The Clang of a Virtual Cash Register: Dangdang.com

When Peggy Yu, 34, and Li Guoqing, 37, co-founders of Dangdang.com, decided upon the name of their company, they chose a bit of Chinese onomatopoeia that encapsulates the entire point of electronic commerce on the Internet.

"Dangdang comes from the Chinese adjective xiangdangdang [resounding or worthy]," explains Yu. "We also wanted a name that would be easy to pronounce for Chinese-speaking people living here and overseas." Among the 70 million ethnic Chinese living abroad--an important asset for Chinese-language Internet growth--the Mainland's pinyin phonetic system is not widely accepted, so Yu and Li sought a name that would be easy for expatriate Chinese to remember and pronounce, avoiding spellings, for instance, that began with Zh or Q. "It's also," Yu says, smiling, as she enthusiastically makes a fist and pretends to be pulling a lever, "the sound of a cash register opening and closing: dang-dang!"

CHINA'S AMAZON
Peggy Yu met her husband and future partner Li Guoqing in the summer of 1996. Li's Science and Culture Books was already a successful publisher of professional titles, while Yu had been working for five years as a mergers and acquisitions consultant after earning an MBA from New York University. In some ways, the match would foreshadow the mix of financial savvy and entrepreneurial chutzpah that is currently driving China's billion-dollar piece of the Digital Economy and redefining the rules of something lovingly remembered as "socialism with Chinese characteristics." Within three months of meeting, the couple married, and soon hatched the idea that would lead to what is arguably China's most successful ecommerce venture.

"Guoqing impressed upon me that in the book business," recalls Yu, "the most valuable asset is the degree of linkage between publisher and reader."

When Yu described to Li what a new, relatively unknown company called Amazon.com was up to, Li was intrigued. "So we began to take Amazon apart and see what made them tick," she says.

Yu and Li quickly recognized that in addition to its online storefront and market positioning, Amazon's greatest asset was its huge searchable database of titles.
"I made some calls," says the indefatigably studious Yu, "and discovered that Amazon originally licensed their database from Baker & Taylor, a book wholesaler. So we saw that Amazon started out with an outsourcing model. They relied on Baker & Taylor for their supply of information and physical supply of books, then just put everything together and started selling online."

But when Yu and Li looked at China's book marketplace, they quickly realized that a similar business model based on outsourcing core aspects of the business simply wasn't possible. China didn't have a nationwide database of title information. So Li and Yu set about producing their own database, China Books in Print (CNBIP) in Beijing. The biblio-entrepreneurs learned how to construct a book database by studying similar products in England and America, and soon developed a proprietary database that would both enhance their eventual online bookstore while also providing the business a viable escape hatch.

"We had a very carefully crafted strategy. In 1996, there were only a few hundred thousand Internet-users in China," Yu says. "We decided that if the Internet ever took off in China, the CNBIP would be online so people could browse for information on titles. If the Internet didn't take off, then we'd just be a professional database company."

200,000 Titles and Counting
Yu and Li's strategy set 3 million Chinese Internet users as the benchmark for going live online. China's net population passed the 3 million mark sometime in 1999. Dangdang went online in November of that year, and with minimal advertising--few in offline society have even heard of the company--Yu expects Dangdang.com to turn a profit in 2002.

With 200,000 titles available via its website, Dangdang.com is the biggest bookstore--online or offline--in China, and is filling a vital need for book-starved readers in a vast country with no chain bookstores, large cataloguers, or other means of distributing a booming supply of titles.

"We looked at the number of books in print in China and the inventory of typical bookstores, and realized that, due to barriers of location and store size, a great percentage of books simply can't reach their potential readers via the traditional retail model. It's still very difficult for people to get good books in China, which have a much shorter shelf-life than they do in the West," Yu says.

Unlike Amazon.com, Dangdang doesn't need to attract customers with discounts. For a growing number of Dangdang's users, the biggest obstacle to buying books isn't price, but availability. For a veterinarian in Gansu province, the ability to have access to recently translated Western textbooks in translation or a hard-to-find book on Taiwan's 1997 hoof-and-mouth epidemic marks a quantum leap far more radical in social impact than Amazon's consolidation of the essentially already efficient book business in the United States.

In addition to the sheer number of titles available online, Dangdang's most attractive added-value is their proprietary database which allows one to browse or search by subject, title, author, or International Standard Book Number (ISBN).

