A Rush into China?

When I lived in Hong Kong in the early-1990s, it was teeming with North American and European executives on their way to explore business opportunities in China, which had just embraced “social capitalism”. Everywhere you turned, there was a CEO or a senior V.P. bullishly talking about the potential size of the Chinese market, and how if “we could just get 1%….”.

Today, I wonder if the same thing is about to happen when it comes to China’s controversial Web market. With 172 million people online, China has, by far, the world’s largest Internet population so any company looking for a huge potential market will find it difficult to resist.

That said, the number of online players establishing footholds in China has been, at best, modest. Google has a high-profile stake in Baidu and Yahoo owns a chunk of Alibaba, but it’s not like there’s a flurry of investment activity happening.

So, it’s interesting to see Facebook apparently make an $85-million bid to buy Zhanzuo.com, a Chinese social network with seven million users. Given how difficult it can be to operate in China, you might have figured Facebook would have gone deeper into existing markets before establishing a foothold in China. Then again, if Facebook could get “1% of the Chinese market….”

While ripe with potential, China’s online market is also chock-a-block with risk. This is a country that makes no bones about have a giant firewall to block content and keep content from leaving, it conducts active surveillance on Internet users and restricts online activity, and has no problems about closing data centers that knock thousands of Web sites off-line.

While foreign companies have been mostly on the outside looking in, a number of domestic companies (many of them with relatively low profiles outside the country) have become major players. This includes Baidu (search), Sina (portal), Tencent (instant-messaging), Tudou (video), Alibaba (auctions), ctrip (travel), dangdang (books) and Shanda (games). (Hat tip to China Net Player).

I’ve been told that one of the reasons domestic companies have become so large is Chinese consumers favour them over foreign entrants. eBay, for example, is having a tough time in China because consumers prefer Alibabay, while Yahoo struggled before selling Yahoo! China to the Alibaba Group in 2005.

It could very well be that the China’s massive online market have minimal prospects for non-Chinese players, even major players such as Google, eBay, Amazon and Yahoo.

Update: IAC is going to invest $100-million in China, including the launch of Ask.com China. (Nov. 23)

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