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Will China 'Unify' Taiwan?

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Will China 'Unify' Taiwan?

Source:CW

Alipay will soon set up shop, Taobao is racking up sales, and Tencent's WeChat is being promoted aggressively in Taiwan. Could China's e-commerce sector be the first to gobble up Taiwan?

Will China 'Unify' Taiwan?

By Yi-Shan Chen
From CommonWealth Magazine (vol. 534 )

Alipay will descend on Taiwan next year. That was the message confirmed by parent company Alibaba for the first time on its English website on Oct. 17, when it announced it was planning to file an application with regulatory agencies to bring the third-party online payment platform to Taiwan.

"Winter is coming," wrote Internet blogger Titan, quoting a common refrain from the hit series "Game of Thrones" to describe what he suspected was the reaction of PChome Online Inc. chairman Jan Hung-tze to the news.

Alipay would not be the Alibaba Group's first online service to extend its reach to Taiwan. Retail sector insiders say that Alibaba subsidiary Taobao Marketplace has long been active in Taiwan and estimate its annual sales in the country to be more than NT$10 billion, putting pressure on PChome, Taiwan's biggest e-commerce platform.

At the same time, Tencent Holdings Ltd., China's biggest listed Internet firm, has spent big money to corral Taiwanese pop music stars Rainie Yang and Show Lo as part of an advertising campaign for its WeChat mobile text and voice messaging service.

"2013 is Year 1 in the Chinese e-commerce sector's drive to expand across borders. Its first targets in the internationalization campaign are Hong Kong, Macau and Taiwan, because they are more closely aligned with the international market," observes Chang Ching-hsiang, the general manager for China of Taiwanese Internet technology and marketing company Wavenet.

Qihoo 360 Technology Co., an antivirus software specialist, will also soon be trying to gain a foothold in Taiwan, Chang said.

Trailing China in Online Innovation

The pending invasion is reflected in the popularity Chinese sites such as Taobao, Internet portal Sina and Tencent instant messaging service QQ have attained in Taiwan, ranking 32nd, 38th, and 39th among all websites in the country, according to web traffic tracker Alexa.

"Chinese e-commerce platforms will definitely be attractive to Taiwanese consumers because of their prices," says Sting Tao, the founder of "Inside," an online media outlet that follows Internet trends. "But payment services involve sovereignty issues. I don't believe that the Financial Supervisory Commission will approve Alipay's application to come to Taiwan."

What if, however, the FSC does approve Alipay's request? Will Taiwanese consumers be more likely to trust Jack Ma (Alibaba Group executive chairman) or PChome's Jan?

"It feels really strange," says Gregory Gibb, CEO of Shanghai Lujiazui International Financial Assets Exchange Co. "Mainland China used to learn from Taiwan in the past, but when it comes to the Internet, Taiwan is having to learn from China." Married to a Taiwanese national, Gibb is a former COO of Taiwan-based Taishin Financial Holding Co., but his current employer is a subsidiary of China-based Ping An Insurance Group.

China's Internet industry freely admits to copying others to get off the ground and depending on government protection through the control of operating rights and censorship to shield itself from foreign competition. But it has created a unique profile in China: an industry completely driven by private entrepreneurs that is fiercely competitive and full of innovation.

As Chinese Internet operators enter Taiwan, the intense competition they will bring is likely to impact Taiwanese businesses and affect domestic consumers.

Taking the Fight to Mobile Platforms

"This is an era in which the kings of the personal computer are rushing to transition to mobile networks," says one senior Tencent executive.

What those kings of the PC age are desperate to acquire is traffic flow that they can control, the executive says. In China, the social networking leaders are Tencent QQ, the Renren Network, Sina and Tencent Weibo; the web portal kings are Sina, Tencent and Sohu; and the e-commerce leaders are Alibaba's Taobao and Tmall, electronics specialist JD.com (formerly 360buy.com), and Dangdang Inc., which got its start selling books. Outside of the fierce competition among the e-commerce platforms, the other sites are basically secure in their positions for a while.

But a new period of cross-sector fighting has arrived. The ecology of mobile Internet differs completely from what came before it, forcing websites to become apps. As e-commerce portals take their battle to mobile phones, those whose apps are opened the moment people pick up their phones will emerge as winners.

At the end of 2011, when Tencent introduced WeChat, it successfully steered its QQ users to WeChat on their mobile phones. With every new version, the social network has gotten bigger. Unlike Line, WeChat enables stores and designers to do business on the social networking site through official accounts, spawning a new "social commerce" model in China.

"Of all the smartphones in China connected to the Internet, 30-40 percent go on WeChat," the executive says. The site's popularity has been a boon for Tencent, which has a dominant position in the market with 235 million active accounts as of the end of June. It was also China's first Internet company to exceed a net worth of US$100 billion, pulling closer to American giants Facebook Inc. and Amazon.com, Inc.

And WeChat has even gotten under the skin of Alibaba, which two months ago suspended Taobao vendors' access to the Tencent instant messaging service, citing "security reasons," according to Bloomberg. Alibaba's Ma further took aim at the Tencent unit on Oct. 22 when he said he was shutting down his WeChat account to promote Alibaba's own smartphone messaging app, Laiwang.

A More Human Way to Transfer Funds

WeChat has brought about a disruption in China's Internet sector. Desperately needing to transition to mobile phones, web services giant Baidu, Inc. has introduced a free map service and invested heavily in acquiring popular Chinese app store 91 Wireless and online video businesses iQiyi and PPS to support its move.

