Cover Story -- The Internet Age -- Business
Shanghai: Big Brother and the E-Revolution
Will heavy-handed Shanghai hold back Netrepreneurs?
It's the end of a trying day for Phil Ren. After hours spent in meetings devising strategies to attract foreign venture capitalists, the tall, bony 23-year-old is in a local restaurant, picking at his dinner. He takes another drag on another cigarette, downs a decongestant for an annoying cold, and confides that despite the apparent success of his two-year-old startup, Shanghai SOIM Online Publishing Co., he is worried about the future. "I'm afraid," he tells me repeatedly.
At first, it's easy to see why. Ren is trying to build an Internet business in Shanghai without the support of the local government, which is determined to control the growth of the city's fledgling Net economy. SOIM, one of the biggest hits of China's Internet industry, sends out electronic Chinese-language news, sports, financial, and lifestyle magazines to subscribers nationwide. And Ren has shunned Shanghai government efforts to buy a piece of it.
Instead, Ren and his 30-year-old partner, Ray Chen, are working a business model uniquely suited to China, where high costs make extensive Net surfing too expensive for many Chinese. Visitors to SOIM's Web site sign up for e-zine subscriptions and receive delivery by e-mail, allowing them to read articles cheaply offline. The formula is working, with SOIM (the initials stand for Shanghai Online Information Mailing lists) winning over 400,000 subscribers--10% of China's total online population.STEEL ARMS. Now, SOIM wants to move beyond the startup phase, with products designed to appeal to more sophisticated Net surfers. That means hiring a slew of people: "We need a Web designer, a service designer, a programmer, marketers," says Ren wearily. He also must find new investors and figure out how to manage it all. "I know a lot about the Internet," he says, "but I know little about management."
As if all of that didn't give him reason enough to worry, Ren must convince prospective investors that they needn't fret about the government's attempts to control the Net--possibly the hardest task of all. Just a few days after I met with Ren, the top telecoms bureaucrat in Beijing startled the Chinese Internet community by denouncing all foreign investment in online content providers.
As China's government reaches its steel arms around the explosive growth of the Internet, entrepreneurs like Ren are feeling the pressure. It doesn't make Ren's life any easier that he's unwilling to accept investment from the most logical source--Shanghai Online, the city government's top Internet service and content provider. Other Shanghai companies welcome the guanxi, or government connections, that Shanghai Online offers, but Ren refuses. "Do you think the government can give you valuable things?" he wonders incredulously. "We need the style of professionals, of pioneers. Not of the government."
Can a Communist government micromanage the Internet revolution? Shanghai's leaders are betting, despite the misgivings of entrepreneurs such as Phil Ren, that they can. They want to make their city, already China's financial and manufacturing center, the country's e-commerce hub. The "information port," as they call it, would be home to elite Internet companies, plugged-in manufacturers, digital schools, and online hospitals and museums. Even the Shanghai zoo is getting in on the act, conducting an online contest to name its new giant panda. The winning moniker: Le Le.
It's all part of a grand vision by city planners to make Shanghai an e-rival to such Asian powers as Hong Kong and Singapore. I've traveled to Shanghai to see whether they can pull it off--and to see just how the impact of the Internet in a developing economy differs from its impact in the U.S. The Net revolution faces strong resistance in places like Shanghai, where few people own computers, primitive infrastructure slows Net traffic to a crawl, and entrepreneurs must operate under an unpredictable authoritarian government. I wonder whether the Communist regime is willing to allow the kind of unruly growth so characteristic of the Net in the West. After all, Shanghai was the site of China's most notorious case of Net persecution: the speedy trial and conviction of software engineer Li Hai, sentenced to two years in jail last winter for sending Chinese e-mail addresses to a pro-democracy group overseas.BEIJING BUZZ. Moreover, when it comes to Net businesses, Shanghai is home to China's most interventionist government. Most of Shanghai's popular sites, such as financial information leader Stockstar.com, are government-backed, while the Chinese Net companies with the most buzz are based not in Shanghai but in more freewheeling Beijing. And e-businesses throughout the country fear more central control after startling comments by Wu Jichuan, the telecoms minister, who declared on Sept. 14 that foreigners cannot invest in Chinese Internet content providers.
It's unclear whether Wu has the authority to institute that kind of ban. He might just be trying to make a last-minute attempt to protect the state companies threatened by upstarts in the private sector. But, as the leadership sorts out its policy in Beijing, back in Shanghai the question remains: how does a place that doesn't trust information, that wants to keep its grip on e-businesses, hope to become an Internet hub?
