Scaling the Wall

U.S. enterprises ready e-business pushes in China

More than 2,000 years ago, invading tribes from the north were repulsed by the 1,500-mile Great Wall, built by vassal states of the Qin Dynasty to protect the fertile lands of China.

At the beginning of the 21st century, the walls that separate the Chinese economy from the rest of the world are poised to fall a notch with Chinas re-entry into the World Trade Organization. That opening, which could come as early as the end of this year and will mean the lifting of tariffs and trade barriers, has many U.S. e-businesses hoping to use the Internet to tap into vast new markets and to link to new business partners.

But, like the invaders that went before them, foreign e-businesses face a number of daunting barriers as they prepare to launch e-commerce in China. Networks and other critical pieces of IT infrastructure still have holes. Government regulations can be a nightmare. And cultural differences make concepts such as business-to-business auctions and online procurement difficult to grasp for many Chinese managers.

Still, many U.S. enterprises are beginning to lay the groundwork to launch B2B e-commerce initiatives in China. Companies such as United Parcel Service of America Inc. and are finding e-business partners in China, familiarizing themselves with Chinese laws and B2B cultural conventions, and even beginning to roll out online services targeted at Chinese business partners. Given the huge potential market in China, investing in such first-step efforts makes sense, experts say. But, they warn, have patience. U.S. companies shouldnt expect big B2B e-commerce returns from China overnight.

"China has the biggest B2B economy in Asia," said Paul Cheung, senior vice president of technology for telecom services provider Pacific Century CyberWorks Ltd., in Central, Hong Kong. "Its strong manufacturing base combined with WTO accession will make it a major e-commerce market. But dont be greedy. You cannot expect to see immediate results."

Gaining Ground

Indeed, the billions of dollars in untapped potential e-business have U.S. companies salivating over China as the next B2B mecca. And its no wonder. With one-fifth of the worlds population, China last year generated $474.3 billion in foreign trade, according to the WTO. eMarketer Inc., in New York, estimates B2B e-commerce revenues in China will grow from $1.5 billion this year to $21.8 billion by 2004.

"Certainly, the WTO will open Chinas market ... in a way theyve never been open before," said Joseph Borich, executive director of the Seattle-based Washington State China Relations Council, which has 200 members, including The Boeing Co. and Microsoft Corp. "The government has begun to eliminate quotas theyve had on imports, and of course, once they join, the tariff rates will come down substantially."

One American enterprise that sees impending WTO membership as a chance for first-mover advantage in China is UPS. Brown UPS trucks driving up to Tiananmen Square in Beijing are an increasingly common sight since April, when the Atlanta-based company became the first U.S. cargo carrier to fly directly from the United States to China. The company currently operates six flights to China a week and expects the service to generate $300 million in revenues during its first year.

More important, UPS has begun to bring to China many of the B2B e-commerce services it now offers in the United States and other Western countries. Package tracking is becoming available from UPS in China, as are supply chain management services. Many customers for those services are U.S. enterprises expanding business in China.

UPS B2B success in China is the result of years of groundwork. The company began operating in China in 1988 by partnering with government-owned Sinotrans, which flew UPS packages into the country. Still, UPS managers said, infrastructure and regulatory barriers stand in the way of much of what UPS would like to be able to do.

"We have several multinational companies doing business with UPS on a worldwide basis," said Daniel Chen, managing director for UPS China, in Beijing. "Whatever we do in China for these companies will eventually affect their supply chains worldwide. Unfortunately, the infrastructure for implementing a sophisticated supply chain here is still in an infancy stage."

When Chen talks about infrastructure, hes not just talking about networking. Hes talking about much more basic technology. While packages in the United States can be shipped cross-country in a matter of days, for example, in China the roads—or lack thereof—mean that, even if B2B e-commerce were to take off, there is no efficient way to deliver products.

"E-commerce is not all about the technology," Chen said. "You have to be able to move things around speedily and in a flexible way to meet the customers needs. The transportation infrastructure is not established."

To ensure packages are delivered on time and to the correct locations, UPS takes advantage of technology already in use in the United States. Four years ago, the company deployed its International Shipping processing system in China to streamline the customs process. Before a shipment leaves China, data about the package is sent directly to Chinese customs for clearance using the electronic data interchange protocol.

This month, the company will introduce its DIAD (Delivery Information Acquisition Device) handheld package-tracking device in China. UPS drivers will use the device to obtain proof-of-delivery signatures from package receivers. The signature will be digitized, allowing anyone tracking the parcel to confirm delivery and receipt of the parcel. Chen said this system will improve the supply chain process of UPS Chinese customers relying on proof of delivery for their billing processes.

