Getting Started in Japan

Earlier in May 2006 Baidu had announced a hiring plan to search for Japanese and Vietnamese search talents and product managers to be in charge of know-how on the local competitive market as well as local cultures. Rumors at the time were that Baidu had already hired several Korean search engineers. Nearly a year after the first signs of Baidu expanding to other Asian markets on March 20 2007 a test version of Baidu.jp was launched. The site runs on servers located in Japan and straight from the start it turned out that the site was mainly getting visitors from China looking for content they can’t find on Baidu’s Chinese site. According to Alexa, at the time the share of Chinese users visiting Baidu.jp nearly reached 60 percent (of which 76 percent were visitors searching for pictures) compared with less then 30 percent of the visits coming from Japan. In a reaction on the launch of Baidu.jp, that was still in beta at the time, the purpose of the bulk of the Chinese visitors is well illustrated: “It is really very good, but nothing stunning for other countries, especially Japan which has a large, specialized pornography industry. Still this is huge for China!” Not surprisingly even before its official launch in January 2008 when more Japanese language services including a blog search application were added, Baidu.jp was blocked in China in April 2007, less then a month after the first launch.

Baidu.jp starting page

Currently Baidu’s Japanese subsidiary has around 30 employees and nearly 90 percent of Baidu.jp visitors come from Japan while only 8 percent comes from China. When looking at Alexa statistics it looks as if Baidu did not get a foothold in Japan. With only 0.3 percent market share it has not been able to claim a significant market share from market leader Yahoo! and the pursuing International giants Google and Microsoft. Though contradictory with its initial naïve announcement Robin Li now appears to be realistic about the situation and realizes that Baidu will not become a significant player over night. “We will be very patient.” In another reaction, Robin Li said that Baidu has plenty of experience in starting of as the underdog and taking over a market. “Baidu wasn’t No. 1 in China from Day One,” he said. “We started quite late. So we are familiar with how to play the catch-up game.”

Why?

It is interesting to evaluate what the initial goal and reason was for Baidu to give Japan a try with such an extensive budget. The decision must have been based on many more factors and incentives and it would be too one-dimensional to purely assume that Baidu genuinely suspected to quickly become a big player in the Japanese search market.  For my study I have tried to collect all possible incentives for the decision I could find. During my interviews with Tangos Chan, China Web 2.0 expert, and Zhang Tao, Baidu’s manager of international business, I have asked them to distribute 100 points over the four reasons for Baidu’s Japan adventure that I had previously derived from numerous interviews. The two respondents could also enter a new reason which they both did and attributed 5 points to. The results of the small survey are depicted below.

Baidu in Japan survey

Following are the six reasons for Baidu to enter Japan worked out separately and in order of influentialness.

1. Maybe the most important reason for Baidu to enter the Japanese search market is Robin Li’s power and personal pride. As depicted in the survey above according to Zhang Tao, sometimes working with Robin Li himself, this could have been one of the primary reasons. Zhang’s remarks on the whole Japan expansion situation made me realize that Robin Li plays an essential role in Baidu and has a very distinctive view on the market. It seems that his personality is determinative for Baidu’s direction and he almost solely formulates its strategy. After having beat Google in its home market he now wants to show the world that a Chinese company can compete with the big Western giants in other markets also. According to Tangos Chan, “Robin Li wanted to prove that it could beat Google not only in China.”

2. The chance to gain valuable market experience in a foreign market has also had its effect on to the choice of Baidu to enter Japan. Paul Denlinger, CEO, China Business Strategy and tech blogger behind China Vortex, thinks this has been one of the major reasons. “The thing is that market share is not the most important part. The important part is to go to another market and put a flag there to learn and understand how the Japanese search market is different from the Chinese search market” he says. Zhang Tao shares the same view and has addressed 40 out of 100 points to the ‘longer term International strategy’ reason. Tangos Chan thinks that the opportunity to learn could not have been extremely influential. I tend to agree since the amount of resources that Baidu has poored in the Japan project does not match with such a longer term strategy. If Baidu wanted to gain valuable insights they might as well have looked for local partners or even acquire local companies which would have been a much cheaper and more efficient approach.