"In traditional bookstores, it can be very difficult to find the title you want. Chinese bookstores use the academic-oriented China Library Subject Heading System, an index system used by library science experts. Hence,a book on how to find a good husband, for instance, is put in the same place with sociology textbooks.

"So we studied how books were indexed in the West and came up with the Science and Culture Subject Heading System, which divides book subjects into 49 large categories and 2000 small categories. If you go to our children's section, you'll see about 20,000 titles, which are then divided into 0-3, 4-7, reading workbooks with pictures, etc. It's very user friendly," Yu states.

Today's Technology, Yesterday's Work Ethic
Although Dangdang.com's success has come at Internet-speed--boasting over ´1 million in sales in the first two months of online operation--the company is a model of Old Economy business-planning, hard work and strategic decision-making.

"For three years we knocked on the door of every single publisher in China, and established a good working relationship with these publishers, so we could maintain accurate and updated information on what books are in or out of print. Also being a publisher for many years before going online gives us a lot of credibility in the industry. Booksellers, wholesalers and retailers know Science and Culture Books as a solid company, so we're able to get very good trade terms on accounts payable, and supply and discounts," Yu comments.

They also have good investors.

Dangdang's investment partners are the Boston-based International Data Group, an IT research and investment firm that is not only one of the earliest and most profitable investors in Chinese publishing, but also currently on a billion-dollar search to provide funding to the most promising online startups in China. Dangdang's other investment partner, Luxembourg Cambridge Holding Group, specializes in professional publishing as well as books-in-print databases in post-socialist countries.

LIGHT-SPEED SALES TO A HORSECART-DRIVEN ECONOMY
As with all electronic commerce business in China, the immediate obstacles to Dangdang's success are not other competitors or a lack of potential customers, but rather a mixed bag of low-tech inefficiencies in shipping and logistics, regulatory inertia and the widespread lack of liquidity due to a nascent credit system.

"Technological development is easy. It's the low-tech barriers that make ecommerce difficult to conduct here. I see a lot of low-tech barriers I wish could make go away. I'd like to see an affordable Chinese version of Fedex or UPS, and I'd liked to see banks make more of an effort to make online transactions a more pleasant experience for customers," says Yu.

Since credit card use is still negligible in China, and many consumers are still concerned with security issues, a large percentage of online book purchases involve a hike to the local post office or bank to pre-pay by postal order or bank transfer. (Dangdang.com's Beijing book-buyers currently have the option of COD payments.) But, as with the millions of mainland cellphone users who trek religiously to the bank or telecom office to pay monthly phone bills, it's a real-world inconvenience most Chinese consumers accept.

Although several banks, notably China Merchants Bank and China Construction Bank, are taking steps to make online commerce easier, "their problem is that the front-end is online--they have a website with a window where you can ask for this and that--but the back-end operation is still manual! That's what holds up a lot of the transactions," Yu says with visible frustration.

"But it's an interactive process. I'm not going to sit here and complain about banks. Unless the banks see a lot of online companies like Dangdang.com utilizing online banking services, it's not going to be worthwhile for them to innovate."

Electronic Commerce in China: An Overview

Electronic commerce is, by all accounts, the most exciting development on the Internet since the World Wide Web. And ecommerce in China is doubly exciting because it is taking place on the still uncertain shoulders of the social revolution begun just two decades ago by Deng Xiaoping.

Companies like Dangdang.com are at the forefront of China's ecommerce revolution--a revolution that's going to change both how business gets conducted, and by extension how people lead their lives in China.

According to netrepreneurs like Dangdang.com founder Peggy Yu, it's going to change the way Chinese people think as well. "It's teaching people the value of intellectual property and intellectual capital. It is also demonstrating the value of risk-taking," Yu says.

It is also empowering the average Chinese consumer with a flood of free information in a way that no one could have foreseen.

"The Internet is a very democratic place. Consumers have direct access to the producer of goods or services. So what they want will have a bigger say in determining the corporation's behavior," Yu adds.

So far, the largest part of the ecommerce story is being told in a jumble of familiar sounding statistics and marketing buzzwords, punctuated by the monthly grumblings of an understandably cautious government seeking to both control and benefit from the fastest growing sphere of human commercial activity since the invention of trading itself.

The most recent Internet survey by the China Internet Network Information Center estimates China's Internet population at about 8.9 million, with 50,000 domain names bearing the .cn suffix. New ecommerce businesses are coming online at the rate of more than two per day--rendering the notion of a biannual survey ludicrous. Ecommerce turnover is expected to grow from US$40 million last year to US$3.8 billion by 2003.

