Tuesday, 4 September 2012

A Sleeping Dragon no more: why start-ups and investors should be thinking seriously about China

By: Joram Sengendo (Summer Analyst)
The Olympic Games is  not yet over. The Olympic stadium - the main venue located in the Olympic park in a once barren area of Stratford - continues to draw cheering crowds. This stadium is indeed, the place to be to witness the brilliance of elite athletes write their names in the history books. There is an analogy to be drawn between the evolution of Stratford, and the emergence of China: the latter was once a dormant under-productive nation but now an economic superpower. The paean to the Eastern giant has been sung countless times before; but is this worth repeating? Quite simply, yes. 

Today’s technology stakeholders should have China at the forefront of their business agenda if they plan to become giants tomorrow. The reasons for this are several, and the world’s largest corporations are already showing signs that they are positioning themselves to grow with China. Some of them are as follows: 
  • 538 million people use internet in China and this represents a growth of 40% and 5% since 2010 and December 2011 respectively: It is projected that this number may grow to 718 million by 2013, accounting for 52.7% of the population and 538 million represents internet penetration rate at 39.9%. If this is compared to the 245 million users in the USA - being 79% of its population - and assuming China’s internet penetration approaches this US figure within the next 5 years, we are likely to see 1 billion internet users in a single country.
  • China has more users accessing the internet via mobile than conventional PCs: 388 million mobile surfers compared to 389 million desktop users, representing a 10% increase from 2011. This is an incredible opportunity for mobile focused technology companies. The internet space is in many ways still built for the PC. Several traditionally strong internet companies are now finding it difficult to reposition themselves for the handheld market - think of Facebook. There is in essence, a micro-revolution on the cards, as clever mobile technology start-ups such as Guanxi.me and Sina Weibo are now being able to take up significant market share ahead of larger corporations.
  • China’s urban population is large and growing: The number of Chinese cities with more than 1 million inhabitants is staggering: 10 have populations of more than 4 million each; 23 have between 2 and 4 million; and 138 have between 1 and 2 million people. It is projected that there would be 221 cities with at least 1 million people by 2025. This makes certain mobile applications nothing less than crucial for the average Chinese city-dweller today but also over the next decade. Local search and map technology will become even more invaluable to both consumers and enterprises looking to make themselves visible in these cities. Today, 50% of Chinese internet users live in rural areas today, and most of these people will quickly transition into urban areas.
  •  70% of China’s internet users are 30 years and younger: Its internet-savvy population is extremely young and represents the new generation of ‘big spenders'. They are always on the internet and purchase most things online – from tickets, to clothing. They even pay utility bills using the popular ebay clone Taobao.com and are known for being the most avid players of the online game ‘World of Warcraft’ - which generates significant revenue for Activision Blizzard. This strong online gaming culture is one which several companies such as Shanda Games are looking to capitalise on.
  • The internet censorship issue in China: This is the biggest and most important risk for online start-ups and their investors who worry that government interference in the marketplace would harm their businesses. Foreign companies such as Google, and Facebook, have had negative experiences in China.While these problems exist, there is hopemobile internet use is less stringently controlled than PC, and most users get around the 'firewall' using mobile apps.
  •  With the increase in wealth, China has a growing venture capitalist (VC) base with significant investment capital: This, therefore, presents an exciting opportunity for start-ups to venture into China with an even better chance of securing capital. In addition, the Chinese government has, in many ways, been more helpful in this respect than most would have expected: for example, the south west city of Chongqing – a fast growing region with plans to become a ‘financial services centre'.  A research paper by the China-Britain Business Council (CBBC) reports that 32 VC funds with a total investment of RMB 30 billion have been set up in Chongqing, and the local government has allocated RMB 1 billion to support this effort.
  •  The Qualified Foreign Limited Partnerships (QFLP) policy should now make currency conversion easier for foreign investors: This used to be an issue raised by many when speaking about investing in China. The QFLP programme was launched in early 2011 to address some currency exchange issues that non-Chinese investors face and with an aim to attract more foreign private equity companies to establish funds in China. This programme allow suitably qualified companies to obtain a licence to convert foreign currency into RMB (up to a strict quota) for onshore investments. 
  • The young Chinese population is one of the most highly educated and computer-literate in the world. As such, workforce is available and at an affordable rate when compared with developed nations. 
Several start-ups have seen some of these potentials and have progressed to become active in the Chinese market: one example is the 10-year old software company Comsenz, which is now owned by China’s largest internet portal, Tencent. Comsenz' founder, Kevin Dai, noticed just how popular blogs were becoming, and how the glut of features on these sites was slowing down the webpages. As an entrepreneur in China, Dai discovered the importance and cultural significance of hiring older and more experienced senior managers in order to sustain business expansion. 

Perhaps, as a start-up or an investor with global ambitions, you are now more convinced that China should not be a secondary objective, but a prime focus.


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