3. The most obvious reason for Baidu to give it a try in Japan is, as mentioned, the presumption that they really stand a chance and can compete in another market. Success in the Chinese market made Baidu feel confident enough to start tapping in on the $700 million paid search market rather than focusing on growth in the relatively undeveloped and small local market. In a reaction on the launch of Baidu.jp Robin Li has said: “We believe that our proven strength in non-English-language search, the high Internet penetration in Japan, as well as similarities between the Chinese and Japanese languages make this market an ideal next step for Baidu.” Gang Lu, owner of MObinoDE and China Internet expert, adds to this and explains that Baidu might have thought “that the Japanese and the Chinese are quite similar and also historically Japan was a part of China, so the technique could be similar.” Some people I have met think this has been the primary reason for the rather drastic International initiative. They believe that Baidu genuinely thought that its strengths, especially its ability to cope with tens of thousands different Chinese characters, combined with good technology would help them to do well. Also because Japan is an important trading partner of China, Baidu might have aimed for linking small Chinese companies to Japanese consumers and businesses through their search engine. It could have been assumed that Baidu.jp would become particularly popular among these groups because these have a strong interest in inexpensive goods produced in China.

4. When I asked Tangos Chan to distribute his 100 credits he argued that besides the major weight of Robin Li also the overall attitude or sentiment of everybody in the company could have been of influence. He came up with a reason I had not previously encountered. He argued: “it was the whole company that wanted to prove that they stand a chance abroad.” Paul Denlinger also thinks this could have been a factor that contributed to Baidu’s move. “The Chinese are proud of Baidu.” he says. Gang Lu’s reaction on Chinese companies going International is illustrative for how many proud Chinese feel about the situation: “I was very exited when I first heard that some Chinese companies were going abroad.”

5. An additional reason that Zhang Tao thinks might have been of influence, is closely related to the influence of Robin Li. According to Zhang Tao the Internet does not have a geographical border it only has cultural and language borders. He points out that Robin Li believes in the concept that if you want to be a global search engine, the best way is to localize as much as you can so language and culture are the main factor for success. This is something Baidu has learned from the Chinese search engine market where Google failed because it “just tried to copy its concept which made them so successful in the rest of the world.” “We want the users in Japan to be a benchmark. If we succeed in Japan our concept is approved.” Zhang Tao explains.

6. A different reason for Baidu to go over the border has to do with the fact that it is listed on Nasdaq. As a public company Baidu has to deal with shareholders and investors that are looking for short term profit. “These guys will look at your quarterly earnings and will try to make sure that you are making money.” says Paul Denlinger. Shareholders could have pushed Baidu to make the hasty decision to enter Japan. Benjamin Joffe, Managing Director of +8* (plus8star), adds to this and says the decision “sends an interesting signal to Nasdaq”. He argues that maybe Baidu has deliberately avoided expanding to developing countries such as the Philippines or Vietnam with a small online advertising market. Instead they wanted to make “a big headline” and expand to a more mature market: Japan, with the world’s second biggest online advertising market.

Conclusion

It is uncertain what has been the primary reason for Baidu to expand its services to Japan, but based on the different stand-points that I have come across there are probably three key factors that have been decisive. When looking at the model the foremost important one is Robin Li’s strategic views combined with the key decisional role he plays. As a founder and CEO he still plays an essential role in determining the longer and short term strategy which has a profound impact on the company. Furthermore despite spending 14 percent of the total 2007 budget and skipping the whole partnership and joint-venture part, Baidu entered Japan to learn. Also considering rumors about expansion to other Asian regions and even Europe, expanding to and learning from the Japan market seems to be part of a longer term International strategy. Lastly because of the domestic success and distinct strategy used in the Chinese market I assume that Baidu genuinely believed that it could quickly acquire a strong position in Japan.

The Uncertain Future

Baidu will certainly have a hard time growing its share in Japan considering the trong competitors Yahoo! and Google. But the strategy has to change drastically in order to even stand the slightest chance of gaining a significant market share and eventually make money. According to a Baidu insider the operations in Japan will be further intensified, but this was all before they got into trouble with their dodgy practices concerning paid for ads of unlicensed suppliers of medical products. Before the while crisis Baidu expected to spend between $20 million and $25 million on the development of its search service in the Japanese market in 2008. Furthermore in July 2008 Robin Li has said that a new president of Baidu Japan will be hired and that despite any specific plans Baidu is also looking into the Taiwanese market. Regarding these considerable efforts to intensify Baidu’s overseas operations and despite Baidu’s current reputation crisis I think it is unlikely that they will pull the plug in Japan any time soon. It is more likely that Baidu will cut back on its International expansion budget.

