Foreign entrepreneurs in the China Internet industry

By Sherman So and J. Christopher Westland

Editor’s note:
This article has been adapted from the book Red Wired: China’s Internet Revolution (http://redwiredrevolution.blogspot.com) co-authored by Sherman So and J. Christopher Westland. The to-be-published book is aimed at helping the readers gain a firsthand understanding of how the Chinese combined successful components from their Western counterparts with innovation, to accommodate the unique characteristics of the Chinese market.
 

In the last few weeks we talked how local entrepreneurs triumph over Western Internet giants by cleverly changing their models to suit China’s business environment. But, to be fair, not all American Internet companies have failed in the Chinese market. 

Despite being overshadowed by their Chinese counterparts, Google and eBay both do good business in the country. Many small businessmen in China use them as a platform for overseas sales, a capability that the likes of Baidu and Taobao lack.  Game developer Blizzard also found millions of customers for its online game World of Warcraft by partnering with local operators.

Although Yahoo failed to attract many eyeballs to its Chinese portal sites, it turned around its track record in China by investing $1 billion for 40 percent of the Alibaba group in 2005. Just its investment in Alibaba’s listed B2B subsidiary alone has now amounted to almost $5 billion in August 2009. Most analysts believe Alibaba’s Taobao would be an even more valuable jewel, once it turns profitable.

Recently released China Internet Network Center (CNNIC) data shows that the size of China’s Internet population has grown to 338 million people – greater than the entire population of the United States –and yet the penetration rate is only about 26 percent – compared to 75 percent in the US and 74 percent in Japan.

Inevitably these numbers will swell in the next decade. There are roles for entrepreneurs, both local and foreign, to play. Many foreigners worked in the country’s first Internet ventures. And many have arrived since. This week, we look at several stories of westerners who founded their own companies in China – people who had only a smattering of Mandarin at the start and ended up running companies where everyone else is Chinese.
  
Marc van der Chijs

Dutchman Marc van der Chijs was sent to work in China in 1999 to work for Mercedes Benz. At the time he was 27-years-old and employed at the headquarters of the German luxury carmaker. When Mercedes posted an opening for a financial controller in its North Asia regional office in Beijing, he applied and got the job.

“It was an interesting job,” said Van der Chijs. “I traveled around the region a lot and did a lot of presentations.” His was a comfortable expatriate life, with good money and a nice house. But something was missing. “I felt I could do more than just write reports,” he said.

Van der Chijs was dazzled by China’s vibrancy. Everything was growing, with construction sites everywhere.  “It was the place to be for entrepreneurs. It seemed like everything was possible. There was lots of potential.”

When his contract expired in 2002, he quit Mercedes but stayed in China. “I was going to study Chinese and probably start my own business,” said Van der Chijs. But in reality, he did not have a plan.

He enrolled in a Mandarin course at Beijing Foreign Studies University. However, student life was rather boring for someone accustomed to the demands of the business world.

As a result, Van der Chijs started his first company – a small consulting and trading outfit. Business grew quickly and within a few months he was feeling the need for frequent business trips, which clashed with his studies. “The first time I did this, the university let me take several days off. But the next time they didn’t allow it, although I was probably the best student in the class.” So he quit school and went back to work full-time.

Van der Chijs traded different products from China to mainly Europe. He also consulted for companies looking to enter the Chinese market. “The purpose was to make some money while I figured out what I was going to do – and what I could do.”

For the next three years, Van der Chijs did a lot of different things, including producing the first reality TV show in China.

“It was a show sponsored by Ford, Sheraton and Nike. We flew to Hainan, south China for the filming. There were 12 contestants competing with each other for 12 days and the winner got a car. It was like Big Brother.”
 
Then he met his business partner, Gary Wang. Together they founded one of the largest video-sharing sites in China, Tudou.com. “I met Gary through my wife. They were colleagues at Bertelsmann. I was sitting next to him at the first-ever Formula One race in Shanghai,” said Van der Chijs.

From 2005 to 2006, Van der Chijs made another career breakthrough. Spil Games, a small online games company in the Netherlands, wanted to set up a website in China.

“I figured, they know about games and I know something about China, so we might just be able to make it work,” said Van der Chijs. He and the Dutch company set up Spil Game Asia in Shanghai in January 2006.

