The internet is becoming one of the most important marketing tools and international companies are starting to use more commonly their web portals as interactive business platforms. In particular companies expanding into new markets, such as China, face the challenge of adapting not only their products but also their online strategy to the local market. For China, this challenge brings a number of unknown factors, as the internet has a relatively short history, and there is a wide range of differences between Chinese and Western consumers. Therefore, websites and their online processing must be adapted taking into account the local consumers and preferences.

But of course, the internet in China is also a topic of controversy. With the internet in China being under censorship, the inevitable question for foreign internet service providers is if they should comply with China's rules and regulations, including censorship, in order to be able to access and tap into this new developing market.
The USA and other countries keep pressuring China to protect the freedom of expression, but until now, all foreign companies that want to take advantage of the growing numbers have no choice but to comply.

Access to the Internet - The Infrastructure

When the China Internet Network Information Centre (CNNIC) revealed the most up to date figures in July, growth was certainly expected but the numbers are still impressive. There are 123 million internet users (or also called netizen) in China, but what makes this industry with all the related advertising and retail even more attractive is the large potential for even bigger growth. Penetration rate in China is, as per the CNNIC, still only 9.4 percent. This represents a 19.4 per cent growth from the previous year, a slightly higher rate than the 18.4 per cent by June 2005. Encouraging for the related industries is also that the number of broadband users is on the rise, it increased by 45 percent to a total of 77 million from June 2005 to June 2006. For service providers of games and broadcasting, this is very important as they require high bandwidth. These figures reveal an immensely growing market for advertisers, service providers and online marketing companies, with only a larger internet population and market in the USA with approximately 225 million.
China's largest internet service providers are CHINANET, CHINA 169, CST NET, followed by smaller providers CERNET, CMNET, UNINET and CIETNET to name a few. Together, they operate approximately a bandwidth of 135 million.

The total number of registered domains are over 2.5 million, out of which over 1 million are ".cn" domains. This indicates that domains for businesses are still rising higher as for any other use, as on average a ".com" address tends to be used for business domains. In 2005, according to the State Council Information Office, a total of 2.4 billion websites were recorded, with only 20 percent being from individuals. 18.6 percent of the websites are located in Beijing, followed by 16.6 percent in Guangdong.

The main intention of the internet however is still for personal use. Approximately 70 percent of all internet users access the internet from home, compared to nearly 40 percent doing so at work. This trend is increasing with relatively inexpensive internet access being offered by low cost providers. Internet Caf?'s are also a common location with nearly 30 percent making use of their facilities, followed by schools.
Important figures for other service providers is that in 2005, around 6.1 million of netizen of the total 111 million, have used other modes to access the internet, beyond a computer. The main time netizen log onto the internet in China is in the evening between 8-9 p.m. This stands in contracts to the western world, where people mainly access the internet during the day time, and confirms that in China, the internet is currently mostly used for leisure.

This is also reflected in the surveys of which services are most frequently used by netizens in China, with news, search engines and email, as well as instant messaging and forums being the leaders. Obtaining information about products, services, job opportunities is also used quite often, as well as listening and downloading of music, videos and files. Internet Games and online shopping is not as high on this list as most service providers might like to see, but still attracts in China remarkable numbers. Definitely disappointing for the travel industry is the fact that as per several surveys, only 4-6 percent of netizens use online reservations for hotels, ticketing and registrations. As outlined further in this article, this has to do with the fact that online payment is not as developed and liked in China as it is in the West.

The Potential Customers - China's Netizen

Of course for any industry it is important to know who their target group is. From history, China's internet users were as a majority students, which was not good news for the advertising industry and the retail of products sold through the internet. Students browsing the net are not likely to spend money, so apart from the tobacco industry most advertisers were building on the fact that these students would be the consumers of tomorrow. And still, two thirds of China's online shoppers are male, and 83 percent are between 18 and 35, which compares to 28 percent of internet users are male and 65 percent between 18 and 35. Having said this, China's e-commerce has grown by 50-60 percent in the last couple of years and is expected to increase further. A report released as per the China Center of Information Development Consulting estimated that the online transactions are expected to reach one trillion yuan this year, a steep rise from the 700 billion yuan in 2005. And, more and more, a new target group is emerging: women over thirty, living in the developed urban areas. In general, they have more money available than the younger male population, and statistics and surveys show, they continue to browse more time on the internet, which will eventually lead to spending more money.