The special started of with an interesting and clear presentation from Kristian Segerstrale, CEO Playfish, a social games company. Based on deep insights in both the gaming and SN market he was able to express why social gaming is the next logical step for both industries. In order to increase the life cycle of existing SNs such as Facebook and MySpace they have to improve constantly otherwise users will not come back and get bored of the service, social gaming will make the users come back. Kristian argued that the gaming industry is missing out a large piece of the market because there are a lot of emotions that the gaming industry has not tapped in yet, namely social emotions like love, envy and pride. Until recently most games were played in solitude and social gaming will change this. As Kristian pointed out gamers will not have to identify themselves as gamers or hardcore gamers anymore. In the future more and more people get in touch via friends or persons they know as opposed to having to go to a store and buy a game, which acknowledges that you are a ‘gamer’.

Games can tap into SNs and know who your friends are. Unlike the mobile market where companies always had to wait for new more sophisticated handsets that are able to run certain games or applications, SNs have provided the market with a ready to tap in infrastructure or digital village. According to the experience that Playfish has build up in little more than a year social gaming has certain characteristics:

• The games are played with Real Life friends
• The audience is massive: the infrastructure is aleady laid out, just think of the sum of all members of Facebook, MySpace, Hyves, etc
• Engagement is high, people play around 30 minutes a day.
  The demographics are very broad
• Social Games have new kinds of mechanics (more socially targeted, also business models differ: digital goods)

Case studies that Kristian mentioned were among others the immensely popular ‘Friends For Sale’ game on Facebook and the by Playfish developed ‘Who Has The Biggest Brain’. Through these examples it became clear that social games are very different from regular casual games because they demand much more interaction, emotion and social engagement from users and their real life friends. Also the distribution of social games is different: 95% of the players get in touch with the game through viral word of mouth within existing communities.

Based on the first half of Kristian’s presentation it seems that the future looks very bright for the young but vastly growing industry, but there are some possible pitfalls and social gaming faces several challenges. First of all experience has taught the industry that creating a hit game is very hard. It seems that most of the success social games on Facebook were lucky shots that sticked coincidentally. The time and expertise needed for deliberate and sustainable success should not be underestimated and the young Playfish is still learning a lot every day. An essential element for a bright future of the industry is getting the monetization right. Besides the more common advertising and branded game model there have been successful cases of the implementation of a partial digital goods business model. There is plenty that social gaming companies can learn from for instance Korea (think Cyworld) or China (Shanda or Tencent with QQ) on digital goods monetization systems. Also in order to build for the long run, users have to be approached with honesty. The market has to be prevented from spam and hit-and-runs from companies that try to make a quick buck. I think Facebook can help here because it is also very much in their interest to prevent the SN from being flooded with ‘crap’ games. Lastly a more broad adaptation of OpenSocial is needed in order to get the industry to a new level.

After Kristian a venture capitalist from Atlas Ventures, Maximilian Niederhofer, added some more insights in the direction the social gaming market is going. Maximilian showed the crowd some interesting statistics to put the potential growth in perspective. In the current gaming market the best selling console is the PS2 with over 120 million sold. When you compare this with the amount of people that make use of Flash in the world, 1.2 billion, one can imagine the potential that social gaming has.

Furthermore Maximailian incorporated on the idea that Kristian had mentioned before. Where currently real ‘gamers’  have to commit to a game and subsequently find friends to play with, social gaming will turn this around: you have friends first and then gaming comes into play. Nintendo Wii was one of the first consoles that understood this, when you look at their ads it is not about graphics but all about playing and having fun with your friends. Basically the emphasis has shifted from graphics and gameplay to social emotions.

