The Innovation Generation: How China's New Internet Entrepreneurs are Changing Online Business

BEIJING--(BUSINESS WIRE)--Despite the huge increase in the number of Chinese netizens, currently over 450 million, the country's internet industry is about to enter an era where "wild growth" purely based on population dividends will no longer be seen, according to a report by Z. H. STUDIO.

“Think of the Gaokao [the widely-known rigorous college entrance exam], as applies to things like micro-blogging, gaming (MMORPGs), retailing and perhaps increasingly with LBS...online services that recognize and incorporate China's achievement culture will succeed in the future”

Given the low barriers to market, players have to be nimble and innovative in order to stand out from the crowd. With nearly infinite options online, providers must create a rich and unique customer experience, whether it be location based service, virtual retail, or mobile applications.

Obviously, China has no lack of early adopters. According to a Nielsen report released in August 2010, for example, mobile consumers in China have surpassed their American counterparts when it comes to using the devices to access the Internet (38% of Chinese mobile subscribers vs 27% of American mobile subscribers), despite less advanced networks.

And that's good news for Xie Xiao, the founder and CEO of sifang.com, a location based service (LBS), where users virtually "check in" to real locations sharing data with venue owners and operators as well as their peers.

Since the launch in May 2010, the sifang.com site has had over 400,000 users, largely urban white-collar workers aged 18 - 35 who are smartphone users with handsets retailing for at least RMB1,000. The typical user appreciates new technology, and in Xie's words, "likes to play with new stuff."

Xie, a 29-year-old graduate of Tongji University in Shanghai, spent over six years working for Microsoft, where his latest projects included work on cloud computing. But Xie has had a passion for programming ever since he was eleven years old.

Being aware of the myriad possibilities of location based services, Xie began prototyping what would become sifang.com in November 2009. By April 2010 he had received angel funding, indicating the rapid dynamism of this sector.

To date, sifang.com as partnered mostly with the food & beverage, fashion, and retail sectors, which suit the tastes of its customer base. Also, it has built up network externalities by synchronizing users' status updates with some of the largest social networking sites -- including Kaixin, Renren, Douban, Windows live, Google Talk and Twitter.

Pay-per-click (PPC) and other methods of lead generation are possible options to gain further revenue -- but as Xie rightly points out, the entire LBS space is still in an early experimental phase. The current focus is to keep creativity and flexibility and to build a richer experience for users. By creating more quality "fun" as well as "real-value" services, Xie expects to attract more market share.

In a coincidence worthy of Newton and Leibnitz, simultaneous inventors of calculus, Xie admits that he had not even heard of foursquare.com when he had the idea for an LBS platform in China. Although the name sifang is nearly a direct translation of foursquare, the company is actually the result of several years of thinking about the power of 3G mobile phone possibilities. After reading about the founding of foursquare.com on TechCrunch, it was clear to Xie that the idea could work in China, as long as it adapted local characteristics.

Xie feels fortunate to be a part of the mobile internet age and is proud that much of the advances in this area have been innovations born in China and mimicked elsewhere. As location based services moved beyond simply "checking in" which Xie notes is "already getting old," sifang.com appears to be well-placed to capture a large slice of a rapidly growing pie.

Archie Hamilton, CEO and founder of Splatter, a brand consultancy that partners with Sina, Douban, and Youku, agrees. "For all the emerging technologies and models, localization is the key," insists Hamilton. "Just copying successful existing websites from the west is not a sufficient strategy. Companies like Youku, Tudou, and some of the various Facebook clones have all recognized this and revamped their strategy.

"This allows nimble small players a chance at achieving serious market share, but on the other hand, bear in mind that giants like Sina can reach 50 million users for their Twitter clone with virtually no media spend."

The top three giants that could shift the paradigm of how people in China interact and process information are Sina (over 80M users), Tencent (largest user base QQ) and Netease, according to Sam Lawn, an equity research analyst at Oppenheimer Investments (Asia).

