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Last Updated: Thursday, 11 August 2005, 13:30 GMT 14:30 UK
All roads lead east for web firms
By Gavin Stamp
BBC News business reporter

Executives from Yahoo! and Alibaba shake on their deal
Chinese and foreign web firms are increasingly teaming up
The boss of eBay recently told analysts that China was a "must win" for all global internet businesses.

Meg Whitman's views are clearly shared by her rivals judging by the flurry of activity which has surrounded China's fledgling e-commerce market in recent days.

Yahoo's $1bn (556m) purchase of a 40% stake in Alibaba.com, which owns China's largest auction site, is the latest and most eye-watering in a series of deals involving Western firms.

Google, eBay, Amazon and Interactivecorp - owner of online travel firm Expedia - have all gained a foothold in the Chinese market in one way or another over the past 18 months.

While Amazon, eBay and Interactivecorp dipped into their pockets to buy Chinese firms outright, Google acquired a small strategic stake in the online retailer Baidu.com.

The wisdom of this move was seemingly highlighted this week when Baidu's shares soared 350% on their first day of trading in the US, giving the firm a market value of $3.5bn.

Heady growth

It is not difficult, at face value, to see what is driving Western interest in China's internet sector.

Staff from Baidu.com celebrate the start of trading in its shares in the US
Baidu.com's flotation in the US has caused quite a stir

China's heady economic growth continues to dazzle investors of all shapes and sizes.

Its manufacturing-led boom and gradual integration into the global trading community is creating potentially vast opportunities for foreign companies.

The internet is at the forefront of this so-called 'gold rush'.

Growing prosperity, technological advances and a more liberal attitude by the Chinese authorities means the internet is becoming an easier and more popular place to do business.

Alibaba.com, a business site which puts small firms in touch with wholesalers, and Taobao.com, an online auction site competing with eBay, have six million registered members between them.

However, it is the future potential of the industry - as much as the current reality - which is fuelling Western interest.

Tiny transactions

The number of internet users may have risen above 100 million this year - making China the second largest market in the world - but less than a fifth of these currently buy or sell online.

The online fascination with China is a continuation of the decades-old belief that China will rule the world and you'd better get in quick
James MacAonghus, Aqute Research.

The small volume of transactions per user is not surprising.

Despite China's rapid economic progress, average salaries remain very small, credit card ownership is limited while online payment systems are relatively unsophisticated.

However, the likes of eBay and Yahoo are banking on this changing in the next 10 years as more Chinese become wealthier, travel abroad more regularly and rapidly embrace broadband technology.

"The online fascination with China is a continuation of the decades-old belief that China will rule the world and you'd better get in quick," says James MacAonghus, an analyst with internet research firm Aqute Research.

"Lately it has got a little easier in terms of regulation which is why you are seeing more activity."

Winner takes all?

However limitless the opportunities may seem for future growth, the current size of the market should be put into perspective.

Despite its vertiginous stock market valuation, Baidu generated revenues of only $13m last year while the more-established Alibaba brought in sales of about $46m.

Chinese cyber cafe
More Chinese are logging on but e-commerce remains relatively small

These firms and other Chinese players such as Sina face major challenges in increasing transaction levels, competing with the likes of eBay and Yahoo and developing business outside China.

Although Alibaba.com and Baidu.com are both regarded as well-run companies, they are tiny compared to their foreign rivals.

"The US stock market is interested to a large extent because of the mystique that surrounds China," Mr MacAonghus adds.

"This does not reflect an objective assessment of the situation. Bear in mind that the whole search market in China is worth about 100m - not a lot."

Web firms with global reach and brand recognition can afford to hedge their bets a little on the pace of Chinese online development over the next decade.

However, they will also be acutely conscious of Ms Whitman's assessment that there are no prizes for coming second.

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