 5 percent of purchases have been made using debit cards. Instead, 35 percent of customers pay for their packages at the post office upon arrival, and 60 percent get their deliveries by bicycle couriers, who deliver anywhere in Beijing for about 50 cents (U.S.) per trip.

"It's very economical and very efficient in terms of the traffic," said Derek Palaschuk, a transplanted Canadian and Sohu's vice president of finance.

The greater challenge confronting his firm is building an e-commerce platform for its storefront and order processing. Palaschuk said Sohu develops most of its own software, since packaged applications typically aren't in Chinese and service can be a problem.

"There isn't a local company that we can call on to provide us with this world-class service you would have in the U.S.," Palaschuk said. "Outsourcing is very big in the U.S., but it's not something you can really rely on in China. You can outsource with somebody like Oracle, but then it's just so expensive."

The business-to-business space also has unique challenges. Porter Erisman, vice president of marketing at Alibaba.com Corp. in Shanghai, a business-to-business site that attempts to match up small and medium-size buyers and sellers, said several major software vendors asked his company to resell their business-to-business software.

"We had our team evaluate the technology, and we actually decided there's not a market for this technology in China," Erisman said.

One reason is that member companies' back-end systems aren't developed enough to effectively use the business-to-business software, he said. "Another is that the enterprises are managed differently," Erisman added. "You'd have to actually reorganize the company in order to use the software that's been developed overseas."

Lu Benfu, director of the China Internet research and development center at the Chinese Academy of Social Sciences, said the lack of information systems, such as enterprise resource planning software, within Chinese companies is a roadblock for business-to-business commerce. As a result, business-to-business marketplaces are at an infant stage, he said.

That's no surprise, said Michael Mingang Xu, executive director of business development at eSamsung China Co., a corporate venture capital firm in the e-commerce sector.

During his tenure with a major U.S. IT consultancy, said Xu, he learned that most Chinese companies, including large multinationals, spend less than 1 percent per year on IT. State-owned enterprises spend even less, he said.

"So do you expect [business-to-business] e-commerce?" Xu said. "I don't think so." Instead, he thinks the best investment is in broadband companies.

Before B2B transactions can take off, Chinese companies will have to focus on improving their internal systems something that Kohlmeyer said he has been pleasantly surprised to see happen with his Chinese business partners, particularly as they prepare for China's entry into the World Trade Organization.

"I'm quite optimistic about the future," he said. "I'm not dreaming and saying there will be a huge, huge development from one year to another. But all signals are that everything is going in the right direction."

M-Commerce Awaits Killer Apps

Mobile phones may be quickly taking hold in China. Mobile commerce is another matter.

As has been the case in much of the world, the sale of goods and services through wireless devices has been slow to develop in China, said various speakers at last week's Online China 2001 conference.

"Some people make m-commerce the next big thing. It isn't," said Paul Cheung, senior vice president of technology at Pacific Century CyberWorks Ltd. in Hong Kong. "In China, I don't expect m-commerce to be there very quickly in terms of being a profitable business."

Yet some analysts said it's just a matter of finding killer applications that will spark a change in consumer behavior.

"I think Japan could be a reference point," said Hai Wu, an engagement manager at McKinsey & Co. in Beijing, pointing to the NTT DoCoMo Inc. iMode services that have caught the fancy of young Japanese mobile users.

Wu noted that the enthusiasm with which the Chinese have embraced mobile phones has exceeded various forecasts. He said estimates that the mobile subscriber base will hit 250 million to 300 million in 2005, up from 68 million in 2000, may be conservative.

"I don't think we'll see meaningful m-commerce for the next two years," said Duncan Clark, managing director of BDA China Ltd. Internet consultancy in Beijing. "But then we get into the third-generation-style phones, which are higher speed and offer more rich content. Then I think you start to see an interesting development."

One likely way to overcome the lack of a payment infrastructure will be to have the major wireless providers, China Mobile Communications Corp. and China Unicom Ltd., partner with the content or service providers and bill customers for services as part of their monthly statements.

But "this would assume that the mobile operators have very good, robust billing systems in place," said Clark. For China Mobile, 31 provinces have their own billing systems, which aren't integrated, he said.

Not Buying

Hong Kong-based NetValue Ltd. measures home Internet users' behavior in China's four major cities: Beijing, Shanghai, Guangzhou and Shenzhen.

- During March, 19.4 percent of homes were connected. Those users spent 54.9 percent of their time online Web browsing and 45.1 percent of their time on e-mail, instant messaging, chat, games, audio/video or file transfers.

- While 58.5 percent of the users visited an e-commerce site, just 6.7 percent entered into a secure connection that would suggest transaction activity.

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