Nurturing Online Communities conference in Shanghai, 2007.
China’s burgeoning Internet industry is helping fuel the nation’s economy. Online gaming and social networking are the most popular uses of the Internet. Business-to-business selling and online shopping are growing rapidly. In just a few short years, and with limited penetration, the Internet has grown to become one of China’s major industries.
The Internet is one of China’s largest industries. The China Internet Economy Research Center (CNERC) divides the Internet industry into many sectors and subsectors. These include Internet enterprises, such as search engines and service portals; Internet business activities, such as advertising, recruiting, and business-to-business (B2B) and business-to-consumer (B2C) e-commerce; online economic activities such as banking, investing, travel booking, and shopping; online social networking, which includes text messaging, chat rooms, and the online community; and online recreation, such as gaming, watching videos, and downloading music.
The history of the development of China’s Internet industry can be divided into four phases: beginning, upswing, depression, and recovery.
First Phase, Beginning (1993–1995)
In 1993 the concept of an Internet economy was first introduced to China, initiating the construction of basic network facilities. In 1994 China officially connected to the Internet, and four main networks were established: ChinaNet, run by a state-owned telecommunication company, is the largest Internet service provider in China providing public Internet access. China Science and Technology Network, managed by the Chinese Academy of Science, is a network for the scientific and technology communities. China Education and Research Network (CERN) is mainly for academic use by students and researchers. And China Golden Bridge Network links government departments.
Second Phase, Upswing (1996–1999)
In May 1996 Yahoo, founded by Yang Zhiyuan (also known as Jerry Yang), was listed in NASDAQ for the first time. A rush to open websites took over China, among which the portal site Sohu became the most influential. In 1998, World Electronic Commerce Year, the Chinese Commodity Market officially joined the Internet. In that same year, the Chinese Ministry of Information Industry (MII) was established to regulate the entire information industry, from the manufacturing of electronic and IT products to developing national communication networks. Internet connections were installed under the directive of the MII to cover forty-three cities that constitute the Chinapac network for data transmission. The MII also connected one thousand universities under CERN to use the Internet.
In 1999 B2B e-commerce began, and the portal site Sina was launched, which ended the leading role of Sohu in China. Also at this time, different kinds of professional vertical websites were launched, and the competition among domestic websites became more intense. During these years the information industry became China’s first large-scale industry. China’s IT sector was growing at 25 percent per year.
Third Phase, Depression (2000–2002)
China, like the rest of the world, suffered through the dot-com collapse at this time. A great number of websites closed before showing any profit.
Fourth Phase, Recovery (2003–present)
Since 2003, the Chinese Internet industry has recovered and has been growing stronger. Although the Internet industry started comparatively late in China, it developed rapidly. Since 2005, its market scale has grown by 40 percent or higher every year.
Overall, the Internet industry continued to grow through 2008, although at a slower rate than in previous years. All sectors continued to develop, and online gaming and mobile value-added services became two of the main drivers in the evolution of the Internet industry.
In 2007 the market share of online gaming exceeded that of mobile value-added services for the first time, with 57 million users generating some 12.8 billion yuan ($1.8 billion) in sales. But after ten years of rapid development, online gaming entered a new phase in 2008. Social problems and legal issues caused by gaming have put this sector of the industry under close government scrutiny. At the same time, reorganization among providers, the licensing of third-generation (3G) technology, and the regulation of junk messaging have boosted mobile value-added services. In the coming years, this sector is expected to see more reshuffling as the government works to strengthen management practices and expand the market.
The top four earning enterprises of the Chinese Internet industry in 2008 were Tencent, China’s largest Internet services portal; Shanda, an online gaming company; Alibaba, a B2B marketplace portal; and Netease, a Web portal and gaming site.
According to CNERC, B2B e-commerce in China developed rapidly in 2008, despite the global economic crisis. Under the effect of the financial crisis, more small and medium-sized enterprises turned toward the domestic market, and online retailing started to become attractive to buyers.
Internet advertising spending grew from nothing in 1996 to 39.6 million yuan ($5.8 million) in 1998 and to 82 million yuan ($12 million) in 1999. It reached 5 billion yuan ($731 million) in 2006. The 2008 Beijing Olympics provided a superb opportunity for large-scale Internet marketing, and Internet advertising increased by 70 percent from the previous year. The long-term effects of the financial crisis that began in 2008 are yet to be seen, but Internet ad sales were expected to hit 12.2 billion yuan ($1.79 billion) by 2009, according to a 2006 Deutsche Bank report. The media service group ZenithOptimedia predicted in a 2007 report that online ad spending in China will surpass magazine ad spending by 2010.
