Locals enjoy advantages in a market with special character

Listen to this article

00:00
00:00

Jack Ma is the new symbol of the growing confidence of China’s home-grown internet entrepreneurs.

A former schoolteacher and founder of Alibaba, a business-to-business e-commerce company, Mr Ma tapped more than $1bn from Yahoo two months ago for a minority stake in his collection of internet properties, which also include the Tao Bao consumer e-commerce site and an online payment system, Alipay.

“It’s a bet on a management team,” says Allan Kwan, Yahoo’s managing director for north Asia. “There’s no one else with all these assets,” he adds.

The message in Yahoo’s decision to throw its lot in with Mr Ma: western companies will have to play by local rules in what is already the world’s second biggest internet market, at least judged by the number of users.

The development of online activity in the rest of the world may have closely followed US experience, according to this view, but China will be different.

To some extent, the early lead grabbed by Mr Ma and others is more a matter of timing than a reflection of true underlying differences.

“All the US [internet] companies woke up a little too late,” says Safa Rashtchy, an internet analyst at Piper Jaffray in San Francisco. “They were were ignoring China. They thought they had plenty of time to get there.”

That let a batch of Chinese internet portals, set up as the first dotcom boom was peaking at the end of the 1990s, win an early lead that they have never surrendered. The regulatory difficulties companies such as Yahoo say they would face if they wanted to become full online information services in China also held them back.

“We decided to step into the search and e-commerce side because we thought we couldn’t compete in the portal space as we had in other countries,” says Mr Kwan.

Local preferences and customs have also played a part in the rise of local, rather than foreign-owned, internet companies.

The success of Shanda Interactive Entertainment and, more recently, NetEase in online gaming has been the most visible sign of how local conditions have defined online activity: the lower risk of piracy and the availability of a mass paying audience through internet cafés made this a natural market.

Also, western companies have found it difficult simply to copy their experiences from other countries. For eBay, for example, which has prided itself on its ability to roll out carbon copies of its auction model in different markets, that could represent a significant obstacle.

“Trying to create a local version of a big US model hasn’t worked in China,” says Mr Rashtchy.

Services developed for other markets do not always translate smoothly. For companies long accustomed to using their global brands and technology platforms to break into new markets, that has made China a rude awakening.

The development of electronic commerce has been held back not only by a lack of credit cards and inexperience in online trading, but by more fundamental resistance among potential users.

“This is a relatively low-trust society,” says James Zheng, chief operating officer of eBay EachNet. “Without solving the trust issue, e-commerce is a giant with only one leg.”

That has led some to argue that e-commerce in China will always rely more on a personal – often face-to-face – relationships. Companies such as eBay and Yahoo contend that they can overcome the problem, though they concede it will take time.

EBay has made its escrow service compulsory for new sellers as well those with lower ratings, and launched its PayPal payments system with a relatively high guaranteed protection limit: more initiatives are on the way, promises Mr Zheng.

Another big difference is the nature of the goods that make up the bulk of consumer ecommerce. Clothing and consumer electronics, mostly sold at fixed price rather than by auction, dominate. Sold on narrow margins, they are asort of collectibles and other hard-to-find items on which eBay built its business.

For now, eBay takes less than 2 per cent of the value of transactions conducted over its Chinese website, compared to the 6-8 per cent it receives in other markets. With an eye on eventually being able to raise that percentage, it has cut prices to promote greater use of its auction format.

Yet competition from Mr Ma’s Tao Bao, a free site which has quickly gained ground against eBay, suggests that a long and gruelling fight may lie ahead.

The US internet giants are turning to what they hope will prove a telling weapon: search. This is an area where Yahoo and eBay – which has invested heavily in its own search engine, Magellan – believe their global scale and technology resources will eventually give them a lasting edge.

That is not guaranteed. The difficulty of conducting search using Chinese characters has forced Google to rethink much of its technology for China, says Mr Rashtchy.

Also, Yahoo failed to cement a lead in search by buying a local company, 3721, letting Baidu, a local search company in which Google holds a small stake, emerge as the most widely-used engine, according to most estimates.

The scale of the spending needed to compete in search may eventually bring a shake-out. “The bar is getting higher and higher with respect to technology,” says Mr Kwan at Yahoo. “I don’t think many companies will be able to keep up in the long term.”

However, it will not necessarily be foreign internet companies that emerge on top.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.