He worked part-time on Spil Games Asia at first, continuing to run his trading business and help oversee Tudou. But the gaming company’s prospects were so bright that he soon took it on full time.

 “Now, we have 75 staff in total, two websites and about 32 million visitors monthly,” said Van der Chijs in late 2008. “Our traffic is about 40 percent of Tudou’s.”

Almost all of Van der Chijs’s staff are local Chinese – people he hired not for their English skills but for their business acumen. “Many foreigners judge their staff by their ability to speak English and they promote the wrong people as a result.”

By the end of 2008, Spil Games Asia was already breaking even. Its revenue came from advertising, which Van der Chijs used for marketing the sites and to attract more users. 

T.R. Harrington
 
American T.R. Harrington’s first trip to China was in June 1994. A university roommate invited him to spend a month exploring the country.

“That month was really breathtaking. China was nothing like what I had imagined,” he said. Wherever Harrington and his friend went, they saw construction sites buzzing 24 hours a day, seven days a week.

In 2003, he went to China again as an exchange student in the MBA program at the China Europe International Business School (CEIBS) in Shanghai.

“Chinese Internet companies, such as Sina, Sohu and Netease, were pursuing different models in 2004. Apart from online advertising, they also had large mobile data businesses,” he said. “I had worked on integrating online with wireless in 1999. I thought that by coming to China I could continue along that path.”

By the time he returned to China, Harrington had lived through the whole dotcom bubble in the US. He worked in online marketing for four different startups in San Francisco from 1996 to 2000.    

He also met his future wife, which made him decide to stay, even though it might have been financially wiser to go home for a while. Without much cash or any specific plans, Harrington says, “I started to network with people here, while figuring out where I could fit in.”

With a few former classmates from the exchange program at CEIBS, he started doing some independent consulting. “It was good for meeting people and looking for opportunities,” he recalls. “At the same time, I was networking with people from eBay, Alibaba and so on to find out how e-commerce worked in China.”

By 2005, the China Internet market had fundamentally shifted. It had reached a critical mass of over 100 million online users. Alibaba had created an e-payment platform, Alipay, and in its wake, eBay introduced Paypal to the country. Logistics services, whether offered by China’s EMS or international providers, like Fedex, UPS and TNT, had improved to such an extent that that if you bought something online, you could have it delivered in two or three days. Taxes and provincial borders, which had prevented the smooth flow of goods from one place to another, had been removed.  And banks started promoting credit cards in major cities.

“You have the pillars of e-commerce ready. My theory was that once e-commerce starts to grab a foothold in China, the market would need a more efficient and measurable means of online advertising. I wrote a business plan from June to August in 2005,” said Harrington.

The plan became his company, Darwin Marketing, specializing in online marketing.  “I started pitching my ideas to my network of friends and let them know I was looking for a local partner,” said Harrington. He soon met Charles Shen of eBay China, who was born and raised in Shanghai.

 “We hired our first employees in March 2006. We hired several developers. We finished our first platform in June 2006,” said Harrington. It was an online-affiliate network, like that of US-based ValueClick.

In the next four to six months they started another online marketing business, a search engine marketing software plus services platform. Their software helped their clients to manage keywords in search engines, such as Baidu and Google. In general, they can improve their clients’ effectiveness by 20 percent or more, by getting advertisers 20 percent more sales leads for the same budget. Search marketing became Darwin’s major business, contributing 80 percent of its revenue in 2008.

In 2007, Darwin added another business called search engine optimization which is a service to improve clients’ rankings on search engines by redesigning their websites.

“We now have three business units, two offices in Shanghai and Beijing, and roughly 50 advertisers. We are managing roughly 2 million yuan ($290,000) in media budget per month for our advertisers.”  

The company got an undisclosed amount of venture capital investment in July 2008.  “The money should be enough for our development in the next two years,” said Harrington.

Almost all of his staff are local Chinese. “I can speak some Mandarin, and if there is something I cannot communicate, I can always grab someone like Charles [Shen] to help. I hire them to do business in primarily Chinese, not in English.”

Harrington said having a Chinese partner like Shen, who speaks fluent English, has helped him a lot. The two complement each other. While Shen takes care more on the day-to-day operations side of the business, Harrington works more on the strategy and sales side.

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