The third speaker of the PICNIC special was the CEO and founder of Social Gaming Network (SGN), Shervin Pishevar. SGN is currently one of the leading social gaming companies in the world and has developed among other the successful Facebook social game and community Fluff Friends. A game that got special attention was iGolf (check out the TechCrunch clip below), an iPhone game where you can swing you iPhone like a golf club, very cool and innovative, but not very social if you ask me. Shervin gave some great insights in the statistics of social games in general based on SGN numbers. Among others he mentioned several strategies and mechanical changes of a game to lengthen the relatively short life cycle and accelerate the growth in daily active users (DAU).

After a short brake all the speakers sat down for a panel discussion where it was emphasized how many possibilities there are in the growing market. A special note was made on localized social games. There is no company that has really excelled in this yet and there are plenty of opportunities for start-ups in this area according to all panel members. The rest of the day there were several interesting case studies and presentation from among others Bigpoint (browser based MMOs), watAgame (Go Supermodel),  and also Yme Bosma from the popular Dutch SN Hyves spoke briefly about the future of SNs in Holland, gaming and mobile. The day was concluded by another panel discussion where subjects as for instance the definition of a social game and the possibility that social games offer for marketeers were discussed. Overall the Social Gaming special was very interesting and insightful, it provided me with some great insights in where the market is going and what the SN and gaming situation will possibly look like in 5 years.

For more information on Social gaming:

http://www.plus8star.com/resources/BDEJ_PlusEightStar.pdf
http://www.insidesocialgames.com/
http://www.littlebigplanet.com

The screenshots below show the the basic interface structure of the most prominent Chinese portals Sina and Sohu.

Sina Horizontal Interface

Sohu Horizontal Interface

The next two screenshots are from AOL and Yahoo, the two biggest North American portals. There is a clear difference in interface design: the two North American portals have a vertical interface structure instead of the Chinese horizontal interfaces.

Vertical Yahoo Interface

Vertical AOL Interface

For more theory on the influence of language on interface design I recommend reading the following rather contradictory reports:

Effectiveness of Menu Orientation in Chinese- Heloisa Martins Shih and Ravindra S. Goonetilleke, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong

Designing menus for the Chinese population: horizontal or vertical? – Jianming Dong and Gavriel Salvendy, IBM Corporation, Austin, TX 78758, USA

There are several spikes in the graph of Facebook users in China. Especially at the end of May there seems to be a sudden interest in Facebook. Also at the end of June of this year it seemed that Facebook was catching up fast during that time. It would be interesting to do a more thorough research on this while taking the popularity of the search engines in a country into account.

Furthermore according to the graph Xiaonei is becoming less popular. So according to this graph it would mean that Chinese netizens are losing interest in both SNS Facebook and Xiaonei! Is there another Chinese SNS that is growing in popularity (51.com, QZone?) or is Social Networking in general becoming oldfashioned in China?

I wonder how much these numbers are influenced by the differences in Baidu and Google users. Are Chinese netizens that use Google instead of Baidu different than their Baidu counterparts? A hypothesis could be that  Chinese Google users are more experienced compared to Baidu users, Chinese Googlers use their Internet more for information rather than entertainment? Anyhow, you can find the full Asia SN popularity test here.

Pieter-Paul Walraven: What are your thoughts on Chinese Internet companies going abroad?

Tangos Chan: Actually most of the Chinese companies will not consider a globalization strategy so far because the Chinese market is huge. So if they can serve this market well they could become very big companies. Look at for example Baidu and Tencent. Of course there is also the language barrier. I think an English language service in the US such as Google is automatically a global service because it serves all the English speaking people. In China companies are bound to be a Chinese service.

So I think there a really 2 kinds of services that will consider to go abroad. Firstly it is the very big companies such as Baidu, Alibaba, and Tencent. These companies will start to consider to get more users in overseas countries. I think most of these companies will start from some developing countries. Or some eastern Asian countries such as Japan or maybe they are also considering Korea. I think Tencent actually has a dedicated team to learn from new applications in Korea and copy it to Tencent.

Secondly, another kind of service is the new start-ups that have been established by returnees. Or established by someone who has worked for a big international company such as Microsoft or Google. So someone who has international market experience. These kinds of people will launch their service with an English version from the first day.

