IN SEARCH OF CHINA'S BILL GATES
Does one of these young entrepreneurs have what it takes to create China's first world-dominating company?
(FORTUNE Magazine) – IN THE EARLY 1990s, WANG ZHIDONG JUMPED INTO THE SEA, as the saying goes. The Beijing University graduate left a secure job to set up his own firm in an abandoned school near a street so crowded with stands hawking PC innards it was dubbed "Electronics Avenue." With a handful of friends, he crafted a program that enabled Microsoft Windows and Windows-compatible programs to work in Chinese. By 1997 the software was running on about 90% of the country's PCs. Then, as dot-com fever came to China, he decided to turn the company into an Internet portal.
Wang suffered from the usual problems faced by tech entrepreneurs--lack of funds, contract issues, fear of Microsoft--but there were a few that Western CEOs have never had to deal with. One: whether to install toilets. In 1997 the American CFO of his company demanded that Wang put real toilets in the company's new office. Wang was flabbergasted; he had never worked in an office that had them and didn't understand why he couldn't just have the usual holes in the ground. "We Chinese are used to these toilets," he says. "We call it 'Chinese kung fu.'" The CFO begged, explaining that he had been making up an excuse every day at 3 P.M. to leave so that he could sneak back to his hotel and use the toilet there.
Wang laughs his full-body giggle as he recounts the story. The company that didn't believe in modern plumbing became, in six short years, Sina, the Yahoo of China, with $160 million in revenues, millions of paying subscribers, $1.1 billion in market cap (the stock trades on Nasdaq)--and bathrooms full of toilets. And Wang, at 37, has become one of the godfathers of the Chinese tech world. Not that he's ready to settle fully into that role: He split with Sina in 2001 and started a new company, Dianji, which he thinks can take on Microsoft, IBM, WebEx, Skype, and others, all with one software application.
In a country that seems to be operating with the fast-forward button jammed on, nowhere is the rate of change more dizzying than in tech. Once one of the least-connected countries, China now leads the world in fixed-phone lines, cable TV households, and mobile phones. Its citizens will thumb out some 550 billion short messages this year, double that of 2003. And in five years it is expected to pass the U.S. with the world's largest number of Net users.
But China doesn't want to just consume; it wants to create and control. Since the mid-1980s, the government has targeted information technology (a projected $28 billion market this year, compared with $395 billion in the U.S.) as the most powerful vehicle to launch the country into the economic power elite. And the best way to unleash the inner geek? Forget communism; this is all about embracing I'm-in-it-for-me capitalism. When a high-level commission concluded in 1992 that the way to inject tech into the economy was through education or scientific research, a high-ranking official quickly set the group straight. "Just emphasize getting rich and making money," said Li Xue, chairman of one of the study groups, according to Digital Dragon, a comprehensive book on Chinese tech policy.
Now China has all the pieces in place for global competitiveness: an enormous and growing consumer market, good universities churning out hundreds of thousands of top-notch engineers, cheap labor, and entrepreneurial drive. But China has its sights set much higher than just being able to keep up. What it wants is its own Bill Gates--a person (or, even better, people) with the vision and maniacal drive necessary to create globally known, respected, and feared corporations that generate whole industries in their wake. World-beating companies don't grow by committee or government decree, and China's tech giants--like Lenovo in PCs or ZTE in telecom gear, both with deep ties to the government--have yet to show the kind of innovation necessary to become the next Microsoft. No, the country needs its Gates. In an article titled "The Thirst for Bill Gates" published four years ago in Life Times, Jin Shenghua, a professor at Beijing Pedagogic University, pined for his emergence: "The day when in the land of China a person like Bill Gates--a world-class super-entrepreneur--appears will indicate the true advent of the China era."
Few doubt that the Chinese era is here. But does that mean a Gates has emerged in the Middle Kingdom? That's what I came to find out. In late July, I spent two weeks interviewing dozens of tech entrepreneurs, from those just starting out to others like Wang, one of a handful who have been dubbed the "Bill Gates of China" by peers and press. While I didn't find anyone who could unequivocally claim the title, I did discover a small but growing community of engineers, salesmen, and dreamers who are likely to produce someone who can. Though the tech industry in China isn't yet 20 years old, it's going through generation shifts at a speed that's hard to imagine--from well-meaning patriots stumbling through the process of starting and competing, to dot-com dreamers copying American business plans, to globally connected entrepreneurs who have innovative ideas and international ambitions. China's tech industry still faces plenty of obstacles--including a lack of management depth and capital market restrictions that make it hard for startups to raise money--but they have come so far so fast that Silicon Valley should be looking over its shoulder.
