China promises Internet bountyYahoo! will pay $ 1 billion for a stake in the Chinese e-com

China promises Internet bounty

Yahoo! will pay $ 1 billion for a stake in the Chinese e-commerce firm Alibaba. com as it battles other U.S. Internet companies for a foothold in China's fast-growing Internet market.

Other major U.S. Web players such as eBay, Amazon. com, Barry Diller's Interactive Corp. and Monster. com are shelling out big bucks for Chinese companies, although Yahoo! hit a new record.

Why the spending spree？

The same mason U. S. companies from Coca-Cola to General Motors have long beaten a path to China's door: The nation has a lot of people. And now it has a burgeoning middle class, primed to revel in prosperity by buying consumer goods.

Less than 8 percent of China's 1.3 billion people are online—but that still gives it 103 million Inter- net users, second only to the United States, with 203 million. By 2009, the number of Chinese Netizens is expected to surpass the number of Americans online. That year, Chinese e-commerce will be a $ 390.9 billion market, according to the research firm IDC.

Those colossal projections have U. S. investors salivating—even though actual Internet sales in China to date are minuscule. Yahoo's billion-dollar deal Thursday gives it a 40 percent stake in a company with just $ 68 million in 2004 revenue. It follows last week's debut of Baidu. com— "the Google of China"— which skyrocketed 354 percent on its opening day of trading on the Nasdaq stock market, despite having just $ 13.4 million in 2004 revenues. Google has a 2.6 percent stake in Baidu and reportedly would like more.

Moreover, e-commerce has some big obstacles in a country where credit cards are still, rare. Internet transactions are sometimes paid for by sending bicycle messengers with cash. PCs are beyond the reach of most of the multitudes, who had a gross national per capita income in 2002 of just $ 940, according to the World Bank.

But its massive demographics and surging economy—China's CDP grew 9 percent in 2004—make the People's Republic seem all the riper to U.S. companies. Now that explosive growth has slowed in the United States, Internet moguls see China as vast virgin territory.

"We are doubling down in China because the potential for Internet commerce in that country is simply extraordinary," eBay CEO Meg Whitman told analysts in February.

Internet firms in China "are getting in at the very beginning of a consumer economy that's really nascent," said Laura Martin, senior analyst with Soleil/Media Metrics in Pasadena, Calif. "First movers have the best advantage at creating enormous amounts of value."

Add to that the Chinese propensity for homegrown enterprises, and you've got a mini-gold rush as U. S, Internet firms vie for Chinese partners to help them penetrate beyond the Great Wall.

Peter Sealey, an adjunct professor of marketing at the University of California-Berkeley's Haas School of Business, was chief marketing officer for the Coca-Cola Corp. in 1979 when it entered China.

Like the U.S. Internet firms, Coke allied with Chinese companies. "You always want a partner on the ground who's native to the territory, who knows the political system, who has connections," Sealey said.

The soft-drink firm faced some marketing challenges. "Coke is an acquired taste," he said. "We had Fanta Orange soda—a taste (the Chinese) were accustomed to. We used to take a case of 24 bottles of Fanta and swap in two bottles of Coke. Then we had to run ads explaining that Coke should be consumed cold."

Internet firms are likely to face a different set of cultural barriers. The reliance on a cash economy is a big one. To help spur Web transactions, eBay is introducing its online payment system PayPal in China this year. Alibaba, Yahoo's new partner, already has a payment system called Alipay.

Then there's cost. "To

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