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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