New online services to thrive on mainland

With the mainland set to become the world’s largest internet market in the next year or so, analysts are forecasting a thriving environment for new services in the online retail, gaming and advertising sectors.

05 February 2008
Published by South China Morning Post

“The mainland will soon overtake the United States as the biggest internet market in the world in terms of number of users,” said Dick Wei, China internet analyst at JP Morgan.
 
Still, the experts disagree on when exactly this will occur. IDC claims the mainland already has the title as the No1 internet nation. It said the mainland’s internet population would grow from 234 million last year to 275 million this year, while the US would increase from 230 million last year to 247 million this year.

The more conservative China Internet Network Information Centre, a government-backed research institution, estimates the internet population was 210 million at the end of last year.

JP Morgan forecasts that it will probably take two more years for the country to surpass the US. China’s internet population would be 238 million by 2010, compared with 227 million in the US, it said.

However, most agreed that growth would accelerate as bigger and bigger networks appear across the world’s most populous nation.

“Growth in the Chinese internet sector will accelerate as roughly 20 per cent of the country’s population is now online,” said Richard Ji, a Morgan Stanley executive director.

As more people discover that many of their friends, relatives, colleagues or schoolmates are also online, use of the network will increase, says Jacky Huang, the senior analyst for digital marketplace research at IDC China.

Mr Wei said the internet population previously had been concentrated in key cities but this was changing. “As the government pushes for broader internet adoption and as the costs of personal computers and internet access continue to drop, more people from second-tier cities and the countryside will go online.”

Mr Ji said online communities, or applications such as YouTube, Facebook and MySpace, which stressed interaction between users, would surge on the mainland.

Mr Huang said overinvestment by venture capitalists in online communities and the Web 2.0 sector (websites that encourage user interaction) had created bubbles.

“But there are tremendous opportunities in the Web 2.0 sector, as people really like these services,” he said, adding traffic on online community sites was high and growing faster than traditional portals. “Once they figure out how to monetise such traffic, the sector will finally take off.”

Another sector poised for growth, but which has been lagging behind, is online shopping. Joyo and Dangdang were some of the earliest companies in the mainland internet sector but none have achieved enough scale and profitability for a public listing.

That contrasts with online portals, such as Sina and Sohu as well as online game company Shanda, which have been listed for several years.

Analysts believe the time has come for online retailers. “Users are getting mature and willing to shop online,” Mr Huang said.

Moreover, the infrastructure of e-commerce, which has been holding back online shops’ development, has improved. Online payment, such as Alipay from Alibaba, is becoming more popular and delivery services are in place.
 

Alibaba reshuffle a precursor to global expansion

Alibaba Group’s management shake-up involving four top executives taking sabbatical study leave, will pave the way for international expansion, industry watchers say.

29 January 2008
Published by South China Morning Post

At the end of last year, the parent of Alibaba.com, the country’s largest business-to-business internet marketplace, revealed a series of changes in its senior management. Chief operating officer Li Qi, chief technology officer John Wu Jiong, senior vice-president Lu Xuhui and president of its online auction site Taobao, Toto Sun, would leave the group at some point this year.
 
The move fuelled a wave of speculation in the market - including talk of a potential spin-off of Alibaba Group’s subsidiaries.

However, analysts said this could be part of Alibaba’s plan to go global.

“Alibaba wants to build its international operations. They need someone who can develop business in the US and Europe,” said Jacky Huang, senior analyst at IDC China, a digital marketplace research firm.

“As hiring someone with overseas experience can be very expensive, they decided to train their own staff. The group on sabbatical leave will be the future management team for Alibaba’s international business.

“Although [the training] could take a few years, [founder] Jack Ma has that kind of patience. Also, the local team has been with Jack for a long time; they are loyal to him.”

In Alibaba’s earlier announcement, the four executives will further their studies in overseas business schools. Other Alibaba executives are scheduled to follow them.