"All of the three are well capitalized, further shifting resources to SNS- and twitter-like services (both PC and mobiles), and providing open platform types of strategies to further capture market share and expand their reach," says Lawn, "Look for Baidu to also leverage their strengths and jump into the SNS sector."

Among the big giants that have capitalized on the convergence of mobile, media, and internet is Lenovo. In November 2010, the Lenovo Group launched the LeFund to support the development of mobile internet applications and services, and the initial investment in the fund is RMB100M.

According to data from Lenovo, in just half year's time just before the launch of LeFund, 2,000 applications have been created, over 1,000 of which have been made publicly available. And 2,774 individual developers and teams have been involved.

Indeed, such hype is no surprise to Huang Aihua, vice president of technology at 3G.cn, the largest mobile platform and social networking service in China. The graduate of North Carolina State University spent several years at AT&T before moving to this local Chinese firm. In his view, 3G had remained merely a concept for many years in China and many "basic" things (e.g. how websites look on a mobile phone versus on a computer screen), which are actually quite tricky, have tripped up many aspiring market entrants.

Huang believes that success will come to those who realize that the mobile internet is not simply another version of the traditional internet. "Those who try to simply integrate 'web stuff' are certainly doomed," he says.

According to Huang, the mobile internet industry in China is very unique compared to other international markets where Apple's app store and Google Android applications have dominated market share. He believes these are not suitable for China, as there is much less willingness to pay for premium applications and bandwidth issues persist.

"Future improvements in mobile CPUs, overall bandwidth, and innovations in cloud computing should see much improved mobile video content, with the video gaming sector likely to benefit," notes Huang.

Interestingly, Huang points to the widespread use of public transportation in China in explaining the success of mobile applications here. Recent studies showed the average commute in Beijing is nearly an hour, among the longest in the world. With so much "down time" commuting to work or school, educational and/or entertaining apps will have a captive audience!

Another man who is nimble at transforming captive audience into cash cows is Riben Ox. Now the founder and CEO of Fclub.cn, an online fashion retailing site, Ox has previously served as exclusive agent for global brands Miss Sixty and Energie. Over a decade's experience in OEM supplying major labels like Armani and Diesel gave Ox deep relationships with global suppliers and retailers, along with a keen understanding of local Chinese consumers.

However, given the relative youth of the sector, there is no roadmap for instant success, and Ox admits to some experimentation in the early days of the company.

Upon launching the site Fclub.cn in January 2009 selling high end products, he ran into problems with consumers who assumed that Chinese sites must be selling fake goods. Learning from this, he moved into lower-end goods, but this only served to confuse potential customers.

Finally, in mid-2010 Ox found the sweet spot which he terms "Chinese mid- to high-end" and has developed a much keener insight on what online consumers across China want, with an eye on regional differences in the market.

As a result, the firm now boasts over 100,000 members, over 30,000 of which are categorized as "active." Orders per day have jumped from 40 per day in 2009 to over 2,000 per day by the end of 2010.

And the business enjoys a sort of "reverse seasonality," in that as with offline retail, sales do peak near the end of the year, Fclub.cn also maintains high sales figures in the traditional low-retail season at the end of summer.

Currently, the most expensive item on the Fclub.cn site is an RMB 30,000 piece of diamond jewelry; but Ox notes that in the U.S., for example, people already buy expensive items like cars online. He believes it will just be a matter of time before Chinese consumers also buy "big-ticket" items on the web, too.

Online consumption is still a relatively young phenomenon globally and it remains to be seen how these paradigm shifts will play out in the China market, given its cultural idiosyncracies. Early indicators seem to show that status symbols still matter in the online world, despite the virtual anonymity of consumers.

Splatter's Archie Hamilton, too, is a believer in cultural impact. He advises future market entrants to be aware of China's cultural focus on achievement as a status marker. "Think of the Gaokao [the widely-known rigorous college entrance exam], as applies to things like micro-blogging, gaming (MMORPGs), retailing and perhaps increasingly with LBS...online services that recognize and incorporate China's achievement culture will succeed in the future," Hamilton says.