A popular—if not always accurate—saying to capture the competitiveness of China's internet industry is that, while a Silicon Valley company will have to beat a few competitors to survive, a Chinese company will have to beat dozens or even hundreds.

But as some of these battle-tested Chinese companies are expanding globally, they are finding that it's even tougher going away from home.

A striking aspect of China's internet industry is the contrast between the dominance of homegrown companies in their enormous domestic market and their relatively paltry presence overseas. The country boasts 700 million internet users, 90% of whom use mobile devices, and it has brought forth the popular and innovative messaging app WeChat, as well as the thriving car-hailing app Didi Chuxing, which outmaneuvered Uber Technologies in China. But China's internet companies still struggle to come up with products and strategies that can make them competitive in the global market.

It isn't for lack of trying. Chinese companies that specialize in mobile internet in particular have been exploring opportunities abroad. As of July, 6,254 Chinese companies, from huge corporations such as Alibaba Group Holding to game developers with a handful of employees, had built mobile products that are targeted at the overseas markets, according to a joint report by internet-research firm iResearch and Baijingapp.com, which operates a database that tracks such companies.

One problem is that many of these companies are seeking to replicate domestic success by targeting developing markets—but are finding that those markets develop less quickly than China has.

Following the Chinese internet wisdom that revenue will come with users, they sought out big user bases in those markets with free mobile games and apps that, naturally, generated minimal revenue.

Beijing Elex Technology, which develops mobile games, started its global push targeting markets including Brazil, Russia and Vietnam. But Chief Executive Tang Binsen says he decided to focus on the more lucrative developed markets a few years ago after finding that fast user growth in markets such as Brazil failed to translate into substantial revenue. The mobile-game company expects its revenue this year to reach $800 million, which will come mostly from markets such as the U.S., U.K., Japan and South Korea.

"The truth is users in some markets are worth much more than users in the other markets," says Mr. Tang. "If you want to build a bigger company, you'll have to target bigger markets."

As promising as emerging markets might sound, it will be years before their infrastructure and spending power catch up with the developed markets, or even China. India's annual digital advertising spending, for example, likely won't pass the $1 billion mark until 2017, according to research firm eMarketer. By comparison, China's digital ad market is expected to reach $40.4 billion this year, while the U.S. is expected to reach $72.1 billion, says eMarketer.

More Chinese companies came to realize this and are shifting their focus to developed markets. New York-listed app developer Cheetah Mobile removed monthly active user growth as a target for 2016 and stopped marketing in developing markets.

Cheetah Mobile is the poster child for international expansion by China's internet sector, with 623 million monthly active mobile users—79% of them overseas. But its sales are still small—$157.5 million in the second quarter of 2016—and the emerging markets that account for where the majority of its users reside, such as India and Indonesia, still contribute a small portion of the total.

Andy Yeung, Cheetah Mobile's finance chief, says the company will focus more on developed markets because revenue contribution from the developing markets won't be meaningful for three to five years.

Cheetah Mobile also is retooling its product strategy. Its utility apps help phones running on Google's Android operating system free up storage, guard against viruses and make batteries last longer. They are more popular among people with lower-end Android phones, such as users in developing markets.

Now Cheetah Mobile is transitioning to content offerings so it can engage users longer and make it easier to monetize their attention through advertising, says Mr. Yeung. As part of that strategy, the company recently paid $57 million to acquire French startup News Republic, which aggregates news in ways similar to Apple News.

The giants of China's internet sector, such as Baidu, Alibaba and Tencent Holdings, also still get a tiny share of revenue from outside China. But some are trying to change that, increasing their presence overseas through investment and acquisition.

Tencent became the world's biggest mobile-game company through acquisitions, including the $8.6 billion deal for Supercell, the Finnish company that created the popular mobile game "Clash of Clans." Alibaba made its largest overseas acquisition in April 2016 by paying about $1 billion for a controlling stake in Singapore e-commerce startup Lazada Group.

Other entrepreneurs and investors remain optimistic about opportunities abroad, including in developing markets. Li Tao, founder of Apus Group, which develops user-management systems on Android phones, says that while some smaller app makers have disappeared, his company is committed to these markets. The company says it has 400 million monthly active mobile users world-wide, with more than 75% in markets such as Southeast Asia, South Asia and the Middle East. With a large user base, monetization opportunities will present themselves, says Mr. Li, who adds that Apus is profitable.

But for Mr. Tang, the game developer, the large user numbers that companies such as Cheetah Mobile and Apus have collected are "just bubbles if without revenue," he says.

Follow Li Yuan on Twitter @LiYuan6 or write to li.yuan@wsj.com.

Write to Li Yuan at li.yuan@wsj.com

 

(END) Dow Jones Newswires

September 21, 2016 14:25 ET (18:25 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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