WE DON'T have China's Bill Gates yet," warned my interpreter, Zhang Dan, but if I insisted on looking, she said, I had to talk with Wang Wenjing. He is one of China's software pioneers, the founder and chairman of the country's dominant enterprise-resource-planning software company, UFSoft. He is believed to own 55% of the company, which makes him worth about $215 million. That's small change by American standards, but not in a country with a per capita income of $1,000.
Visit Wang (no relation to Wang Zhidong), however, and it's quickly clear that this ain't Redmond. UFSoft is an hour from the center of Beijing in a high-rise neighborhood that seems to spring out of nowhere. In the lobby of the UFSoft building there's a fingerprint timecard machine, an employee dining room, and a wall with Chinese characters that spell out the company's original mission statement. And what a mission: "Develop a national software industry to improve China's management modernization level." It's a far cry from Apple's "Think different."
Wang, 39, is a small man with a wrestler's build. He sits at a conference table wearing a white Nautica short-sleeve shirt and silver-frame glasses. Behind him is a bookshelf that holds a photo of himself and the real Bill Gates, taken during a recent Microsoft swing through the country. He laughs when I ask him about the slogan in the lobby. "That was put forward ten years ago," he says. "At the time I felt that the development of the company couldn't live without the whole country's economic development."
Wang entered college at 15 and later landed a prestigious government job creating financial software. In 1988, as the country began encouraging private development, he bolted. Wang and a colleague pooled about $6,000 and started UFSoft. Selling to government departments as well as to many small and medium-sized businesses, UFSoft soon became the industry heavyweight.
Growth came quickly at first. But in 1992 the government opened its gates to Gates and the rest of the Western powers by lowering tariffs and dropping barriers to entry. Microsoft and IBM both opened their first offices in the country that year. In response many of China's homegrown tech companies decided to diversify. (Stone Group, started as a collective by scientists from the Chinese Academy of Sciences, moved into cement and even snack cakes.) Wang stuck to software but found that going head to head with the West wasn't easy. By 2000 the Chinese software market had grown into a $1.3 billion industry, but it was dominated by Americans: IBM, Microsoft, Oracle, and Sybase. UFSoft, with less than 2% of the market, ranked seventh, according to tech research firm IDC. Today Wang is still a huge player in China but knows he needs to win overseas to keep growing.
One of the most popular books in China in the late 1990s was Challenge Microsoft's Hegemony by a local IT analyst, Fang Xingdong, who warned about the dangers of Microsoft's growing clout. For his part, the toilet-doubting Wang Zhidong decided to both court and compete with the company. Microsoft's Steve Ballmer even stopped by his office a few times to cement a relationship. "Between my products and Microsoft's products there was a very delicate dance," says Wang. "It was cooperative and competitive." But he also realized that in the battle to be Bill Gates, Gates was probably going to win. So Wang decided to find his salvation online, in an area not yet controlled by Microsoft. He wasn't alone.
THE INTERNET boom brought a lot of good things to China--fast access to information, an ability to subvert the local censors, access to an ever-expanding number of time-wasting pages. It also brought something uniquely Chinese: sea turtles. At least that's what Zhang Dan, the translator, had told me as we went over the itinerary. She was concerned that I would spend all my time with "sea turtles" and not enough with any "autochthonous potatoes." I figured I was caught in a Lost in Translation moment. But through Zhang, I learned about a culture war that had driven a wedge through the Chinese tech community just as the dot-com boom started in 1997.
The sea turtles--a homonym of hai gui, which means "oversees returnees"--were the Chinese students who had studied abroad and now saw a chance to put their Western skills and business sense to work back home. The "potatoes" (later the word would also be translated for me by a public relations person at Yahoo China as an animal the size of a large squash that crawls on the ground) were intimidated. Many had never left the country and were operating by gut instinct. The savvy sea turtles--by 1997 more than 65,000 students were studying abroad--knew how to play both the finance and tech game and didn't waste time importing their knowledge.
