The Chinese Internet Industry: Mapping International Initiatives

The results of my research on the Internationalization of the Chinese Internet industry have showed that a few of China’s prominent Internet companies in different segments have climbed up the value chain. They are now – just like ie Lenovo, TCL and Haier were a while ago – entering the next phase in China’s development: they are establishing co-operations with international partners, licensing their services, and some of them are even in the phase of initiating overseas operations. This study has foremost shown that as a result of the extremely skewed situation of the Chinese Internet market, diverse Internet industries are in different stages of development. An important conclusion is that, besides services that are international from nature (think Alibaba or Ctrip), it is primarily the entertainment industry that has caught up with advanced markets such as Japan, South Korea, the U.S. and Europe. As a result various game companies are taking the lead in international expansion.

Why Going Overseas ?

An interesting outcome of this research has been that the reason for going abroad is generally not unilateral. Above and beyond the obvious financial incentive, I have found that in practice the choice to enter another country depends on many factors that can vary per industry. In addition the strategy that companies have used in their effort to internationalize differs greatly among different online service areas. Findings have shown that the decision to go overseas and the international strategy of a company heavily depends on the domestic market outlook, saturation of the market both domestically and overseas, whether a company is listed or even the sentiment of the person in charge, to name a few.

The map above (click the link for full-size pdf) is an oversight of all international initiatives that I have encountered of the companies relevant for this research. It is a summary of all overseas operations organized in two categories: ‘partnerships, licensing, and co-production’ and ‘self operated or wholly owned overseas initiatives’. Through these two distinctions we can see that the dashed lines that each represent an action in the ‘self operated foreign initiatives’ category, have a relatively low representation which indicates that not many Chinese Internet companies are enrolled in true wholly-owned international operations yet. There are only a handful of Chinese companies that have their own overseas operations running in the form of an office: Alibaba, Baidu, Tencent, Sina, and Perfect World. Surprisingly, as the lines point out, while some wholly owned overseas operations are set up in the South East Asia regions, the majority of the dashed lines lead to the U.S. and Europe combined. Especially the U.S. appears to be a popular market among the few first movers that have set up an office abroad. This is likely because of the large scale and exponentially higher return on investment in that market. But results show that it is also influenced by the fact that the majority of these companies is listed in the U.S.

Gaming Industry Takes the Lead

Unlike the relatively scarce dashed lines there are plenty of ‘partnerships, licensing, and co-productions’. Especially the gaming industry is fanatically licensing its products and looking for overseas partners predominantly in the East Asia region. The most popular areas to license games to: Vietnam, Hong Kong, Macau, Taiwan, Singapore and Malaysia. MMORPG developer Perfect World is taking the lead in going over the border. It was the first Chinese gaming company to license one of its in-house-developed games at the end of 2006 and also more recently it was the first company to open up an office in the U.S. to bring MMORPGs to the U.S. netizens. Interestingly also Tencent has initiated its wholly owned overseas subsidiary through entertainment services: mid 2008 it began with offering in-house developed casual games to the U.S. public.

When taking a closer look at the gaming companies (Tencent included) the noticeable prevalence of regular lines in the map indicate that several companies make use of a step-by-step international expansion strategy. In an effort to kick-start the international line of business initially feelers are put out in the form of partnerships, licensing or co-operations. Such a strategic step gives corporations the opportunity to learn about certain markets. Through international partnerships companies can gain valuable insights in the culture of a country and get the opportunity to test certain models with a relatively low risk. This study points out that only Tencent has applied such a strategy, Perfect World has entered the U.S. without any previous partnerships or cooperation in that particular area. However by licensing to and partnering with many other foreign enterprises it did gain valuable experience in how to localize their services. Regarding Tencent’s and Perfect World’s strategies, gaining experience through partnerships, the partnering and licensing activities of the other gaming companies discussed in this study could be a pointer for events in the near future. It might point at a shift in which an increasing number of entertainment-oriented Chinese Internet companies will start running their own overseas operations after co-operation with local partners.

Alibaba, Sina, and Baidu.

As my outcomes show, companies that have gone overseas other then the entertainment focused ones, are mostly exceptional cases. Alibaba is special since its services and business model are international from nature. Especially in the past 2 years Alibaba has really started to emphasize on rolling out an international strategy (read this post for a more in-depth analysis). It is focusing more and more on growing the amount of non-Chinese sellers, among others, to be prepared for a possible stagnation or even down-turn of export and general growth of the Chinese economy. Regarding the latest developments in their overseas activities Alibaba will probably intensify this risk-spreading strategy in the near future. Sina can be seen as an unusual example of a Chinese Internet company operating overseas. It is nearly 10 years ago since Sina has set up offices overseas. Based on observations regarding the efforts put in these overseas offices nowadays one could conclude that Sina is carrying on a heritage of their past, the international activities appear to be nothing more than a leftover of an outdated business model. Baidu entering Japan can be considered an exceptional event. Baidu expected to grow organically through better technology and understanding of the language so that Baidu could profit from the high margins available in the Japanese search advertising business. But it has been struggling to get a foothold and seems to have underestimated the saturated Japanese market. Regarding the current market share of Baidu.jp, it is unlikely that Baidu will expand into other markets any time soon. Read more on this here.

Conclusion

Despite many differences the Chinese Internet companies that have gone overseas do have something in common. They have all got to a certain scale in the domestic market. Porter Erisman, Vice President of Alibaba, explains: “You need the domestic scale to be able to expand internationally.” Victor Koo, CEO and founder of Youku a market leading video-sharing site, shares that view: “You want to lead the domestic market first before you go outside.“ Marc van der Chijs, CEO of Spill Group Asia, a Dutch casual gaming company, and co-founder of Tudou the other market leading video-sharing site, adds that if a company wants to go overseas it has to start all over again in a more competitive market where expenses are often higher. Only domestically leading companies have the time, patience and resources to do this.

Future

As the results show the market is slowly changing. It is becoming more and more mature, and after copying and incrementally tweaking concepts copied from other more developed markets in the near future there will be an increasing amount of Chinese start-ups that stand a good chance in a foreign market. Benjamin Joffe, managing director of Plus Eight Star Ltd (+8*) , the leading cross-market and cross-cultural strategic consultancy focused on Internet and mobile innovation in Asia (full disclosure: I work for +8*), explains such start-ups can develop and test-drive their service relatively cheap in China and subsequently they could launch it overseas straight away with the help from someone that knows the local market. According to Benjamin the problem is that Chinese start-ups are often too distracted by the idea of the Chinese market being really big and having a lot of potential. This is only partly true, since for example in the U.S. netizens have a lot more to spend (so they are worth a lot more) and moreover the online advertising market in the U.S. is much more developed than in China. The misconception of standing a better chance of succeeding in China because of the scale might change in the near future as the Chinese market is becoming more competitive and mature.

* After I finished collecting data for the first version of this research, Alibaba opened up an office in London. Ctrip, ItalkI, and TOM Group International activities still have to be included in the results. Hat-tip to George Godula.
** I need your help !! Please share your insights on other customer-oriented Chinese Web companies with an international agenda that I have missed. Do leave a comment or contact me on: piet@plus8star.com. Let’s make this the indefinite and ever expanding research on globalizing Chinese Internet companies, cheers!