According to Taobao.com, China’s largest online auction site, online shopping accounted for just 0.64 percent of retail sales in China in 2008 but will likely make up 5 percent to 8 percent by 2012. The total amount spent online increased 125 percent in 2008, according to a survey by Shanghai-based research agency iResearch Inc. Online shopping in China was expanding sharply in early 2009 and expected to continue growing, bucking the worldwide trend in private saving over spending. The iResearch agency predicts Chinese e-shoppers could be spending 569 billion yuan ($83.1 billion) a year by 2012. E-shopping is attractive to Chinese consumers because of the low prices of goods available online, the countless choices that appeal to younger fashion-conscious buyers, and the purchasing power of the yuan.
Foreign-made goods are in particular high demand with online shoppers, with products from Europe and East Asia leading the way. In 2008 purchases from the United States ranked fourth on Taobao.com by volume but first in amount spent per transaction. Transactions at Taobao.com’s global shopping channel have been rising at a three-digit rate each year since the channel launched in 2006.
Profiting from Taobao.com’s success, Alipay, an e-commerce payment-transfer provider, introduced a new service in 2007 that enabled overseas retailers to sell products directly to mainland consumers. Eighteen months after launching, Alipay had 250 partner retailers based in Hong Kong, East Asia, Japan, Europe, and the United States. Its membership had reached 120 million by the
end of 2008. The service is sure to grow because Chinese online shoppers are trusting and prefer third-party payment transfers to paying by credit card online.
The most popular purchases through Alipay are cosmetics, brand name clothing, nutrition products, and electronic equipment and gadgets. Alipay’s biggest user group is made up of young, relatively affluent women. Often a number of these shrewd shoppers band together to place group orders, which results in reduced shipping costs.
The Internet shopping market potential is huge. In June 2008 China became the largest Internet country in the world when it surpassed the United States with 253 million users online. (By comparison the United States had 223 million active Internet users in June 2008.) By January 2009 there were 298 million Internet users in China, according to China Internet Network Information Center, a government-approved group that provides data on technical aspects of the Internet as well as demographic information.
In spite of the rapid development of the Internet industry and Internet use, a number of factors persist to limit development of the industry and the proliferation of Internet technology.
Most Internet users in China live in urban areas. People in the countryside are isolated by the lack of communication. Estimates are that half have never even used a telephone. Farmers do not know the market prices for their crops and are swindled by business people who profit from their ignorance. In emergencies farmers have to walk, often long distances, to get help because they have no technology with which to connect to the outer world. Lack of access to communication restricts employment and education. The main cause of unequal access is cost. Most people in the poorer rural regions cannot afford Internet services or equipment.
Although there has been a notable expansion in the quantity of services and equipment, quality has remained second-rate in many cases. China’s Internet infrastructure lags behind most other developed countries’ facilities; the bandwidth is narrow; the pace of accessing is slow; and the running standards of networks are poor. Development of the Internet industry has been unbalanced. Different sectors and different enterprises have developed at different rates. In addition, investment in Internet infrastructure construction and improvement has been low.
The level of innovation in information technology in China falls far behind that of other developed countries. The core technologies that make up of China’s basic information architecture—such as network facilities, computer chips, system software, and security products—are usually provided by foreign enterprises. Some major technology projects still depend heavily on the participation of foreign companies.
Although advancing, until recently B2B e-commerce had been unknown and underused. A suitable platform for effective B2B e-commerce is still being tested. Logistical problems, inefficient payment systems, and a lack of available credit have been bottlenecks in the expansion of e-commerce in particular and the Internet industry as a whole. But the government is now actively promoting a workable e–commerce platform, and awareness of this way of doing business is growing among Chinese business people.
Despite the limitations and problems, researchers at CNERC and others believe that the Internet industry will be grow steadily in the future, if not as dramatically as in the past. With easier access, higher quality products and services, supportive government policies, and the commitment of 300 million Chinese Internet users, it is reasonable to expect a bright future for the Internet industry.
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Source: Du, Junfei. (2009). Internet Industry. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 1175–1178. Great Barrington, MA: Berkshire Publishing.
Internet Industry (Hùliánw?ng ch?nyè ?????)|Hùliánw?ng ch?nyè ????? (Internet Industry)