I caught up with the most famous of the hai gui, Charles Zhang, CEO of Net portal Sohu.com, as he was lecturing a group of new employees on how big Sohu (market cap: $540 million) could become. The group of 30 crowded into a glass-enclosed conference room that featured a picture of Zhang on the wall. Most of the new Sohuers looked barely out of college, sporting T-shirts and shorts and drinking yogurt from boxes through straws. As they shuffled out, Zhang explained that they were computer engineers who were working to improve Sohu's technology.
Tech wasn't always at the center of his company. Zhang earned a Ph.D. in physics from the Massachusetts Institute of Technology in 1994, saw the development of the web in the U.S., and decided he could get in on the ground floor in China. He collected $225,000 from friends and started the company in 1996 as a copycat Yahoo. He also borrowed another American idea: He decided to focus not on bits and bytes but on himself--a celebrity CEO for a country that was falling in love with business.
From the start, Zhang set aside Friday afternoons for interviews with the press. He would paint pictures for them of the power of the Internet and talk about his background in China and the U.S. and his commitment to bringing the best technology back to the mainland. The spiel won him fans among not just users but also government officials who hoped others would be inspired by Zhang. Zhang also started to bring in Western items he thought might dazzle crowds. He Roller Bladed to one event; at another he showed off his mountain-climbing skills. Just bringing a new computer to a meeting was sometimes enough to get people talking. "When I showed up with a laptop, people thought I must be someone very important," he says. "Because of my own credentials, and my willingness to stand up and say things and do the kind of marketing that Chinese society had never seen, we could at a very minimal cost make myself and Sohu well-known."
Other sea turtles who had played supporting roles in the American boom saw a chance to star in China. Robin Li, a graduate of Beijing University, spent eight years in the U.S., first earning a master's in computer science from the State University of New York at Buffalo, then developing web-search algorithms. His patented process eventually became the backbone of dot-com highflier Infoseek. When Disney bought the company, renaming it Go.com, Li realized that search wouldn't be its central focus anymore and decided to move. On Christmas day 1999, Li returned home and started Baidu, a search engine for the exploding Chinese-language Internet. He raised $11.2 million in two rounds of venture financing from Draper Fisher Jurvetson, IDG, and others, opened an office in Silicon Valley to serve as the major hub for programming and innovation, and paid a few hundred dollars to a local consultant to help navigate the government bureaucracy to open his Chinese headquarters. Quickly Baidu became the search service for local portals--from Wang Zhidong's Sina to Zhang's Sohu to China's third major portal, NetEase.
Local companies were dominating the game--at last it looked as if tech titans were emerging--but the real locals, the entrepreneurs who had stayed home, were left staring with a mix of awe and resentment. Zhou Hongyi, a former software programmer at Founders Group, quit in 1998 to start 3721, a company that offered people a way to type Chinese characters into a browser's address bar to access where they wanted to go, eliminating a major barrier to local Net use. He and his wife lived off her salary and worked out of a rented one-room apartment in Beijing. Three or four other engineers lived with them, turning Zhou's bed into a desk during the day. He had heard about venture capital, but he didn't know how to get the VCs interested. It drove him crazy to watch others with what he considered inferior businesses raking it in. "Many sea turtles had good backgrounds but didn't have a creative idea," he says. "They just copied some model from America and put together a business plan, and they suddenly got tens of millions of dollars." Desperate, Zhou took to asking almost any sea turtle he met to join his company. "But these guys were very arrogant," he says. "They thought they would go to IPO in one or two years and have tens of millions of dollars. They didn't believe my business model."
That's not surprising. After all, Zhou's business model was new, and there were plenty of tested ones in America worth choosing from. Hundreds of firms promising to be the eBay of China, the Webvan of China, the iVillage of China, popped up. Peggy Yu, who came back to China in 1998 after 11 years in the U.S. to start DangDang (er, the Amazon of China), said that at one point she knew of 300 companies also attempting to sell books online--even though credit card use was (and still is) too small to allow much e-commerce. In Chinese these entrepreneurs were known as "follow-your-ass bugs"--copycats. When the dot-com bust hit the U.S., it quickly rippled through China. The bugs were squashed. Companies that had persuaded the government to allow them to go public were smacked hard by investors. Sina, which went public on Nasdaq in April 2000 at $17, watched its stock tank nearly 60% in six months; Sohu went out in July at $13 and six months later was trading below $2.
