Zeng lights the Internet spark in China

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Sparkice.com aims to be the leading E-commerce portal to, from and within the global Chinese community. It is building a network of Internet cafes throughout China. The company, founded in 1996, has already established itself as one of the fastest growing companies in the sector. Chairman and CEO Edward Zeng talks to Global Telecoms Business about the company's plans.

Internet use in China is growing rapidly from 900,000 in 1997 to a projected 6.7 million at the end of 1999. It has been estimated that there will be over 30 million Internet users in China by 2003. China is likely to become the biggest Internet market in the Asia Pacific and one of the top three globally.

Sparkice.com is already recognized as one of the leading ISPs in China. It is at the forefront of Internet growth in China. As well as being an ISP, the company aims to be a leading Internet content provider. Its CEO and founder Edward Zeng is considered a leading Internet network pioneer in China. Recently Zeng has played a key role in building business relations between the US and China. In June 1998 Zeng met the chairman of the People's Republic of China, Jiang Zemin and the US president, Bill Clinton to discuss Internet development in China.

Established in 1996 as JV with China Unicom, it was called at the time Unicom-Sparkice Information System Engineering Company. It was recently renamed Sparkice.com. It is building a number of Internet Cafes in the metropolitan areas of China, such as Beijing and Shanghai. Sparkice.com aims to have a network of 100 Internet cafes by the end of 2000.

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Zeng expects revenue from E-commerce services to increase dramatically: it may well account for 10% of the $250 billion in exports from China that have been projected over the next three-four years.

Sparkice.com is establishing an international business-to-business platform. Buyers for retailers in different regions of the world will have immediate access to Chinese manufacturers and their on-line product catalogues.

Sparkice.com is not only targeting the international E-commerce market. It also aims to be the leading E-commerce business to consumer portal and is establishing itself as an E-commerce on-line payment provider. In an interview with Global Telecoms Business, the chairman and CEO Edward Zeng talks about Internet developments in China, Internet cafes and his hopes and ambitions for Sparkice.com.

What role is Sparkice.com playing in Internet development in China? How many Internet users are there in China? What levels of growth do you expect to see over the next two-three years?

I think that we aim to become the leading company for global E-commerce traffic into China, out of China and within China. So in one word we are the leading E-commerce and Internet service provider in China. The number of Internet users in China has risen from 2.1 million at the end of 1998 to over five million today. In three years, we are talking about a figure of 30 million. In 2000 China could be the leader in the Asia Pacific.

Can you describe the benefits that you derived from your time in Canada?

Well my Canadian background provided me with an idea of the western framework and market experience. It also showed me how to think from both angles, from both a Western and Chinese viewpoint. To be honest, it helped me a lot.

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If I had simply stayed in China, I would know the market to be as hot as a spark. If I hadn't stayed in Canada, I wouldn't know where the ice was coming from. So I was able to combine the hub market in China with Canadian ice-cool reflection. So the combination in Sparkice constitutes a linkage between east and west.

It also involves having the entrepreneurial skills and growing the small business into a big one. This is something I learned from Canada. A lot of companies have been set up from there. I came over as the government's official economist. Now after the Canadian privatization, we become entrepreneurs and part of regulation. So it is a perfect match in the Chinese market.

How will the explosive growth of the Internet affect the way in which business is conducted in China? Is there significant pent-up demand for E-commerce services among the Chinese business community?

Of course. Within three years the global business to business market will be worth over one trillion dollars. It will certainly witness explosive growth in China for the following reason: irrespective of whether it is E-commerce or commerce, there are three factors - the buyer, the actual transaction and the supplier. Right now, most western companies control the buyer and transaction platform, but China has an advantage on the supplier side.

How many Internet Cafes does Sparkice.com operate in China? How many will be operational by the end of 2000? Which areas are being targeted in China for new Internet cafes?

I cannot provide you with an exact figure, as we have a number under construction, but we have more than ten. We aim to have 100 Internet cafes by the end of the year 2000. It is a pretty good business model. We are looking at the top ten cities. We have cafes in Beijing, Shanghai and Tejeing right now.

Which specific services is Sparkice.com looking to develop for users in China? Which new services are you planning to launch over the next six months? Could you tell us about Sparkice 1.0 and Dragon Pulse?

