Descriptions of China’s economy are often paired with the best of accolades: promising, miraculous and meteoric, to name a few. But observers rarely use the words “fair” and “transparent” to describe the country’s business environment. One need not look far to see why: rampant corruption, preferential policies for state-owned companies, and copious red tape all prevent private enterprises from thriving.
Yet out of this unequal playing field, e-commerce giant Alibaba and web portal Sina have created two of the fairest and most transparent business platforms in China. Alibaba allows individuals and companies to sell goods on its Taobao platform, giving vendors a set of standards and leaving everything else to their discretion. Weibo is similarly a free-for-all of Chinese expression, with the notable exception of controversial political topics.
Both Taobao and Weibo have exploded since their founding and have maintained commanding leads in their respective fields. Taobao sales were US$58.7 billion (RMB370 billion) in 2010 while Tmall, a site aimed at more developed brands spun off of Taobao in 2008, currently has about 55,000 vendors. And in the two years since Sina Weibo’s founding, the Twitter-like service has racked up 250 million users.
“If you ask people, ‘Why you want to shop online?’ I think many people will say that it gives transparency of pricing… people look for convenience, people like more information,” said Phil Wei, China CEO of Export Now, a startup that allows US-based companies to list products on Tmall. “One thing [Alibaba founder] Jack Ma did is offer freedom to all these consumers and all these business units.”
The free market
The freedom to compete is giving rise to third-party service providers that could become some of the most dynamic companies in the Chinese economy. As has been the case with US tech giants Twitter and Ebay, Taobao and Weibo have both spawned an eco-system of third-party companies that provide related services, making the platforms practically an economy unto themselves.
The type of third-party service providers surrounding the two platforms reflects the different aims of Taobao and Weibo. “Taobao is doing business transaction[s] while Weibo is media spreading information,” said Deco You, a Beijing-based analyst at iResearch, an online market research company. This discrepancy results in very different growth rates, said You. “The number of Taobao-related companies will increase much faster than those Weibo-related ones.”
In addition to opportunities to sell goods, Taobao and Tmall offer business opportunities for subcontractors that provide services to vendors, such as store design, customer service, logistics and marketing.
As a media platform, Weibo naturally lends itself to marketing companies, which began to emerge about a year after Weibo’s founding. Yang Xin, founder of marketing firm Weichuanbo, said he knows of at least 10 start-up companies that also specialize in Weibo, not to mention traditional marketing firms which have entered the arena.
Despite these differences, doing business centered on either Taobao or Weibo is remarkably similar. The short lead times and relatively limited barriers to entry have resulted in fierce competition among many similar companies.
Many of these third-party companies are quick to copy each other’s successes, a common tactic in China where enforcement of intellectual property rights is not as strong as in the West. But instead of knock-offs, the competition seems to foster flexibility. Weichuanbo has upgraded its software platform three times in attempt to stay ahead of copycats, Yang said.
The companies also compete for the best online “real estate” on Weibo and Taobao. Taobao and Tmall sell ad spaces to the right of search results, although search results themselves are organic and depend on sales and consumer ratings. Weibo marketing companies commonly pay influential users to promote their products. Weichuanbo compensates about 200,000 users for their help, and Yang hopes that number will someday grow to 2-3 million.
The instant feedback of web analytics also means that companies know immediately if they are falling behind the competition. If a user doesn’t like an attempt at viral marketing on Weibo, they are likely to say so or ignore it altogether. Shoppers on Taobao are just as quick to pass judgment.
“Online, if a client comes to your store, if they stay longer than five seconds your store is not bad,” said Wei of Export Now. “That means the chances they become frequent visitors will be significantly higher. But if [they stay] less than five seconds, they probably will not come back again.”
Taobao- and Weibo-related companies also compete for unbridled optimism. Weichuanbo aims to have more than 300% in annual revenue growth within the next two years. Export Now expects to have some 300 US manufacturers selling through its service and US$1.59-3.18 million (RMB10-20 million) in revenue by the end of the year, up from virtually nothing at the present.
“The market will keep growing and the trend will continue in the next five to 10 years, and the expansion brings about more opportunities for third-party companies,” said Dong Xu, an analyst at research firm Analysys International.
Yet growth in the Weibo community may not be sustainable. The government-led research center China Internet Network Information Center issued a report last month stating that new signups for Weibo began to slow in the second half of 2011. Weibo users nearly quadrupled from the end of 2010 to 250 million. With only 500 million internet users in China, however, continuing at that pace will be impossible.
Although user growth will slow, there is still much money to be made. Spending on internet marketing is projected to grow to US$12.5 billion (RMB79.1 billion) in 2012, up from an estimated US$8.1 billion in 2011 and US$5.2 billion in 2010, according to iResearch.
Marketing revenue in China is likely to continue growing quickly, said You of iResearch. Advertisers have only recently begun to shift online, attracted by ad space that is often more targeted and cost-effective than traditional print and TV advertising.
Marketing and analytics companies can strive to grab more of that revenue by improving on underdeveloped technology and becoming more efficient, said You. Foreign companies with better technology and efficient operations could also enter the market, though they will still be limited by cultural barriers.
Taobao and Weibo could also begin providing additional marketing services themselves. Taobao launched an internet marketing division in April 2010 called the Taobao Alliance, which quickly grew to have US$238 million (RMB1.5 billion) in revenue, according to iResearch.
This potential for new entrants means the market for third-party services is likely to remain highly competitive. Many companies that fail to keep up with the pace of innovation will undoubtedly be pushed out of business or be acquired by more successful competitors. But those that do innovate and survive will probably be among the most dynamic companies in China’s internet sector, regardless of the platform.
As Wang Weili of Taobao marketing firm Shenzhen Fangwei E-Commerce puts it: “There might be other websites driving our business in the future. But where there are clients is where we will be.”