Suddenly it looked as though the Chinese weren't quite ready to take on the West. The burgeoning tech titans? Many were left working for Americans who were themselves hoping to be the next Bill Gates. Yahoo bought 3721 last year for $120 million and made Zhou its general manager. Early this year Google bought a chunk of leading search site Baidu for a reported $10 million, though Li insists the companies are still competitors.
The sea turtles who did manage to salvage their businesses made major changes to become more Chinese. Sohu's Zhang started embracing Confucian management: the idea that his employees aren't motivated to do their job just to get rich or to get by--as he says workers in the West are--but also out of loyalty to their bosses. Now he's spending less time with the media and more time making sure to "build relations in the company." True to the new policy, the day before we were first scheduled to talk, Zhang canceled our meeting. He decided to take an entire division of Sohu mountain climbing instead.
IN MANY WAYS the rise and fall of the dot-coms was a blessing to China. Entrepreneurs were given a two-year, countrywide MBA. A whole generation learned how to write business plans, how to lure cash, and how the capital markets did and didn't work. And the locals got a shot of self-confidence as they watched the turtles disappear. The hai gui--many now jobless--even earned a new nickname: hai dai, or "seaweed," a reference to their idle state.
And as the forest of startups cleared, a few companies that had been overlooked suddenly stood out. It's at that point that Chen Tianqiao started to be seen as the man who might be able to storm into other countries as a symbol of Chinese innovation and technological might. For Chen, who runs Shanda Interactive, a company whose online games allow players to spend years building characters, it was vindication.
Unlike many others in his industry, Chen is not a gamer. He's a businessman, and he thought he saw a market where no one else did. In 1995 he became one of only 18 students ever to graduate early from Fudan University in Shanghai. He worked for a few years at a state-owned company, then in 1999 decided he had to strike out on his own. "In China everyone wants to be a government official," he says. "Power is much more important than money. But I said, 'In the next five years there will be a good opportunity here.' I didn't know what it was, but I had a sense an opportunity like this wouldn't come again."
With his wife and brother, Chen tried a hodgepodge of businesses--gaming, cartoons, virtual communities. In 2001, as the dot-coms were in their last stage of flaming out, he realized that gaming was about the only business that looked as if it might be successful. Draining the last of Shanda's startup funds, Chen licensed an online game from Korea for $300,000. If he couldn't turn a profit in three months, he knew he would fold. Two months later the game was in the black. Chinese consumers, as Chen discovered, had an insatiable appetite for online gaming, an industry that no Western company wanted to enter in China for fear of piracy. Even today finding an Xbox or PlayStation in China is nearly impossible, a fact that's unlikely to change as long as people can pick up pirated top videogames for 90 cents from any street vendor. Chen found a way around the problem by giving away the software free--the pirates even acted as a distribution channel--then charging users to log on to the "universe" to compete with other players. He also came up with an innovative way of collecting cash in this e-commerce-free country. Taking a page from the prepaid cellphone industry, Chen sold scratch-off cards offering varying amounts of game-playing time.
By the end of 2002, it was clear that Shanda--with about $42 million in revenue, $17 million in net profits, and an average of 280,000 people playing its games at any one time--had found an industry and a method for success that didn't rely on aping some Western company. "Shanda's business is in a totally new area and a new market, and they are facing the local consumer," says Fang Xingdong, the author of the book about Microsoft's power in China and founder of tech research firm ChinaLabs. "They don't have any international competitors."
Today Shanda, with eight games, is the largest online-game company in China. The company on average hosts some 1.2 million simultaneous gamers; major rival NetEase hosts about 230,000. Shanda is a powerhouse--and investors have taken notice. The company went public in May, and its stock has been climbing. Chen and his wife own some 40% of the shares, worth about $680 million.