DragonPulse is a database, while Sparkice 1.0 is our one-stop E-commerce solution provider for our Chinese business providers. DragonPulse is just like a database for China's merchandise, while 1.0 has been set up to help those merchandisers on-line, including a web site, broadcasting and transactions. In terms of new services, we are trying to set up an international business-to-business platform, especially from China to other areas world-wide.

How many employees do you have? Do you think that you will increase this number significantly over the next two-three years? What kinds of training programmes are you putting in place to improve core skills?

At the moment 88 people are involved in the E-commerce side of the business. We have 100 people involved in the cafe sector, and have over 200 employees, if you include sub-contracting agreements. In terms of training, nobody can teach us. We can only teach ourselves. I think that practice provides the best training programme. We put people in the front end, so that they can gain this practice.

How do you view the regulatory environment in China? In your opinion, how will the regulatory framework develop for Internet services?

China is so big. We have a traditional, planned economy. We have a market economy. We have developed and developing areas. We have high-tech and low-tech areas. So I strongly believe that the door from China to the West will open, but the question is when. I think you have to establish the regulations first and open the door later. This is a very smart decision by the government.

Who do view as your main competitors in this market? In your opinion, what are your competitive advantages over other ISPs? Do you expect the market to become crowded with many new entrant ISPs?

We see ourselves as our main competitors. Team management is essential. We need to be as aggressive as business demands. We have to determine whether or not we should combine the western buyer and supplier side. These are the very important issues.

Do you believe that Internet subscriber charges are too high? When do you expect these costs to fall? Do you believe that the Internet is currently too expensive and too slow?

The infrastructure side will lead to a reduction in costs. At the same time, the more services you provide to those people, the more prices may go up. I don't agree that that the Internet is too costly. After all, the use of a mobile phone is more expensive. But price is definitely a key factor.

But I think that E-commerce is driving change. So if people are making money, they don't care if they are spending money. I think the application is not big enough.

Sparkice.com is playing a key role in the development of E-commerce in China. What impact do you think this will have on the Chinese export industry? Have Chinese companies displayed a willingness to develop E-commerce and Internet solutions?

Well I think that Unicom will play a role on the infrastructure side. We want to provide a competitive backbone and an international gateway. But, in terms of value-added services, such as E-commerce, it is a little premature for Unicom right now. I think that E-commerce will boost the export industry dramatically.

Traditional exports from China to the west will increase from $150 billion to $250 billion over the next three-four years. I hope that people interested in Chinese goods will drive that figure from 5-10%, which is about $10-13 billion exports through E-commerce. I think that market reaction to these developments is very positive.

Do you have any partnerships with suppliers such as Cisco? Which suppliers do you use? Do you have any partners such as CommerceOne, used by SingTel, for the E-procurement business?

We have struck a lot partnerships. Some of them are already defined. We are still in negotiations with some big names. But we are pretty close to finalizing some of these strategic partnerships.

How will the launch of three new operators to challenge the virtual monopoly of China Telecom affect Sparkice's operations? Do you believe that additional competition in the fixed market will stimulate Internet usage?

I think that, as the market is so big, one or two new operators will not necessarily be able to meet the high demand. They may double the number of operators, but the market is still ten times the size. So everyone will still be busy. Of course, competition has started and this development will benefit Internet usage.

Could you tell us about your relationship with China Unicom? How did the JV come about? Could you tell us about the relationship with the Bank of China and CyberCash to develop a debit payment system? Could you tell us about the Yangtze River Donation Project?

We are probably the first joint venture where Unicom provided some of its own money as an equity investment. It is different to other models. At that time, our target was to try and be a value-added services provider for China Unicom. We started as an intra-country franchise. So we have developed a pretty good relationship.

The Bank of China and CyberCash only developed an on-line payment system last year for donations for the Yangtze River project. We donated a lot of money as well as gifts. We worked with China Red Cross and we created a system where people around the world who had a credit card, Visa or Mastercard, could make a donation.

Is it true that you are considering a listing for Sparkice? If so, when is the listing likely to take place? What has been the result of discussions with Morgan Stanley Dean Witter? How much would a listing raise?

Most of the IT and E-commerce companies become successful, partially because they are able to list in public. Sparkice will follow the same model, but we are in the final stages of deciding when, where and how to go public. We have had some initial talks, but we have not committed ourselves yet. Morgan Stanley is just one of them.