Just before Alibaba.com was listed on the Hong Kong stock exchange, it had attempted to recruit talent to develop its international operations.

A source said he was approached by a head hunter for the position of regional marketing director for international business at Alibaba.com, but turned it down on remuneration grounds.

“For a position of such responsibility, the average pay would be about HK$1.5 million to HK$2 million a year. But Alibaba was only offering about HK$1 million to HK$1.25 million. That is not attractive for an expatriate,” the source said.

Although the offer came with share options, they were priced at “300 times earnings, and were basically useless”, he added. Other people contacted for the same position also turned down the offer, he said.

Alibaba does not believe a low remuneration package is behind the company’s failure to attract foreign executives.

“Since day one, we have been a global company and have attracted senior managers from around the world,” said Porter Erisman, the company’s vice-president for corporate affairs.

“Our compensation is globally competitive and is a combination of base salary plus year-end bonus plus stock options. Throughout the years, our overall compensation has well exceeded the market rates when performance rewards are factored in and we’re confident this trend will continue,” he said.

“We’ve never looked for people who simply want to ‘cash in’. We want people who are truly committed to the company with a long-term view and prefer to have their compensation based on performance and results,” he said.
 

Brain drain hits mainland venture capitalism

Some of the oldest brands in venture capitalism, including Intel Capital and the 3i Group, have seen their mainland turnover shrink in recent years as key personnel traipse out the door.

21 January 2008
Published by South China Morning Post

“We have seen huge turnover of talent in this industry which is supposed to have much longer tenures than investment banking and other fee-income businesses,” said Vincent Chan, who headed the North Asia division of Jafco for seven years. Japan-based Jafco is a venture capital investor active on the mainland.
 
Mr Chan said that in the mainland market, most venture capital specialists left after two or three years with a firm. Few stay with the same company for 10 years.

“That is extremely unhealthy,” he said.

High turnover of key staff has resulted in the loss of good investment opportunities for some major venture capital firms. One industry source said Goldman Sachs did not invest in the third round of Alibaba Group due to the departure of a manager responsible for the project and instead sold its stake cheaply. Apparently, the manager’s replacement did not feel comfortable handling Alibaba. Another venture capital source said: “It could have easily made more than 50 times [the money it invested] if it had kept its stake.”

As key people leave, even corporate venture capital firms backed by major industrial or financial groups - such as Intel Capital of chipmaker Intel - have problems raising funds.

EPlanet Ventures, a Silicon Valley-based venture capital firm had problems raising funds after investors realised all its key employees, including two in charge of its mainland operations, had left.

EPlanet raised US$650 million in 1999. It invested in some of the best deals in the technology sector, including Skype, Baidu and Focus Media. Its 1999 fund had grown to US$3 billion as of March last year. It has an annual rate of return of 35 to 39 per cent and is one of the best performers in the industry. Still, the company could not raise US$100 million in funding, the source said.

Some of the most talented investment managers have set up their own funds in recent years, allowing them to make much more money.

“If you set up your own fund, you can take the ‘carry’, which is about 20 per cent of the profit of the fund. If you stay with a corporate, such as Intel Capital or 3i, the company takes the carry and you are only paid a bonus,” the source said.

Besides the monetary rewards, establishing their own fund also gives investment managers the freedom to pursue their own strategies, rather than sticking to a company’s rules, he said.

Setting up your own shop is not difficult. Armed with a track record of reasonable returns, experienced investment managers “don’t need recognised brand names to raise new funds”, he said.

Former Jafco employee Mr Chan is a case in point, having just set up Spring Capital Asia. So far, he has raised US$100 million and plans to raise a further US$200 million in the first quarter of this year.

But can the new venture offer better investment returns to investors? Mr Chan believes so, arguing that those who manage their own fund tend to work harder to bring in more returns.

Moreover, the advantage of major corporate venture capital firms providing regional coverage is disappearing. Most venture capital firms will have to be located in the country they are investing in as “local knowledge is key to getting a better deal”, Mr Chan said.