With China’s online population of 400 million users, China’s internet players like Baidu (BIDU), Shanda (SNDA), and Sohu (SOHU) are becoming more and more innovative rather than followers of internet firms in the U.S. They are also monetizing their products and services. Growing innovation also applies to financial services, a sector traditionally more conservative. CMR recently sat down with Pascal Nouvellon from COFIDIS, Europe’s online credit powerhouse and Vice-Chairman of the Consumer Finance Working Group at the European Chamber of Commerce in China to discuss online market trends.
CMR: What are the trends in China’s internet that investors and executives need to know about?
PN: The top Chinese internet firms like QQ and Sina are maturing. You now see 2 major trends: Innovation and e-business. China’s internet players started by replicating Western models and adapting them to local Chinese tastes. That’s how Baidu.com dwarfed Google (GOOG) here or Alibaba’s (OTC:ALBCF) Taobao.com beat eBay (EBAY) – they took what worked in the U.S. and adapted for local regulatory and consumer conditions. But in the last 2-3 years more and more Chinese companies have been launching entirely new formats.
CMR: Are there specific Chinese firms that are becoming very innovative which investors should take note of?
PN: There are many. One I like especially is Kaixin001.com. It was launched in 2009 as a social network mixing a web 2.0 community with gaming. What’s great about Kaixin001 is that they gained popularity by their impertinence. The first game they launched enabled users to literally “buy” new friends. They now launch a new game format every 2 to 3 months, which each time makes a big hit among the Chinese Internet community. It is a unique format and a serious bet from the founders on the capacity of Chinese young Internet users to break from their parents’ neutrality and be openly provocative.
CMR: You mentioned the second trend was e-business, what’s your take on its development?
PN: It is booming. 2 or 3 years ago, many analysts said that Chinese consumers were not interested in e-commerce because of payment problems and lack of trust.
Only a handful of analysts said it was bound to explode. CMR was among them, and I must admit you were right! (see CMR’s Chinese Cozy Up to E-Commerce in BusinessWeek)
The number of users who made online payments in 2009 grew by 80.9%. E-commerce transactions are estimated to have grown by 93% in 2009 to 263 billion RMB (38.5 billion US$) and are forecasted to grow almost 5 fold by 2013 (source: I-research).
CMR: All right, but what are the key factors driving this development?
PN: There are several factors. Of course, the fact that the offer is developing fast with the emergence of new websites plays a great role in the development of ecommerce. E-commerce websites have improved a lot their services [sic], triggering more trust from their users. But I think a key factor that is seldom mentioned is the fantastic development of credit cards. The number of credit cards has exploded in China since 2007 and there are now more than 185 million cards in circulation (up from only 13.5 million).
Credit card payment on the Internet has developed by 181% in 2008. E-payment actors, such as 99Bill and Alipay (China equivalent of eBay’s Paypal) are now available on most websites. Users are also using more and more instalments to pay online. Several websites such as 360buy.com or 3suisses.com.cn are now proposing easy instalment solutions linked to a credit card. With more websites proposing easy payment and instalment solutions, and users building trust from buying online, I can only see e-commerce developing very fast for the coming years.
But e-commerce also greatly benefits more traditional players that focus on digital as a new sales channel. A very good example is the insurance sector. Ping An (OTCPK:PNGAY), for instance, has been one of the very first to launch its online offers for home and auto insurances. Traffic on pingan.com has seen a steep increase in 2009: Clearly more and more users get familiar with collecting information and applying their insurance online.
CMR: Who do you think will be the biggest winners of the development of e-business and e-financial services?
PN: In my mind, the biggest winners of China e-business are investors. One example: investors that bet on Ctrip (CTRP), China’s leading online travel services company, over the past 12 months have outperformed Nasdaq by over 60%.
A large number of leading ecommerce websites such as M18.com and vancl.com have received venture capital funding. As those companies search for new funding and their early VC investors looks for exit plans, we should see more and more Chinese ecommerce companies IPO-ing on the Nasdaq in the coming 12 to 18 months. I would very much recommend watching out for those investment opportunities.
The 2nd winners are customers, especially young active urban ones. Their life is very stressful and workload here for sales persons or entry level managers are similar to that of a junior investment banker on Wall Street. There is a clear demand for some operations to be done online, such as making an investment, following your portfolio or subscribing to your car insurance in order to free time.
Finally, I see a great opportunity for 1 or 2 early movers in each category to capture online demand. This is particularly true in the financial services sector and I think international partnerships with insurers or banks that have an online presence in the U.S. or Europe could be very beneficial to both Chinese and overseas’ partners.