This is a new business model. All models are very unique. I haven't seen anything comparable to this model. We are talking about a trans-continental E-commerce business-to-business model, focused on the supplier's side. Right now, the model is more domestic, focused on the buyer's side. It is pretty hard for me to convince the original people to understand from a global perspective.

How do you intend to become the leading E-commerce portal to, from and within the Chinese community? How do you view the potential of operators such as Cable & Wireless HKT, which is also targeting this market, by offering a bilingual portal? Will you also provide bilingual services?

I think that we are focusing on the transaction part. I have not heard about other major competitors doing that yet. Hong Kong has a lot of money and an advantage in management, but I don't think that they have a very close relationship with the government and merchandise issues in mainland China. We don't care about competition, but we do provide a bilingual service as well.

Are you considering a link-up with Cable & Wireless HKT, which is also exploring the potential for broadband services?

If there is a chance, I would like to discuss these issues, but I have not spoken to them yet.

Consumer spending in the Asia Pacific has declined due in part to the Asian crisis. In addition, many of China's inhabitants still live in rural areas with little disposable income. Will you be able to bring the Internet to these areas? Or will it remain a big city phenomenon in China?

That is a very good question. We do not want to target just the English-speaking Internet users in cities. That will be limited. We have a country of two billion people, where 95% of the population can't speak English and don't know how to use a computer. We have tried to develop an E-commerce appliance for those people. Yes we are definitely interested in extending our reach.

How do you assess Sparkice's role in transforming China into an "information economy"? Are your operations dominated by users outside China who want Chinese-made products? When do you expect the domestic market to expand?

I think that it is good to keep our feet on the ground. We have a good relationship with the Chinese government. We also need to have a very good international management team with a clear vision and focus, as there are so many opportunities and there are a lot of factors that will help us obtain a leading position in China.

I do think that our operations are dominated by users outside China. There are two directions - inside and outside China - and there may be opportunities for big name companies that want to sell some products in China. They can also leverage their franchises. The domestic market will grow rapidly. It has already grown faster than we had expected.

You serve as an Internet advisor to several ministries in China. You write 1-2 policy papers a month. What are the main themes of the policy papers which you contribute?

They mainly concentrate on E-commerce, the history of the west and the future for China.

How do you view the potential for Internet telephony in China? Which particular services will, in your opinion, prove most popular in E-commerce? Similarly, which E-commerce services will prove most profitable?

The market is big. It really depends on whether China has a lot of international friends and connections. It depends on whether China becomes part of the globalization process. It also depends on some other issues.

So I think that the future is big, but the pace and scale of growth is related to other issues, such as the foreign companies allowed into China or the Chinese companies that operate outside China. I think that the user will gain access to universal service, hardware and software, which will help people make money. I believe that there will be more in that.

The Internet is by its very nature an open playing field, where you have access to all kinds of information. What are your opinions on the possible regulation of content? How is this issue being addressed in China?

I think that there are two ways to stop people seeing something. You can block his eyes or you can tell him not to look at it. I think that mature teaching methods should involve advice not to look at such content, explaining to people that they will derive no intrinsic benefit from this content.

So let the people have the choice. It is more important than blocking eyes. In my opinion some regulation is fine, but the key long-term issue concerns the increasing maturity of people.

Finally, what are your hopes and ambitions for the company over the next two-three years? What role do you see for the company in the telecoms sector in China? Which emerging trends do you perceive in Chinese telecoms?

We have renamed the company Sparkice.com, instead of Unicom-Sparkice. This will simply become a subsidiary. We are just forming a holding company to put equity into Sparkice.com. I think that Sparkice.com will become the leading E-commerce facility for global companies that want to buy and sell into China. We will play a key role on the value-added side, driving the Chinese telecoms industry.

We are the people creating the infrastructure. High demand for high-value services will drive the infrastructure. That is the key. I think that the latest IP technology, bandwidth and competition will be the key trends in China. But a policy of retaining control, while still opening the door, should be the way forward to ensure the smooth functioning of a healthy and rapidly growing telecoms industry.

Is there anything you would like to add?

We are looking at things in terms of a global business-to-business base, instead of looking at things from the buyer or supplier side. We want to be the platform for whoever wants to buy or sell something in China.