But, while the DIAD is used as a wireless device in the United States, users of the system in China will need to bring their computers to UPS offices to connect with the UPS system, meaning Chinese businesses wont have the same up-to-the-minute package-tracking capability as their e-business counterparts in the United States.

Wireless, Chen said, isnt an option in China because UPS is concerned about the quality of satellite network providers, as well as about the developing wireless market in China. As a result, moving data wirelessly and accessing the Internet can be frustratingly slow and expensive. UPS and other e-businesses say they hope foreign capital and technology will improve that situation soon. Chinas impending re-entry into the WTO and concessions promised in the U.S.-China Bilateral Trade Agreement include the prospect of increased foreign ownership of Chinas telecommunications industry and, eventually, unrestricted foreign investments in Chinas transportation and distribution sectors.

Already, providers such as Sprint Corp., Bell Canada International Inc., Nextel Communications Inc. and France Telecom have begun investing in Chinas telecom infrastructure. UPS Chen said the company is currently talking to several service providers in China to see if they will be able to provide wireless capabilities to the company in the future.

Chinas immature infrastructure isnt the only thing impeding the growth of e-business. While the Chinese government is enthusiastic about the future of the Internet, it continues to regulate the flow of information coming into China. New regulations, for example, require that companies doing e-business in China release encryption keys to the government. And, mainland Internet content providers need to apply for a license from the Ministry of Information Industry to operate legally in China.

While U.S. corporations are leery of such regulations, Hurst Lin, U.S. general manager and vice president of business development at B2B portal, said he believes theyll have to get used to them. "Obviously, the Chinese government has inserted stronger elements of state requirements and state security but, otherwise, its very similar to the way other Asian countries are governing the Internet," said Lin, in Sunnyvale, Calif.

Its also possible to work around the regulations. UPS Document Exchange service, which provides secure delivery of online documents, uses high encryption levels that are covered under Chinese regulations. To keep its encryption keys private, UPS chose to locate the servers used to provide this service outside China.

To comply with Chinese regulations—particularly those that limit foreign companies to 50 percent ownership of ventures in China—many U.S. corporations have been forced to partner with Chinese companies to conduct e-business. Today, for example, UPS can transport parcels between China and the rest of the world, but it is prohibited from delivering parcels between cities within China.

After carefully considering several partners, UPS in 1988 started a joint venture with state-owned transportation company Sinotrans, in Beijing. Through Sinotrans, UPS has branded operations in 21 cities in China, where packages are delivered by UPS uniformed delivery people driving brown trucks. In all, UPS delivers parcels to 120 cities across China through its joint venture with Sinotrans in Beijing and offices in Guangzhou and Shanghai and by using the Sinotrans network. The company has not yet, however, integrated its internal logistics or other operational systems with those of its partner.

Still, experts say, partnering with Chinese companies is smart because it offers benefits that go well beyond easing compliance with Chinese regulations. Business in China, as in many Asian countries, is built on trust and enormous amounts of personal contact. As a result, experts say, B2B e-commerce can be a tough sell. Finding a partner in China can help resolve some of those cultural issues. is one company that said it is hoping to change the way Chinese corporations view e-commerce. The company was the first—foreign or domestic—to be granted a license by the Ministry of Information Industry to provide online content. Already, the Chinese language content provider and seller of B2B services in China has more than 90 million page views per day.

The company offers programs on its site that provide Chinese companies with e-commerce components including commerce engines, hosting services, and advice on how to display content and information about products. To date, has signed up 1,000 small and midsize businesses in China.

In the fall, the company plans to launch a B2B e-marketplace that will enable Chinese companies to supply products to overseas corporations. It has also leveraged partnerships with state-owned banks to provide a variety of payment processes, something novel for a country in which most customers, concerned about online security, prefer to pay in cash.

Certainly, not all U.S. companies are pushing as hard to pioneer e-business in China as are UPS and Infrastructure, regulatory and political barriers are causing even large U.S. enterprises such as Boeing to take a wait-and-see approach to B2B e-commerce in China. While U.S. corporations operating in China say they havent experienced any negative effects as a result of tensions between the United States and China over the 50-3 Navy spy plane, the expectation by many is that Chinas re-entry into the WTO will not be smooth sailing.

Boeing, for example, uses the Internet mainly to exchange information regarding airplane design, drawings and communications with Chinese customers. The company has not, however, launched any China-specific B2B initiatives or provided Chinese language content. Any B2B e-commerce done with Chinese suppliers is through the Seattle companys [email protected] program, which is available to all its suppliers worldwide. The company cant say how many, if any, Chinese business customers use the exchange.

Over time, however, as barriers fall, even skeptical U.S. enterprises will be drawn into B2B e-commerce in China, experts predict.

"Mainland China is still kicking the tire," Sina.coms Lin said. "Business-to-business e-commerce isnt going to happen overnight."