Dot-Consolidation in China

As many of the country's once high-flying dot-coms fall to earth, those most likely to survive are state-owned enterprises

By Bruce Einhorn

For months, people involved in China's Internet industry have been predicting that many of the country's leading dot-coms would disappear. Indeed, they had to. There were simply too many Internet portals chasing too few Internet advertisers. When Chinese computer giant Legend Holdings confirmed the week of June 4-8 that it was tying up with AOL Time Warner's America Online, the consolidation era officially started.

The big winners are likely to be Chinese state-owned enterprises -- companies like Legend that are backed by the government and therefore have the resources and the guanxi, or connections, to survive in a nascent market. During the first stage of China's Internet boom, state-owned companies that tried to be Net players looked like dinosaurs, losing out to livelier and nimbler startups run by twenty- and thirtysomething entrepreneurs. Meanwhile, a few of the private-sector dot-coms listed on the Nasdaq developed nationwide followings as representatives of China's hip New Economy. For a while, it seemed possible that these private-sector heroes could dominate the Net. Now it seems likely that they won't survive through the end of the year.


  Until now, Legend had been a bit player in the portal scene. But the deal gives its portal,, access to the world's most successful provider of Internet content. That should help it compete with more popular Chinese portals from the private sector such as and But success is by no means assured. Even though Legend is the top PC company in the country, its portal has been a second-tier player.

Meanwhile, AOL's forays into China haven't been so successful, either. The company launched its first Chinese-language operation in Hong Kong in 1999 by teaming up with Chinadotcom, the local holding company partially owned by Xinhua, Beijing's official propaganda service. But the Hong Kong ISP market has lots of players, and AOL's service hasn't been able to overcome the dominance of local entities such as Hong Kong Telecom, a division of Pacific Century CyberWorks (PCCW). While AOL offers dial-up service that can be dreadfully slow, ISPs such as PCCW and Wharf Holdings subsidiary I-Cable offer ultrafast broadband service at cut-rate prices.

AOL's performance in Hong Kong has been disappointing, but what now for Chinadotcom? AOL took a stake in the company in 1999, shortly before Chinadotcom's IPO on Nasdaq. Back then, many people figured that AOL was using Hong Kong as a China test bed and that, when the U.S. company decided to make the jump to the Middle Kingdom itself, Chinadotcom would be its partner. Now AOL has hooked up with Legend, leaving Chinadotcom out of the picture.


  That doesn't mean Chinadotcom is finished on the mainland. For starters, the company operates a second-tier portal of its own there. Many analysts are speculating that Chinadotcom will need to take over the popular Nasdaq-listed portal Giving weight to this speculation: Sina's chief executive officer and one of its founders, Wang Zhidong, has stepped down. "He was seen as an obstacle to a deal," says Duncan Clark, managing partner for Beijing-based consulting firm BDA China. That makes many people suspect that a deal is imminent.

All the activity may complicate the plans of AOL's biggest rival, Microsoft. China looms large in Microsoft's plans: Bill Gates has set up several R&D centers in Beijing and Shanghai, part of his effort to woo the Communist leadership and cement Microsoft's position in the world's most populous country. It's unlikely he'll be willing to stand by and let AOL steal the thunder from his own MSN.

Another company in a bind is Yahoo!. It should have been way ahead in China, since it launched Chinese-language versions in the late 1990s. Plus, it was one of the first Western Internet companies to form a partnership with a Chinese state-owned enterprise. But Yahoo's China business has never really taken off, as a result of regulatory problems in China and the management shakeup in California. Now Yahoo's new CEO faces a mountain of woes in the U.S. that could lessen the focus on China for a while.


  There's one guy to keep an eye on in all this: billionaire Li Ka-shing. His Hong Kong-based China portal,, was a brief star in Hong Kong during the boom days. Before's IPO in March, 2000, thousands of Hong Kong people queued up for hours just to get a chance to buy some shares. Since then, the stock has plummeted, like just about every other Internet stock. But Li has shown he's not giving up on e-commerce: Last week, he further increased his stake in U.S. online retailer Li is likely to bring that company to China and other parts of Asia. Another Hong Kong company, I-Cable, is reported to be buying Beijing-based, one of the most popular portals in China. Garmen K.Y. Chan, a spokesman for I-Cable, said the company wouldn't comment.

BDA's Clark prescribes caution amid all the rumors swirling about China dot-coms right now. In the close-knit Chinese Internet industry, people often follow the herd. A year ago, that meant pursuing a Nasdaq listing. "Now it's cool to consolidate," Clark says. "You have to have a story -- whether you are [doing a deal] or not." But we can expect to hear a lot more about consolidation in the weeks ahead.

Einhorn covers technology for BusinessWeek from Hong Kong. Follow his column every week, only on BW Online

Edited by Douglas Harbrecht

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