You should check out a web service called Mojiti. I am not sure whether this start-up is still alive now, it is actually established by one of the ex-Microsoft guys. The service is about video, you can make subtitles or add text on a video. The service was acquired by Hulu, a video-site launched by NBC and News Corp. So the whole Mojiti team is working for Hulu now. I think Hulu just thought that the Mojiti technology was good so they have acquired the team for their technology background. I think these kinds of services will consider a global entry from their first day.

PPW: So do you think that there are enough innovative ideas that stand a chance internationally?

Tangos: I think p2p video streaming technology is quite good in China. So services as PPLive and PPStream. They are leading in the global market. I heard that France Telecom is currently partnering with a Chinese company in order to try to implement the technology in the French market. So I think that there is innovation in the Chinese market but it is still only a small percentage. Most of the Chinese companies just copy ideas from countries overseas, they copy many ideas from the Silicon Valley. But I think that for p2p video-streaming China is quite innovative.

Also IM bots is something that China is good at. So you chat with a robot with your IM service. There is a company called Xiaoi that is the most well known IM bot in China. They are the official partner of Windows Live Messenger in China. So if you want to check the weather you just ask a question to the bot. They received plenty of VC funding, I believe IDT has invested in them. I have blogged about this a while ago.
Actually in China there are also some companies that offer IM bots where you can order your lunch. You can just type in what kind of food you want for lunch and maybe half an hour later it is delivered. So you just ad this bot as a contact in your MSN. So then you just type in what you want to order.

Also gaming companies like Shanda and Perfect World are going abroad. I believe Perfect World is besides their operations in the US also starting in Europe. Tencent is also cooperating with AOL to provide casual games. I think for online games, casual games will have a greater chance to succeed overseas when compared to MMO’s. This is because Asian and Western companies have very different cultures among MMORPG games. So I think that games that are very popular in China or in Korea might not be as popular in western countries. Also in China over 60% of the netizens play online games and I think that percentage in the States is much lower.

PPW: Do people in lower tier cities play games more often than in metropolitan cities?

Tangos: Because the currently available statistics are only on everybody that plays online games we have no idea about how many of them are playing casual games and how many are playing MMO games. I think in China more and more people are starting to play online casual games. So if we consider the whole landscape including MMO and casual games I don’t think that percentage will drop.

According to a recent report the percentage of users who play online games in urban cities is even higher in rural areas. It is about 10% higher. It is a report about Chinese Internet users under the age of 25. I think that the numbers for urban cities are about over 63% and in rural areas it is only about 50%.

PPW: Why is this? I would expect differently because in urban areas people have alternatives for entertainment.

Tangos: According to the report the usage rate of almost all-online services in rural areas is lower than urban areas. Only 2 services share a similar percentage of urban and rural. One is online chatting so QQ. And the other is music download. For the rest of the services the usage rate is higher for urban areas. I think that these numbers are not about how much time users put into online games, but it is about how many of them have played online games. So maybe in urban areas people play short games during their break at work. But also maybe for the people in rural areas, they mainly use the Internet for QQ. Therefore they have similar usage rates compared to urban cities.

PPW: How should companies cope with the rather skewed user base of China; sophisticated users in the eastern metropolitan areas and less experienced netizens in the more rural areas in the west?

Tangos: Actually I think that some companies just focus on one kind of user. For example the SN website called 51.com. I think they are the MySpace of China. They target users in 2nd or 3rd tier cities. I believe they have only a low percentage of users in the big cities. Xiaonei is more targeted on university students so they don’t have many members in the more rural big cities.

But it is not easy to cover all the users across China. It also depends on your service because if you are a search engine like Baidu it is not really a problem because everyone uses a search engine in more or less the same way. For SN websites it is different. Maybe for video-sites it is not really a big deal either because in both urban and rural areas people will watch dramas.

PPW: And what about MMO companies, is the skewed situation a problem for them?

Tangos: I don’t think the big gaming companies will have a problem. Maybe the only problem is whether the Internet cafés in rural areas are able to run the games or not. But for users I don’t think it is a big problem. If you look at the figures, for Internet users younger than 18 years old, the percentage of them that has ever played online games is over 76%. So this is the highest group of users that play online games. So when people grow older the percentage decreases.

