Week of October 4, 1999
  Snapshot from the Field

China's Chilly Web Wind: Crackdown
Threatened on Outside Internet Investors

China's control-freaky government leaders are at it again, and this time their target is the World Wide Web. The Chinese government is threatening to enforce an existing ban on foreign investors' participating in Web-based ventures inside China.

The threat has huge implications, not only for companies investing and setting up operations in China, but also for the growth of China's Internet economy. Analysts expect China to emerge as one of the biggest markets for Internet businesses and e-commerce. The Chinese information technology market totaled US$9.2 billion in 1998 and could almost double to $15 billion by 2000, according to International Data Corp. (IDC at www.idc.com).

China's officialdom, however, now appears to have its hands firmly on the controls governing just how much the Chinese Internet economy actually grows in the near term.

Already, the government's threat is sending shock waves through the community of major non-Chinese firms that have entered the market to tap the nation's huge Internet-related potential.


Information Minister Wu: More Content Control Needed

Information Industry Minister Wu Jichan was the Chinese leader tapped to drop the big-bomb announcement. The government needed to strengthen its control over Web information content, said Wu. That, he explained, necessitated enforcing China's longstanding law prohibiting foreign ownership in Internet service operations.

Coincidentally or not, Wu's announcement came on the same day that Lycos announced its intent to build a $50 million Internet portal focused on China (plus other Asian nations). The government's threat also came on the same day that Intel announced that it was going to help China-based Sohu.com (www.sohu.com) construct a system that would allow Internet users to buy goods marketed through the Web.

Prior to Wu's proclamation, Chinese companies like Sohu.com and Sina.com, which have already secured some U.S. investment, had publicly declared that they wanted to raise more foreign capital through IPOs on the U.S.-based NASDAQ stock exchange. Now, that strategy is heavily shadowed by questions.


Major Players Taking Wait-and-See Posture

Large question marks also now surround the business fate of the Internet players who've already made a big move into China. None of them seem to like what's happening. At the same time, though, all seem to know that directly confronting the Chinese government equates to a fast-freight ticket out of the country. Intel, for example, is continuing with its project with Sohu.com, but spokesman Tom Waldrop says, "We will be in close communication with the government, and we will comply with their intentions.''

24/7 Media, an Internet advertising firm, is taking a similar wait-and-see posture towards its year-old partnership with China.com (www.china.com), one of the leading portals with Chinese-language content (the site also provides English-language translations). 24/7 CFO Andrew Johns, however, says a ban on foreign funding for Chinese Internet operations "would mean that we would have to look elsewhere, taking a different Asian market approach."

The foreign investment ban has long been on China's books. The Chinese government, however, generally ignored the statute, as did the host of Chinese startups that avidly sought investment from U.S. companies and venture capitalists.


Confusion Continues to Reign

Almost a month after Wu's announcement, myriad questions remain -- including what Wu really meant. Most observers still remain unsure whether China's objections apply to all Internet investment or only to the service providers that control access.

Western conventional wisdom would suggest that the Internet economy's vast potential would prod the Chinese to back off the threatened ban. But Western conventional wisdom doesn't take into account China's historically consistent cravings for control, particularly over content.

A few years ago, for example, U.S.-based Globalstar won the coveted contract for the Chinese telephone only by bowing to government demands for control over information flow.

Globalstar agreed that it system would bounce calls to Chinese gateways, where national security snoops can tap phone lines and identify cell phone users' locations. "That's the real reason they picked us," one Globalstar executive allowed.

Officials at the (pre-bankruptcy) Iridium consortium said they lost the contract because their system would've bounced international calls to an Arizona gateway. No monitoring, no sale, the Chinese government said.

China's government has always seen foreign investment as a potential threat to information control, says Greg Mastel, director of global economic policy at the Washington, D.C.-based New America Foundation. Now, he says, the Internet's burgeoning growth has exacerbated "something that they've worried over for a long time."


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©1999 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.