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Wednesday, 4 October, 2000, 19:03 GMT 20:03 UK
Tough times for China's dot.coms
Chinese dot.com advert
China's dot.coms are facing a life or death struggle
By Rupert Wingfield-Hayes in Beijing

China's internet industry is in trouble.

After two years of phenomenal growth many of China's new dot.com companies are now facing bankruptcy.


In February ... if you said you were a dot.com every door was open to you

Jay Guo, internet entrepreneur
Foreign venture capitalists who have helped to fuel the boom have suddenly got cold feet and are pulling out.

Nonetheless, the number of people using the internet in China continues to grow at breathtaking speed.

From less than two million a year ago there are now nearly 10 million web surfers in China - and that number is expected to hit 20 million by the end of next year.

So what has gone wrong with China's dot.coms?

Life and death struggle

Child on computer
China's youth are expected to drive the country's online revolution
At Beijing University a recently rock concert was paid for by one of China's most popular internet sites - Sohu.com.

It's a blatant and apparently popular marketing ploy - part of Sohu.com's life and death struggle to become the dominant internet portal in China.

For Sohu's founder Charles Zhang the stakes are high - if he succeeds, the payback in terms of advertising revenues could be huge.

If he fails he could face bankruptcy.

"We have the loyalty of the largest user base in China," he says. "This user base is very attractive to multinational and domestic companies when they start to seek sophisticated ways of promoting their products.

"These represent a large base of future consumers - people who own a large user base are people who own customers."

For Sohu the struggle to dominate China's internet market has been given new urgency by events on the other side of the world.

Taking a dive

Laptop advert
E-commerce is increasingly visible in Chinese cities
Earlier this year Sohu took the plunge and issued shares on the US Nasdaq.

When the Nasdaq index crashed Sohu's shares plunged - 60% of the company's value was lost in a matter of weeks.

The collapse of the Nasdaq has hurt China's fledgling internet industry badly.

Jay Guo returned to China from the United States to set up the web site Fudao.net.

A year ago foreign venture capital companies were queuing up to lend him money - but not any more.

E-business advert
Many-e-businesses are fighting hard to survive
"In February, before the fall-off, if you said you were a dot.com every door was open to you," Jay says.

"If you said you were a Chinese dot.com they would lead you by the hand through the door. Now if you say you are a Chinese dot.com, generally they say 'Oh we don't do that anymore'."

Beijing's Haidan district is known to locals as China's Silicon Alley.

The streets are lined with computer stores selling everything from hard drives to the latest in video game software.

They are also home to more than 600 internet start ups.

Controlling the net

But according to the Beijing tax office, of these only 39 have ever made a profit.

Net surfers
Internet freedoms are worrying the Chinese authorities
Lack of profits is not the only thing driving investors away - so is the Chinese Government.

From his office in Beijing, venture capitalist Jim McGregor has watched as China's communist rulers have issued an ever more bewildering array of regulations in their attempts to hold on to control of the internet.

"The state wants to hold on to all information channels here," he says.

"In truth technology is passing them by very, very quickly, Chinese people go off shore and read the Chinese sites. It's only a matter of time before it opens up.

"However if you are an investor in a content play in China you are stuck within a regularity system that it absolutely unclear."

Net subversives

The latest set of regulations issued this month hold internet companies responsible for the content of everything on their web-sites, including comments made in internet chat rooms.

Material considered subversive includes anything supporting cults, anything that could harm the reputation of China, and anything that could hurt the reunification of China and Taiwan.

Even so the potential for the internet in China is vast.

In five years time there are expected to be well over 100 million Chinese online.

But before that dream is realised many - if not most - of today's young internet start ups will be nothing more than a fading memory.

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See also:

02 Oct 00 | Asia-Pacific
China tightens internet controls
23 Sep 00 | Asia-Pacific
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09 Aug 00 | Asia-Pacific
China to battle internet 'enemies'
21 Aug 00 | Asia-Pacific
Jiang backs China's net growth
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China charges web entrepreneur
02 Feb 00 | Asia-Pacific
China cracks down on internet cafes
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