Piecing Together A Chinese Software Giant

Chinadotcom got its start in Web portals. Can it reprogram itself and win big?

For a man determined to build a business in China, Peter Yip sure spends a lot of time focused elsewhere. In the past year, Yip's chinadotcom Corp. (CHINA ) has bought companies or formed partnerships in the U.S., Canada, and India -- while preparing to shed one of its key businesses in China. The reason: CEO Yip requires knowhow to turn chinadotcom into a provider of enterprise software to Chinese manufacturers. And he's not finished with his dealmaking. "There are still a number of pieces we need," he says.

It's a big change for chinadotcom. The Hong Kong company was a pioneer of China's Internet, controlling portals that serve both Hong Kong and the mainland. Xinhua, Beijing's official news agency, was a founding shareholder -- a connection that helped chinadotcom become the first Chinese Net company to list on NASDAQ. But despite its pedigree, chinadotcom has lagged behind portals Sohu (SOHU ), Sina (SINA ), and NetEase (NTES ), and so will sell most of its Internet business this year. "We were second-tier from the beginning," Yip says.

Instead, Yip wants to focus on software -- a business chinadotcom has long been quietly building. For years, the company has resold Western programs that help Chinese businesses streamline their production, manage contacts with customers, and organize their human resources departments. To prosper in that field, though, chinadotcom needs its own software, Yip says. So in February, the company completed a $56 million buyout of Pivotal Corp., a 420-employee developer in Vancouver that specializes in customer-relationship-management programs for small and midsize businesses. Another acquisition, of Atlanta's Ross Systems Inc. (ROSS ), is almost sealed. And last year, chinadotcom paid $50 million for IMI Corp., a Mt. Laurel, N.J., maker of supply-chain-management software that counts General Electric (GE ), AT&T (T ), and Starbucks (SBUX ) among its customers.

PICKING UP STEAM. Another of Yip's ambitions is to turn chinadotcom into a software outsourcing shop. Though the company has just 140 programmers in China today, Yip expects to have 1,000 within three years. To boost expertise in outsourcing, chinadotcom formed a joint venture with India's vMoksha Technologies, a startup run by Pawan Kumar, former head of IBM (IBM ) Global Services for India. "China can learn from us how offshoring works," Kumar says.

Yip may see little value in his Net businesses now, but without them he wouldn't have the cash to pay for his software spending spree. Even after the recent deals, chinadotcom has more than $250 million left over from its 1999 initial public offering and subsequent stock issues. "Unlike so many of the dot-coms that raised money, chinadotcom didn't blow through its cash," says Jason D. Brueschke, an analyst at Pacific Growth Equities in San Francisco. And while chinadotcom was never a star, last year it turned its first profit, earning $15.4 million on sales of $89 million.

Still, analysts like Brueschke say Yip's change in strategy is smart. Brueschke predicts that software sales will help chinadotcom more than double its earnings to $38 million this year and $51 million in 2005 as Chinese companies seek to boost productivity and efficiency. To be sure, Yip will face plenty of competition. SAP (SAP ) is pursuing small and midsize customers in China, while Oracle Corp. (ORCL ) has opened development centers in Beijing and Shenzhen, and is sponsoring educational projects nationwide. But with its foreign technology and Chinese pedigree, chinadotcom could be the one to beat.

By Bruce Einhorn in Hong Kong, with Andy Reinhardt in Paris

— With assistance by Andy Reinhardt

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