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China's Dot-Coms: A Saner Round Two

By Bruce Einhorn For Chinese Internet companies, it's starting to feel like old times. During the dot-com bubble of 1999 and 2000, a handful managed to go public in the U.S. NetEase (NTES), Sina (SINA), Sohu (SOHU), and Chinadotcom (CHINA) raised hundreds of millions from investors, and many other Chinese concerns were eager to follow. Then the Internet party ended, and they had to focus on survival by figuring out ways to create businesses based on earnings rather than hype. China's Netrepreneurs put their initial public offering (IPO) ambitions on hold.

Now, it seems that their wait is coming to an end. This month, Shanghai-based travel site (CTRP) went public on Nasdaq -- and the stock price soared, almost doubling on the first day of trading. The following week, HC International, a Hong Kong holding company that owns Web sites in China including Huicong, an online search engine, enjoyed a strong debut following its IPO in Hong Kong. More listings are sure to follow, with the market buzzing with speculation that some of China's most popular online gaming and instant-messaging concerns will be going public in 2004.

THE NET'S LIMITS. Will China's second wave of Net outfits prove to be more cautious and realistic than the first? Perhaps so. That's the impression I had when I spoke to Ctrip's Neil Shen. For the co-founder of a dot-com, he's surprisingly modest about the power of the Internet. The Shanghai native worked for Deutsche Bank, Lehman Brothers, and Citibank before joining with two Shanghai partners in 1999 to launch Ctrip, which helps Chinese customers make hotel and plane reservations nationwide. Shen, a 35-year-old Yale graduate, says the Net in China has its limits as a medium for doing business.

He adds that Ctrip isn't going to be overly dependent on the Internet. Instead, it does most of its business through toll-free numbers -- Ctrip has more than 500 operators working in its Shanghai call center. They handle about 70% of Ctrip's reservations, with the Internet taking care of the rest.

"It's obviously difficult to define what Ctrip is," he says. "In essence, this is a travel-service company. It's very different from traditional travel agents, with [their] limited applications of technology. We use technology to serve the customer through the Internet and call centers."

CHEAP SOLUTION. Why rely on old-fashioned call centers? For starters, explains Shen, in China they're hardly old-fashioned. Indeed, they're almost as new as dot-coms. "In the U.S., the call center was a revolution to replace the brick-and-mortar shops," says Shen. That revolution took place back in the 1980s, and it wasn't until the mid-1990s that call centers were eclipsed by e-commerce. But in China, "we leapfrogged that stage," he says. "The call center and the Internet happened at the same time."

Moreover, in the land of cheap labor, it's easy to find inexpensive operators. It costs Ctrip just $350 a month to employ one in Shanghai. Shen says that's one-tenth the cost of a U.S. operator. Access to such cheap labor reduces the need to turn to a more productive, money-saving medium like the Internet. "Given the Chinese labor environment, it's pretty efficient to run a call center.... Our call center is able to give us competitive margins." Shen says.

Not that Ctrip is ignoring the Internet. It provides incentives to customers who use the Net. For instance, it awards double mileage points to those who book their trips online. Shen says he expects the percentage of customers using the Net for Ctrip transactions to increase to 40%, from the current 30%, "in the next two to three years."

CELL-PHONE UBIQUITY. Still, it remains somewhat difficult to do business over the Net in China. While the country's online population is increasing (it's now more than 78 million), Shen says "China is lacking the infrastructure" to make e-commerce more widespread. Not many consumers have credit cards, and even those who do are often reluctant to use them online. "That produces a barrier to people establishing substantial Internet usage," he notes.

Furthermore, with China home to more mobile-phone users than anywhere else on Earth, Shen says it makes more sense for Ctrip to be targeting the phone caller rather than the Net user. "I don't see the Internet taking over from the call center," he says. "You can't replace the value of the call center with the Internet altogether."

Ironically, Shen's words of caution may actually bode well for the future of e-commerce in the world's biggest country. During the bubble days, it was hard to find a dot-com executive who didn't preach that the Internet was the most revolutionary development in modern history. The fact that Shen -- and others like him -- are more realistic about what the Internet can -- and cannot -- do in China means the current Net revival has a better chance of lasting. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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