Alibaba has bought stakes in Sina Weibo and digital mapping company AutoNavi Holdings Ltd., and at the end of September Taobao University held a three-day micro-marketing co-innovation lab, searching for ways to exploit social commerce opportunities. Countless social networking apps exist under the Alibaba banner, but the one used most by mobile phone owners is the Alipay Wallet app, which has a 75 percent share of the mobile phone payment market.

"People's wallets will be a gateway to online traffic in the future," says Fan Zhiming, president of the domestic business group of Alibaba's small and micro financial services unit.

On Oct. 17, the Small and Micro Financial Services Group, which includes Alipay, introduced Alipay Wallet version 7.6. The updated app enables users to attach an emoticon, type a few words or attach an audio recording when transferring funds, creating a more human money transfer experience that has developed social network-like functions.

Another major change was the broadening of the Alipay Wallet service into a platform with apps for buying movie tickets, registering for a hospital visit, or doing some banking, which is expected to increase the frequency of use of the already dominant mobile payment service. The upgrade also featured sound wave technology that connects users' phones with other Alipay Wallet-equipped devices in the vicinity and will allow people to transfer funds even when they do not have access to the Web.

The improvements came in response to Tencent, which challenged Alipay in August by launching a mobile payment option through WeChat. The service allows users to pay for transactions through bank accounts integrated with their WeChat accounts, essentially combining online and offline businesses through a phone rather than a PC.

Ultimately, search engines and online vendors must position themselves to fend off social networking sites, a challenge that could easily pit e-wallet services and social networking platforms against each other.

The constant change in China's Internet sector exists not only among the biggest players but throughout the freewheeling industry. Online vendors spring up there every day, but 99 percent of them quickly fall by the wayside, which begs the question, why is the turnover so abrupt?

"It's caused by the nature of the Chinese and the rules of the game of American capitalism," says Wavenet's Chang.

China's Internet sector was launched 20 years after the country began opening up its economy. From Baidu to Sohu, several entrepreneurs in the industry were educated overseas and were able to attract massive capital infusions from American venture capitalists, in the process transplanting American venture capital methods in China's Internet sector.

American venture capitalists expect goals to be achieved in about three years, and they employ a fast-paced method of trial and error. They determine a target, invest in advertising and seek to list overseas. Operations that don't make the grade are merged into something else. This makes the entire Internet industry highly dynamic.

"China has venture capitalists that really understand the Internet business," says Peter Yen, co-founder & CEO of Pinkoi, a vendor of designer products that has emerged as one of Taiwan's most successful online start-ups in recent years.

Wang Xi, the vice president of Dangdang, China's first online company to list overseas, says 80 percent of the capital invested in China's top 100 online ventures comes from abroad, but that has not stopped them from becoming truly local companies because of the customer base they are targeting.

"In China's market, you still have to use Chinese talent," he says.

Ma's '100 Million RMB Bet'

These third-generation technology entrepreneurs in China not only compete fiercely among themselves but are now disrupting every aspect of China's economy. Internet vendors are accelerating the transformation of traditional department stores, big-box retailers and consumer electronics outlets. Even the highly conservative and stable financial sector has felt the heat.

One of these intrepid Internet literati has put up his own money to back his confidence. Alibaba's Jack Ma recently bet Wang Jianlin, China's wealthiest person and the chairman of commercial land development conglomerate Dalian Wanda Group, that online sales will account for more than 50 percent of China's retail sales in 2020.

If that threshold is met, Wang will owe Ma 100 million renminbi; if not, Ma will lose out.

According to McKinsey & Company, the Internet currently accounts for 6 percent of China's retail market, and market trends certainly favor a growing role for the Internet in China's retail economy. Retail sales in China have been sluggish the past two years, and traditional brick-and-mortar outlets face the prospect of seeing their businesses shrink. Only online vendors are thriving.

Rachel Sang, vice president of Taiwan-based venture capital company the CID Group and the head of its research institute in China, says e-commerce is rapidly supplanting brick-and-mortar channels in China's first-tier cities, chasing off traditional retailers such as department stores to second- and third-tier cities, and the trend could even migrate to the financial sector.

Just as many Chinese have leapfrogged directly to the use of mobile phones at home, spurning landline phones, China's rapidly growing Internet banking sector could vault past the more conventional development of the financial sector seen in the West and change the rules of the game.

An encounter between Alipay and bank card organization China UnionPay vividly illustrates the trend. Ten years ago, Alibaba's Ma met with UnionPay and asked it to help develop an e-commerce transaction platform. He was flatly rejected and was left with no choice but to establish Alipay. Alibaba's micro finance research institute has estimated that Alipay will handle 11 billion transactions this year, exceeding the 10 billion transactions made using UnionPay credit cards.

Alibaba's financial services unit already makes loans to merchants and more recently started processing inter-bank transactions free of charge and introduced a way for Alipay users to invest idle funds in their accounts in financial products, all suggesting the company's determination to expand its presence in the sector.

"China would have no way to catch up if it resorted to traditional thinking to develop the banking industry. From a strategic perspective, China is likely willing to let the Internet sector get involved because that's the only way it can redefine the global financial services market," says the vice president of a Taiwanese financial holding company who has worked in China for years.

Starting with Alipay, these third-generation Chinese entrepreneurs are determined to extend their reach to Taiwan. With the prospect of such stiff competition on the horizon, Taiwan must urgently contemplate how to confront the threat.

Translated from the Chinese by Luke Sabatier

Keywords:

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