PPW: Do you think Social Networks have a lifecycle, like games have?

Tangos: I think the challenge is whether Facebook can provide enough applications or new services, which can attract users. Because as a user when you are in a SN for maybe 2 or 3 months you can sometimes feel fatigue. When you log in you just don’t know what to do on the network. So I think that is one of the success factors of Facebook; they have launched a developer’s platform. So users have many new applications to play with everyday.

I think that will be a trend for Social Networks in China. So far none of the Chinese SN’s have opened their developer platform. MySpace China is working on OpenSocial and also some smaller startups are doing this. City!N is working with OpenSocial too.

PPW: You think that there is a Chinese Internet bubble coming up?

Tangos: I don’t think that there is a bubble in China. This year investors became more cautious in new investments though. Of course there are some very big investments but generally speaking the investment market environment in Internet start-ups is not so good. There are many small start-ups that have difficulties in raising funding. Especially Chinese companies that do not have a very good business model. I think 2 years ago the market environment was much better. 2 years ago there were plenty of little start-ups without a good business model that have received funding from investors, but after 2 years investors realized that some of their investments are not doing very well now. So now they become more cautious.

PPW: Do you think that another reason for VC’s becoming cautious has to do with the fact that there are not so many ideas to copy from other countries anymore; Chinese entrepreneurs have to start coming up with their own stuff?

Tangos: A copy is not a problem for an investor. But also every investor is looking for something unique on a global level. If you have a service, which is truly unique, in China investors will hesitate and they will be more comfortable to invest in copied ideas. I also think there are too many companies that want to invest in China. I think a lot of VC’s are managing too much money so they are eager to invest and make some big deals. So for new start-ups it is not easy for them to raise small funds, small rounds. Many VC’s just ignore fundraising for under maybe $5 million. There are VC’s that used to invest maybe $1 million to $3 million, but currently they will only consider investments from over $3 million. So they have too much money and they need to invest it all within 1 or 2 years and they don’t have enough energy and time to invest in many small start-ups. They need to look for other bigger investments.

PPW: It seems that the Chinese government has a pro-active approach in the development of the Chinese economy, they realize that the next step is innovation and setting up Chinese brands in order to sustain the development.

Tangos: Yes. But it is really not easy. If you want to make Chinese more innovative and creative you have to educate them from the bottom up, so start with the children. According to my experience I think the educational system in China, from kindergarten to primary school, does not encourage children to think creative and does not stimulate creativity overall.

It seems that more and more people in the rural areas are getting into private-made tech stuff! Is there a trend coming up of autodidactic farmers in China? Check out this submarine or this story of a guy that has built his very own helicopter! Also farmer Wu Yulu is into home-building; he makes his own robots.

The emergence of the Chinese economy has many similarities with the past emergence of the Japan and the ‘four Asian Tigers’ Taiwan, Hong Kong, Singapore, and the Republic of Korea. Even though there are major differences in the economical climate for these tigers they have all gone through a certain development pattern in order to sustain their growth. Private domestic investment, combined with rapidly growing human capital, were the principal engines for growth.

Chronologically their development pattern looked something like this:

• Lure in foreign investments with low-wage assembly work
• Attract multinational investments and slowly start to build up some white collar services
• Stimulate and attract multinational high-tech investments
• Knowledge transfer, for example through the acquirement of foreign companies
• Start developing and branding own products in order to sustain economic growth

Learning about how the four tigers achieved sustainable growth and how the government has stimulated companies in the past will give me more insight in China’s current development. Elements that are relevant for my thesis are: the market conditions, policy interventions and strategic choices by the Chinese government.

The World Bank

In a 1994 World Bank’s study ‘The East Asian Miracle: Economic Growth and Public Policy’ an attempt was made to understand the miraculous growth of Japan, the four tigers, and the three newly industrializing economies of Southeast Asia, Indonesia, Malaysia, and Thailand. In the report that is mainly focussed on policy interventions, the secret of the economic succes of these eight so called High Potential Asian Economies (HPAEs) is unraveled.