But, then, there are a lot of big game developers--just as there were plenty of software and operating-system makers when Microsoft was on the rise. Where Chen stands out is in his vision. Shanda's 47,400-square-foot headquarters in Shanghai looks like a California apartment complex. In the courtyard four-story red banners display Chen's sayings. One reads: FEET PLANTED IN CHINA, WITH ASIA AT YOUR BACK, TO BECOME THE WORLD'S LEADING INTERACTIVE MEDIA ENTERPRISE. Chen, who is only 31, reveals that he is using a U.S. company as a model: Disney. Just as Disney grabbed at each new technology to become a winner, Chen thinks he can move from games to cartoons to movies to any form of entertainment; from the Internet to mobile phones to PCs to TVs; from China to the rest of Asia to Europe and the U.S. Just how big does he see his company getting? Chen tipped his hat in February when he hired Tang Jun, former president of Microsoft China, as Shanda's president.
Chen, though, plays coy. "I always find that the media or newspaper or TV say, 'This guy is the Chinese Bill Gates,'" he says, leaning back in a lounge chair in his spacious office. Behind him is a copy of Jack Welch's Jack: Straight From the Gut, a gift from a Western employee that Chen says he hasn't read and doesn't intend to. "In China there is no Bill Gates. There's only one Bill Gates. We respect him. He's a hero. In China we should grasp any opportunity and don't think always about who's our Bill Gates. Maybe in 20 years we can. But right now everyone should just focus on what they can do."
Some in the tech industry can't help but focus on Shanda. Feng Tao, the managing partner in New Margin Ventures, has been buying into companies with foreign capital--local venture capitalists are hobbled by restrictive rules--for years. Between puffs on his State Express 555 cigarette, Feng, a no-nonsense speed-talker, says that Chen is one of the few Chinese entrepreneurs who has a shot at becoming a Chinese Bill Gates, because Shanda is "changing the ecosystem." Before Shanda, he says, "no one in the gaming industry was making money. You sell games and you have intellectual-property protection problems. You have piracy problems. But Shanda introduced a lot of new ideas--the prepaid cards, for example. It's not anything fancy. It just takes knowing the local market and having a great ability to execute. They changed the ecosystem. A lot of small companies, like the Internet café owners, now make money because of Shanda."
Every other successful Chinese company started as a copy of another company, Feng says. But not Shanda. Now Feng is looking for his own ecosystem changers. And he motions to the entrepreneur sitting next to him, a preppily dressed angel investor named Gong Hong-jia. Gong's latest venture: three related companies working on technology to deliver live streaming video to mobile phones and other gadgets. Feng thinks it could change the ecosystem.
CHINESE ENTREPRENEURS can grow big only if the government allows them to, and so far the government seems to both desire and fear creating a Bill Gates. This summer the state-owned mobile-phone company flexed its muscles. It fined Sohu, Sina, and others and suspended them from sending messages over its system--a major revenue source for most portals--ostensibly in retaliation for unsolicited marketing. Now the gaming industry is waiting to see whether it's the next target.
But let the government do what it wants. Chinese tech entrepreneurs have seen and learned too much to be held back now. With people like Chen showing them the ropes, they have their own hometown heroes to emulate. And the new breed is quickly forgetting how far China's tech industry has come so fast.
In fact, Sting Liang isn't quite sure just what hurdles there used to be. The 29-year-old Liang is one of the three young founders of an online and SMS-based fantasy sports league called Wham Sports--this in a country that is just starting to pay attention to non-Olympics competitive sports. He and his partners, dressed in shorts and T-shirts, seem confused when I ask if they ever thought about how hard it would have been to strike out on their own ten years ago. Their answer: It was much simpler to get money back then. "Our situation isn't easier than theirs; there are no bubbles anymore," says Liang. His partners--29-year-old Kan Ni and 30-year-old Billy Wang, a Taiwanese who first met the two in a sports chat room--nod in agreement. No matter how hard I press, they can't imagine the concept of debating installing toilets or seeing the shadow of Microsoft for the first time. They're just concentrating on getting Wham up and running, then possibly taking it to Japan and who knows where else.
Liang dismissed any grumbling from the old men of the industry--those in their late 30s--as just whining: "If someone's successful, people don't talk about what he's been through. If he's failed, then we know he must have suffered a lot." All three laugh. And right then, we could be anywhere--Shanghai or Silicon Valley. China may not have its Bill Gates, but it has its young, cocky, and determined group of businessmen who look only to the limitless future. Just like in the States.