Assessments of the user profile, the penetration rate and target groups are important for e-businesses and online advertisers. Dividing the internet users into provinces and cities, it is not surprising to see that the highest developed cities Beijing and Shanghai have the most internet users, with 28.7 percent and 26.6 percent as of December 2005. To stay with the regional difference, also as of December 2005, 9.7 million Internet users live in cities, and the internet penetration in urban areas is 16.9 percent, compared to 19.3 million users and a 2.6 percent in rural areas. In addition, geographically, the more developed east of China has nearly 60 percent of all users in China. The penetration rate is nearly twice as much as in any other region.

With regards to age groups, even though the highest penetration rate is 18-24, with a rate of 28.6 percent, it only accounts for 10.4 percent of the Chinese Population, but 35.1 per cent of internet users. This is still a good sign for the future. The second highest rate with 17.1 percent is the 25-30 year olds, which means that in the generation younger than 18 and the older generation, there is a very low number of internet users in comparison. But of course as the generations change with time, the internet users will move into different age groups and spread out the target groups more evenly. In addition, given that 25 percent of the population is under 18 years old in China, a substantial growth in new internet users and potential e-business users is foreseeable.

E- Commerce - and the Online Payment

When building a platform to sell services or products through the internet, how to organize payment plays an important role. This is still a challenge in China.
Surveys show that 50 to 60 percent of e-shoppers have used an online payment method. Other ways for payment are cash on delivery, bank transfers and postal orders.

There are four main online methods that can be used in China, which includes: payments via a third party payment platform, direct cooperation with local banks, indirect cooperation with banks through facilitators like UnionPay and internal online payment systems.

There is no clear leader of online third party payment service provider. So far, there are about 20 well developed third party payment platforms, and banks such as the China Merchant Bank, China Construction Bank and China Industrial and Commercial Bank have all released their own online payment platforms.
Of course, international players are also looking at the China market, but not without difficulties. PayPal, one of the most successful online payment platforms in the world, has to adapt their business model to profit in China. PayPal enables anyone with an email account to engage in person to person payment after setting up an account. It has more than 70 million users registered in 45 countries, and is based on payments with credit cards, whose risks are relatively high. In China, bankcards are used, where payment risk is relatively well controlled and therefore the profit margin through risk control is not as high. This is a serious issue for the profitability of such an operation and requires an adaptation of their business model in China.
As an internal payment platform, the most successful in China is Alipay, where every member of Taobao (also owns Alibaba) can obtain an Alipay account and pay for goods.

The biggest difficulty for online payment is that it is simply not yet that popular in China. People still prefer to pay cash, so the online payment industry has still a lot of work to do to convince people to pay online, and enable a better environment for e-businesses.

Finding the Right Strategy

In China, for most business to business websites, it is important to find the right strategy. Depending on the business products or services, for B2B sales they have to offer a good structured website, with products and contact details. But in China one of the challenges is how business contacts can find your website. This means, marketing through search engines is important.

Consumer targeted websites present a very different challenge. Most Chinese websites are loud, busy and crowded, not unlike typical retail areas in China. But as Chinese website designers tend to use a lot of technologies for their designs, and also often use a lot of flash, international training and education seem to be lacking. For many large international brands this adaptation to a different web design inevitably proves to be a conflict, as they have very strict branding guidelines. Mostly they translate basic information and structure their China site into the international site.

Another difference of consumer preference is that in China, users like to find new information and constant updates. In order to be competitive, foreign companies need to focus on their websites and add content on an ongoing basis, in order not to loose out to local websites on the search engines. For a more cost effective option, a good translation of the basic website and adding features like blogging is becoming more and more popular. Blogging in itself is becoming increasingly more used, even though personal blogging is often censored. But corporate blogging allows constant adding of new content and product feedback without much effort.
One of the major issues with websites in China that foreign companies struggle with is the bandwidth. The best recommendation is to host a website in China if the China market is targeted. When hosted overseas, slow downloads often occur. If China is not the primary target, establishing mirror sites in different locations is recommendable.

Email Marketing

Nowadays, many countries and companies are fighting spam. So to direct a good and effective email marketing campaign without being classified as spam is difficult. Spam is only going to be on the increase, with such a potential growth in users. How difficult it is to define the line between spam and email marketing, is reflected in the regulations that have been issued. In March of this year anti-spam regulations came into effect in China, which created more questions than answers for companies using emails for their marketing.

But, as emails are an effective and, depending on the structure and use, cost efficient marketing tool, how can it fulfill it's intended goal of reaching new customers? As per experts, education will be the key point. Consumers need to be able to identify trustable sources and marketing from illegitimate communications. But with the increasing numbers of internet users in China, also a generation of more mature users will emerge, who will be able to receive email-marketing and be able to make use as a consumer.

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All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.