Alibaba founder Jack Ma meets President Bush at the APEC Summit in 2008

China’s central government is taking the global economic crisis seriously. As early as November 2008, the State Council announced nine key sectors that would be targeted in the 4-trillion yuan stimulus package, including steel, auto, shipbuilding, information technology and light industry. While the effect of the economic stimulus remains unclear, China is quite likely to also issue a second plan to reverse the downturn as soon as possible to reduce taxes and promote domestic consumption.

How will the economic situation hit the high-flying tech sector? Rebecca Fanin, author of the book, Silicon Dragon, which was published in 2008, claims that most of the tech companies she covered in her work are still doing fine, except for a blogging site, Bokee, which went under at the end of 2008. She said that China’s biggest business-to-business (B2B) site, Alibaba, is still expanding, and search engine Baidu is still growing.

“The economic situation will be good for companies who can prove they have some competitive advantage,” says Fanin. “For example, Oak Pacific Interactive, which runs several groundbreaking Internet companies, is still raising money for his Internet communities and platforms. The CEO, Joe Chen, is using the opportunity to buy up competitors in the Web 2.0 space.

Chen sees the growth in the social networking and gaming areas, where young Chinese can play games or contact friends at Internet cafés for very little money. He is targeting the pre-teens and teenagers by supporting the development of Chinese games, Fanin added.

Oak Pacific Interactive, one of the successful copycats detailed in Silicon Dragon, combines Chinese versions of MySpace, YouTube, Facebook and Craigslist in one company. Chen acquired entertainment portal Mop.com in 2003, the first of several acquisitions in a strategy to build a portfolio of Web 2.0 companies. Among the company's other sites: Xiaonei, a Facebook-like company focusing on college students; DoNews, a tech blogging site; Wowar.com, a fan site for players of the popular World of Warcraft online game and Uume.com, an online dating site that morphed into a YouTube-type play. Chen’s Web sites have over 22 million registered users and well over 150 million page views.

Oak Pacific Interactive has attracted funding from some of top US venture capitalists, includidng General Atlantic LLC, Doll Capital Management, Technology Crossover Venures, Accel Partners and Legend Capital, some of which is likely to go into more expansion and building “brand awareness” for its online advertising, wireless value-added services, and online broadband entertainment offerings. However, Fanin warns, “Oak Pacific will have to run faster to outwit Wendi Deng, Rupert Murdoch’s wife, who is bringing Myspace to China, and competition from Google’s YouTube. His plans to go public in the US may have to wait a while in this economic climate.”

Mistakes of the past
Most of the leading information technology companies in China are doing well, but will face investors and advertising clients who will be more selective in the future.

“It’s a time to buy up competitors and manage for profitability by managing the cashflow carefully. Entrepreneurs are still going strong,” Fanin said. At the same time, mistakes and inproper corporate behaviour may be a thing of the past. For example, Baidu, China’s largest Chinese-language search engine, which has the world’s largest number of Internet users and 60 percent market share, is reeling from relevations that it accepted paid advertising from unlicensed medical companies.

Baidu CFO Jennifer Li has lowered estimates of expected revenue for fourth-quarter 2008 to around 900 million yuan from about one billion yuan, pointing to the paid-advertising problems as well as the economic downturn. However, the company is still expanding by building a consumer trade platform similar to Ebay, which will bring more traffic to the site. According to a recent Asian Wall Street Journal article, Morgan Stanley analyist Richard Ji said Baidu will be able to keep up aggressive customer acquisition because of its market dominance and its ability to price advertising competitively.

Meanwhile, prosperity beckons at Alibaba’s chairman and founder Jack Ma’s door. Ma is known in Hong Kong for purchasing the territory’s most expensive flat in the Mid-levels, the penthouse at Branksome Crest for US$36.3 million, a new record as the most expensive apartment in Asia. He made the purchase in November 2007, after the initial public offering of Alibaba, the world's leading B2B e-commerce company, with now over 20 versions of the site in many languages.

Headquartered in Hangzhou, Alibaba.com has offices in over 30 cities across Mainland China as well as offices in Taiwan, Hong Kong, Europe and the US, with more than 6,600 full-time employees as of September 30, 2008.

Since 2006, Ma has added Taobao.com, a consumer-to-consumer business site; Alipay online payments, primarily for Chinese customers; Alisoft, which provides Web services to Chinese small- and medium-sized enterprises, and Alimama, on online advertising exchange. In July, 2008, the company established an “Investors’ Alliance” in association with 20 domestic and overseas venture capital companies to target China’s software-as-a-service market.
Fanin does not see the company slowing much during the downturn. Interest in China is still high, so this B2B company will continue to grow.

“This economic downturn will prove the undoing of the weaker companies in China, and promote the survival of the fittest,” Fanin said. “China has the most Internet users, with over 200 million people online, and the largest mobile phone market – numbering around 600 million – so the future looks rosy even if there is a bump for a couple of quarters.

Fanin maintains: “It’s hard to stifle the entrepreneurial spirit. This economic situation will make it easier for the big players to find better qualified people. Venture capitalists are getting more picky, but they are still funding good ideas, so it may be a good time to start a business in China or the US. China may not have this opportunity again to cash in and control a whole industry.”