Still, it is important to keep in mind that ecommerce in China is only in its embryonic stages. For starters, there are only 16 computers per million connected to the Internet in China, versus 97,500 per million in the United States, according to the latest World Bank World Development report. But what China has is potential.

Last year's billion-dollar China.com IPO linked Wall Street, Zhongguancun, AOL, Xinhua and the Cayman Islands in a manner that once and for all clarified the nuances of the phrase "with Chinese characteristics." And despite the fact that Sina, Netease, and Sohu--China's top Internet portals, whose mission is to "guide" one through the confusing miasma of information on the Web--still can't produce advertising that anyone can understand, there are nevertheless small armies of Silicon Valley venture capitalists scouring the country for worthwhile startups to join the inevitable flood of public offerings of China's Internet goldrush.

E-Obstacles
When investing in Chinese ecommerce firms, it's essential to be aware of the shortcomings of selling online in China. First, very few buy-and-sell transactions are actually handled over the Net. Because credit cards are not widely used in China, most Internet purchases

consist of placing an order online and then paying for the goods upon delivery. The items are usually bought with cash.

Second, the delivery of goods purchased online is hampered by China's inefficient transportation system. The nation's infrastructure is underdeveloped and the postal system is slow and unreliable.

Also, online access rates are slow. Most Internet service providers (ISPs) offer connections at 33.6 kilobytes per second. Thus, logging onto any sites with even the most simple graphics can involve a lengthy, tedious wait.

The Good News
But most ecommerce observers are betting that these problems will only be temporary. Credit card use is spreading in China, albeit slowly, and Chinese Internet sites are working to increase the security of their web servers.

China's distribution system is improving. Beijing is spending billions of yuan to improve the nation's telecommunications infrastructure. Internet firms are also finding ways to get around transportation problems. MyWeb, for example, is working with a taxi company in Beijing to ensure prompt and reliable delivery of its online products.

Foreign companies will also be allowed to get into the local distribution business three years after China enters the World Trade Organization. This added competition should improve efficiency. Online access rates are also improving. The nation's backbone telecom infrastructure is being converted to fiber optic and ISDN, DSL and ADSL connections are gaining popularity in major cities.

Investors' Picks
As the number of ecommerce companies in China continues to grow, those looking to invest now may feel overwhelmed by the surfeit of choices. Investment gurus recommend the following:

Legend
Legend Holdings is by far the most Internet-savvy of the online companies in China, according to Credit Lyonnais Securities Asia (CLSA).

Not only was Legend the first large firm in China to roll out an ecommerce strategy (last year it linked 300 of its distributors to a company ecommerce system), but it has stayed ahead of the curve ever since.

Its most recent online venture was the launching of a TV set-top box online stock trading product, bringing ecommerce into the home via a cheap, easy-to-use format (you don't even need a computer).

SG Securities likes Legend because the company expects to sell up to 350,000 high-margin Conet Internet PCs in 2000. It will also benefit from expected lower import tariffs on components.

Merrill Lynch and ABN AMRO have been recommending Legend shares since last summer.

TCL International
TCL International, a major TV manufacturer, benefits from running "one of China's most extensive sales and distribution networks," notes a CSLA research report.

BNP Equities believes TCL has potential because it's gradually transforming itself from a pure TV maker to an IT giant. The company is beginning to manufacture Microsoft Venus computers, set-top boxes and network equipment.

Indosuez W.I. Carr Securities recommends TCL because its products have practically captured China's rural color TV market. TCL, which also makes refrigerators and washing machines, is using e-commerce to upgrade operations and accelerate market expansion.

Founder
Another favorite is Founder. A company whose core business is electronic publishing, last September, the Founder Group signed a Memorandum of Understanding (MOU) with Yahoo to launch http://www.yahoo.com.cn.

CLSA believes the company is a good bet because the former vice president of Hewlett Packard China was appointed to help guide future development.

Indosuez W.I. Carr Securities writes that "its Internet focus could bring new momentum to profit growth, by capitalizing on extensive media clientele, including newspaper and TV stations."

Merrill Lynch notes that Founder possesses superior technical expertise, an early-start advantage, "and the local knowledge to succeed in this new market."

Virtual China contributed to this article http://www.virtualchina.com