Easy, says Fan Xipin, vice-director of the city's information technology planning office. Although many critics accuse the state of Net censorship, Fan says, "the government doesn't create obstacles to prevent people from getting access to the Internet." He insists that Shanghai is working very hard to ensure that the city is on the cutting edge of China's e-commerce revolution. By yearend, the city government will have helped introduce a raft of new services, including business-to-business sites and consumer-focused e-commerce.
Shanghai is hardly an Internet hotbed now, but there are plenty of indications that change is coming. Take the surge in the number of Shanghai residents online. At the end of 1998, the city of 12 million residents had just 120,000 Internet accounts, according to Shanghai Online. Six months later, there were 200,000. By yearend, estimates Zhang Linde, general manager of Shanghai Information Industry Co., Shanghai Online's parent, the number should hit 400,000, and the city has launched an effort to boost its capacity to 800,000. Several hundred thousand additional users get Shanghai Online's free intranet, a proprietary Chinese-language service that does not provide access to the Web. In October, Shanghai is launching a broadband network that will allow users to take advantage of the latest applications, such as video-streaming technology.
Businesses are waking up to the potential of the Internet. One morning, I meet Xiao Hongfa, a gruff 40-year-old manager for state-owned China Taixing Group, which makes heavy machinery from its factory in Jiangsu province, just outside Shanghai. Five months ago, Xiao began using a local version of Internet telephony operator Net2Phone Inc. to make his international calls. "I save 90%," he marvels. Xiao also is trying to find new customers over the Net, though he admits it's an uphill slog. "We have received lots of e-mails, but no one has bought from us," he says. The Internet "is not so successful yet because people in China don't have so many computers."
Even small companies are trying to go online. In August, Ni Wei, a 31-year-old who helps run Shanghai Lin Gao Co., a family-owned exporter of silk and linen, started using an online service to reach potential U.S. customers. The tiny firm, with just $800,000 in sales and a single computer, can't afford to send a representative to U.S. trade shows--but the Internet still offers access, at a far cheaper cost. "For a company whose finances are not so strong, we can save money and also get our aim," says Ni."INFORMATION MAFIA." As Net usage grows, the biggest beneficiary should be Shanghai Online, the city's Internet giant. Its dominance is nearly complete, with over 90% of locals using its Internet service provider. Also an Internet content provider, it offers 170 Web sites. "Shanghai Online is like the information mafia," explains Duncan Clark, the founding partner of Internet and telecoms consulting group BDA China. "That's a bit crushing for private enterprise." Clark, a 31-year-old Englishman who splits his time between Shanghai and Beijing, is a former investment banker for Morgan Stanley who grew weary of Beijing's oppressive bureacratic culture. He sees a positive side to Shanghai's efforts at control: "Here, the government is smarter and more organized. You have people who understand the technology. In other places, they would like to be interventionist, but they don't know how."
That techno-savvy makes for an uneasy alliance for the majority of Shanghai's early Net entrepreneurs. For them, survival has required staying on good terms with Shanghai Online. Gao Limin, deputy manager of StockStar.com, counts on Shanghai Online and a city-owned venture-capital fund to help smooth over problems with China's state-owned banks and brokerages. "You have to have government support," says Gao, an intense 32-year-old, oblivious to the onslaught of bicycles and motorcycles whizzing past him on Caoxi North Road on this late afternoon. We're walking to the China Telecom building that hosts the 54 servers of StockStar, which has 380,000 users, up from 180,000 at the start of the year. Gao ignores the rush-hour traffic, intent on explaining why Shanghai's Internet scene shouldn't take a back seat to Beijing's. "They get the publicity," he concedes, "but we spent more time on infrastructure-building."
StockStar's government backing has been a plus, but Gao admits that there are limits to how far the guanxi can take you. "If the government ownership is too big, then you are too slow," he says. He just put the finishing touches on a deal that lowers Shanghai Online's stake in the company, with Gao's privately-owned company taking majority control.
Those who don't have Shanghai Online as a stakeholder pay a price. Jeff Huang, 38, is managing director of Shanghai ZS Information Co., a privately owned company that runs Hotcinema.com. The Web site offers online reservations for 19 Shanghai cinemas. Rather than invest in his own servers, Huang pays a Web-hosting fee to Shanghai Online, which until recently charged him by the number of users. "The more customers I had, the more I paid," says Huang. Now, Shanghai Online has changed its policy, charging Huang a fixed monthly fee of $120. That's giving him some breathing room, and he says that Hotcinema will grow from its current 4,000 registered users to 10,000 by yearend.