Rapid Growth

HPAEs differed from other developing economies in several ways. High rates of investment, exceeding 20% of GDP on average during 1960-90, rapid growth in domestic savings, and high endowments for education, are three key factors of the economical growth. Also the total factor productivity (TFP) performance of most of the HPAEs exceeded that of most other economies during 1960-90. The main components of the TFP were technology growth and efficiency. To summarize: the success of the eight HPAEs was a result of a combination of allocating capital to high-yielding investments, education, and at catching up technologically to the advanced economies.

Public Policies

What about the influence of public policy on economic growth? What interventions were made to allocate resources to high-yielding investments? According to the World Bank study most of the HPAEs have created what they call “contests”. The key feature of these contests was that the government has distributed rewards to well performing companies. Rewards could exist of access to credit or foreign exchange. Also acquisition of technologies through an open policy to direct foreign investments and licensing is mentioned as an important element for growth.

Export Growth

Low inflation, a result of good macroeconomic management and policies, encouraged long-term planning and investment and may also have been responsible for exceptional saving rates. Many of the policies that were primarely aimed at fostering stability also contributed to rapid export growth. High savings in Japan and Taiwan allowed them to enjoy extended periods of exchange rate protection which kept them competitive in the export market. This can be compared to the current situation China is in.

Economic development and cooperation

A very relevant element of sustainable economic growth for China has to do with the support of the society at large. How did the HPAEs cope with legitimacy of their often authoritarian or paternalistic leaders? According to the World Bank study explicit mechanisms were used to demonstrate the intend that all would have a share of future wealth. This is definitely going to be a challenge for the Chinese leaders because of the size of the population and especially because of current income differences between the coastal and rural areas. According to Andrew Ross in Fast Boat to China, China is currently in a unique situation: ‘From the lowest assembly platform work to the upper reaches of industry and services.’ How are China’s leaders currently demonstrating to less developed rural areas that the government intended for all to share the benefits of growth? Paul Denlinger wrote an interesting post on the importance of Social Stability in China on The China Vortex.

Human Capital

Levels of human capital were higher in the HPAEs in the 60-ies than in any other low and middle-income economies. This not only resulted in widely available primary and secondary education, but also in an improvement in the quality of schooling. Also tertiary education in HPAEs tended to be more focussed on technical skills. The World Bank report states: ‘Overall, educational investments seem particularly well focussed on the acquisition and mastery of technology.’

Comparing Economic Development in the HPAEs to China’s

I have picked out only a few of the long list of elements that contributed to succesfull sustainable economical growth in the HPAEs dicussed in the World Bank study. At first sight it appears that there are many similarities between the past development of the HPAEs and the current development of China, but there are also considerable differences. Therefore the World Bank concludes with a relevant note: ‘Recently China, particularly southern China, has recorded remarkably high growth rates using policies that in some ways resemble the HPAEs. This very significant development is beyond the scope of our study mainly because China’s ownership structure, methods of corporate and civil governance and reliance on markets is so different from the HPAEs, and in such rapid flux, that cross-economy comparison is problematic.’

What would this implicate for China where piracy is still very common and because of it some markets get the chance to flourish? I have spoken to some people about the future of the Chinese Internet and more specifically about what Internet markets in China will most likely catch up or even pass the West. According to some of the people I met international property rights enforcements such as ACTA provide services as PPLive, p2p streaming video network with the largest number of users worldwide, and PPStream with great opportunities. Because of the strict policies in the West they hardly have any competition from overseas. According to Tangos Chan from China Web 2.0 Review,

p2p video streaming in China is already leading in the global market

Foreign companies are already actively looking for Chinese p2p partners in order to use the technology in their home markets.

It is very likely that the upcoming ACTA will give Chinese p2p technologies even more time, space, and opportunity to innovate, develop, and evolve. According to the wikileaks source the proposal also specifies a rather naive plan to encourage developing nations to accept the legal regime. Regarding the current situation of piracy and p2p services in China cooperation by the Chinese government seems rather unlikely.

Perfect World:

Video-sharing sites Tudou and Youku, but also gaming sites such as Giant Interactive, Perfect World, and Shanda were forced to shut down and suspend their services for three days from Monday the 19th. Marc van der Chijs has posted a nice story about the actual series of events before shutting down a casual gaming (Spill Group) and video-sharing site (Tudou). Competing entertainment websites are anxiously keeping an eye on each others actions in order to prevent losing users, or worse, losing their patriotic reputation. Benjamin Joffe from Plus8Star made an interesting remark about this: ‘Over-reaction is not a choice in China. Better follow and over-follow government guidelines else your competitor will label you unpatriotic.’