Cutting prices doesn't come easy to Shanghai Online or other subsidiaries of state-owned China Telecom. Over the past year, everyone from ordinary Net surfers to Premier Zhu Rongji has griped about the high costs of China Telecom's Internet access--an outcry that led the quasi-monopoly to slash rates. As a result, Shanghai Information Industry's Zhang Linde says his ISP now charges just 50 cents an hour, compared with $1.80 last year. With Zhu pushing to reform the telecom industry, rates are likely to fall further. "In the field of ISPs, we are all losing money," says Zhang, who won't reveal the extent of the losses, "but we can't not do it."
With the ISP business so bad, Zhang is pushing Shanghai Online into the Internet- content industry. But there, too, Shanghai's dominant player finds it tough going. Shanghai Online is No. 1 in its home market, but aspires to be a national player. Outside the city, though, its reputation suffers: A recent nationwide survey of the most popular Web sites showed it falling to No. 9, from its previous No. 4. Zhang blames other ISPs that don't provide easy access to Shanghai Online's offerings, and he looks enviously at Beijing-based portals, such as Netease.com and Sohu.com. His solution? Open an office in Beijing. The Shanghai government may not like it, but, says Zhang, "if you don't go to Beijing, you can't be on a national level."
When it comes to finance, Shanghai is second to no Chinese city, and online stock trading is a logical industry for it to dominate. But China's heavy-handed regulators are stunting the growth of the business. Early this year, government-owned Hong Kong Macao International Trust & Investment Co., usually called Gangao Securities, started offering customers online trading services. It now has about 1,000 online clients whose trading volume accounts for roughly one-tenth of Gangao's monthly turnover of $180 million. Problem is, Beijing says China's brokerages must all charge the same commission. That makes it impossible for Gangao to offer discounts to online users. Since online customers must also foot the bill for Internet access, says Xu Dong, manager of the company's remote-services department, "to use the Internet, you have to pay more." As a result, online trading is mostly for people who live far from a brokerage office.
I hear a similar story at the Shanghai Museum, a stunning building that opened a few years ago and houses one of the best collections of Chinese bronzes anywhere. Over tea in the museum's elegant coffee shop, associate curator Zhou Yanqun tells me the museum's galleries have space to show 120,000 items, but that's just one-tenth of its holdings. The Internet can help the museum show the public more of its pieces, says Zhou, and also improve the museum's reputation with art history scholars worldwide. She envisions the museum hosting a symposium and broadcasting it live over the Internet. Zhou says a philanthropist in the U.S., the widow of a late media titan, is ready to donate the necessary computers.
But for now, all plans are on hold. China's culture mandarins are worried about what might happen if the images of national treasures end up on the Web. The bureaucrats are demanding that no museum put its items online until UNESCO comes up with a system to protect copyrights. "Museums have to be very careful," sighs Zhou. "It takes time."
While bureaucrats fiddle, technological breakthroughs are making the Net more and more accessible. During a trip to China early this year, Microsoft CEO William H. Gates III announced that his company was working to develop a Chinese-language system to provide Internet access via television. That project, code-named Venus, has yet to come out with its first product. But that's not stopping Lawrence Cheung, the 31-year-old CEO of Shanghai WebTV Corp. Cheung, a Hong Kong native, predicts that "a stable product will come very soon" and is launching his service in October, using set-top boxes from Asian and Western suppliers. Since most Shanghai residents have TVs but few own computers, Cheung says it should be easy for him to get 200,000 subscribers by 2001.SHAKY HOLD. As the Internet starts to take off in Shanghai, the government's hold is becoming more tenuous. Startups are sprouting all over the city. Since August, two companies have begun offering online bidding, eBay-style. A couple of portals are launching, too. With foreign venture capitalists showing great interest in the Chinese Internet, the auction sites have been shunning state aid. "Government investment limits your growth," explains Bo Y. Shao, a 26-year-old Harvard University graduate and founder of auction site Eachnet.com. "It inhibits outside investors from coming in."
Chinese bureaucrats, though, have more ways to interfere than direct investment. A few days after the telecom minister made his surprise announcement denouncing foreign investment in Internet content providers, I give Phil Ren a call. The SOIM co-founder is in Beijing, where he has just opened a small marketing office. Ren's not sure what to make of it. "There is not any other clear information," he says, but adds the news could complicate his efforts to get venture-capital funding. It seems the battle to control the Internet in Shanghai is far from over.By Bruce EinhornReturn to top