Giant Interactive:

As a result of the entertainment suspension most web entertainment related stocks are falling. After the earthquake I have been closely following the news and stocks of three of the gaming companies I visited during my time in China: Shanda Interactive Entertainment Ltd (Public, NASDAQ:SNDA), Giant Interactive Group Inc (Public, NYSE:GA), and Perfect World Co., Ltd. (Public, NASDAQ:PWRD). Coincidentally the week after the earthquake both Perfect World and Giant Interactive had their financial reports due. Shanda will announce their financial results for the first quarter on May 27th.

Shanda:

Despite that Perfect World even beat Wall Street estimates for the first-quarter, the stock price still plunged around 12%. It seems that the only reason for the stocks to decrease is that they lowered their second-quarter revenue forecast due to the suspension of their services. Also Giant Interactive stocks plunged even though they surprised the analysts with a a first-quarter profit of $0.20 per American depositary share (analysts were expecting $0.16 a share). As you can see in the graphs of all 3 companies the decrease in value is quite drastic, especially when considering the suspension of only a few days. It seems that besides the companies themselves also shareholders are overreacting.

It is surprising though that the stock value has not yet recovered to the level it was before the earthquake so there might be something else that influences the stock value. Did the quake result in a general distrust in this particular market? Did the areas in Sichuan that were affected by the earthquake contribute a considerable part of revenue for MMORPG companies?

[UPDATE] Frank Yu has some good insights in the reason for distrust in the gaming market [UPDATE]

I have collected around 25 hours of interviews, nearly 5 kilos of booksleafletsreportsanalyses, and a fortune worth of digital reports made by some prominent research companies. Furthermore I have a lot of new Facebook and LinkedIn contacts, around 150 pictures, AND, last but not least, a red Chairman Mao waving alarm clock!

Guestblogging

During my time in China I have written several posts on my class blog which fortunately was not blocked:

- My experiences in Shenzhen; visiting Tencent and Shenzhen High-Tech Industrial Park (SHIP).
- Who I have met and what I have been doing in Shanghai.

I also had the opportunity to blog for the MObinoDE blog from Gang Lu:

- My thoughts on Tencent expanding overseas.
- My thoughts on Shanda and Giant Interactive after I visited their headquarters in Shanghai.

Pooring my thoughts on paper ASAP

The last few days I have been busy with e-mailing the last few companies for their Investor Relations ppt’s. I also started writing asap about all the stuff that surprised me the most during my stay in China. I want to put all my thoughts on paper as quick as possible before my memories will become less strong and I forget anything. I am really enjoying working on my thesis and I am looking forward to actually start typing, analysing the data, and drawing some conclusions.

A goodbye in Centro

The night before my flight home I organised a small get together for some of the people I met during my stay in Beijing. It was great to see everybody again and have a beer or two. Some people who were there: Tangos Chan from China Web 2.0 review, Benjamin Joffe from Plus Eight Star and some friends and colleagues, Kaiser Kuo from Ogilvy and Digital Watch, James Loudon from the Economist, Bjorn Lee and Zafka Zhang with friends and colleagues from Hipihi, Frank Yu a casual/mobile games entrepeneur, Yanxing David Ding who works at Oracle, etc. Thank you guys for being there and spreading the word on Twitter. The next meeting is in Amsterdam, you are all invited!

Shaky grounds, even in Beijing

For now my thoughts go out to all the earthquake victims and everybody that is affected by the disaster. It is good to see that some of the big Chinese portals are showing their respect by switching to black and white. During the earthquake I was in Beijing on the 17th floor interviewing Zafka Zhang from Hipihi. It was a really weird experience, initially we both thought we were getting very dizy, but then I saw people running towards the stairs and we realized it was an earthquake. We only felt the quake for 35 seconds, so it was over before we could even decide what to do. The good thing is that I recorded it all on my voice recorder! Quite funny to hear my reaction:

‘What the ****, do you feel it shaking !!?’