A boom year for China’s tech companies

Beijing, China – Despite slowing economic growth, 2014 proved to be one of the most successful years for China’s online giants with several high-profile IPOs grabbing worldwide headlines throughout the year.

The country’s internet companies posted record revenues fuelled by an increasing pool of web users in China and generated renewed excitement abroad among foreign investors.

Although expected by analysts, the internet economic bonanza happened somewhat paradoxically amid China’s overall economic slowdown and President Xi Jinping’s anti-corruption campaign both taking heavy tolls on other sectors of the Chinese economy, including green energy, real estate, and luxury item sales.

“2014 was probably one of the best years for China’s internet industry,” said Paul Gillis, co-director of the international MBA programme at Peking University’s Guanghua School of Management.

“You’d have to go back to 2007, which was sort of the previous peak. 2014 was so huge because of Alibaba, it kind of dwarfed everything else,” said Gillis, a long-time Beijing resident well-versed in China’s internet scene.

Hangzhou-based e-commerce colossus Alibaba Group made history in September this year after it raised $25bn in New York in what became the world’s largest initial public offering ever recorded in the United States.

Yet “China’s Amazon” was not the only Chinese internet media darling to list abroad in 2014.

Other household names in China include JD.com, another e-commerce platform, which raised $1.78bn on the Nasdaq in May. The company carried its IPO only two months after Weibo Corp, “China’s Twitter”, raised $500m in March.

“2014 has been a very hot year for China’s internet companies, this is not a surprise. The US stock market proved very good throughout the year. This gave them a window of opportunity,” said Will Tao, analysis director at iResearch, an internet consultancy.

Timing is everything

China’s internet titans are not short on cash – and the irony is that this year’s wave of IPOs was not triggered by a need to land more financing.

“The companies actually didn’t need money,” said Gillis from Peking University.

Rather, he said, overseas listings were meant to give an “exit” to the companies’ current investors – mostly foreign private equity and venture capital – and provide further room for start-up acquisitions.

Acquisitions have become more and more important for China’s internet companies as the pool of web users expands and usage diversifies.

By the end of June 2014, China had 632 million internet users, an increase of 14.4 million from last year, according to the China Internet Network Information Center, an official body set up in 1997 that provides regular statistical reports on online developments.

More noticeable, however, is that for the first time mobile internet use (83.4 percent) overtook traditional PC (80.9 percent) usage in 2014. The number of mobile internet users reached a record 527 million, an increase of 27 million compared to the end of 2013.

“This explains the success of China’s internet companies pretty much completely,” said Gillis. “They were at the right place at the right time.”

Employees inside record-breaking Internet giant Alibaba’s headquarters in Hangzhou, China [EPA]

Earliest entrants

The biggest winners of 2014 were China’s three internet behemoths: Alibaba (e-commerce), Baidu (web-search), and Tencent (e-messaging apps).

Among them, Alibaba enjoyed the highest growth. Total revenue for the third quarter of 2014, which ended on September 30, reached $2.7bn after a 54 percent year-on-year rise.

China’s number one search engine Baidu enjoyed similar success over the same period earning $2.2bn with a 52 percent rise, as did Tencent raking in $3.2bn while shooting up 28 percent, according to the latest data on their websites.

Alibaba, Baidu and Tencent were the first to enter China’s promising internet market in the late 1990s. While modest at their beginnings, they eventually transformed into domestic empires while their founders, most often vision-driven entrepreneurs trained overseas, kept a tight rein on their company.

But analysts said it should be a more quiet year for China’s internet companies in 2015.

“I don’t expect there will be many IPOs next year. The best brands have already listed and those who haven’t yet are not ready,” said Tao from iResearch.

However, 2015 will probably witness more industry consolidation.

Analysts said they expect China’s internet companies to keep going beyond their core competency by buying out smaller Internet start-ups to get their foot in other fields such as mobile finance, online gaming or cultural content.

Others will pursue international ambitions. Baidu, for instance, generates 99.8 percent of its revenue in China and has only 96 employees working abroad out of a total of 40,500, according to its website.

Chinese search engine Panguso [EPA]

American dream

Nevertheless, its co-founder and current CEO Robin Li – China’s second-richest man with a net worth of $16.3bn, according to Forbes magazine – has big global ambitions.

Baidu announced earlier this year it would invest $300m in a new research-and-development centre in California dedicated to artificial intelligence.

“I think he [Robin Li] definitely has international plans,” Clinton Cimring told Al Jazeera in a phone interview from his home in Florida.

The South African engineer worked for two years with Li helping him set-up RankDex, a complex algorithm that is today Baidu’s backbone.

“The point was to build a perfect search engine for the United States specifically. It was a complete surprise when he took it to China. I had no idea he was going to do something like that,” Cimring said.

“With his patents, which no one else can copy, he could now launch in the US a search engine that would turn more sophisticated and more reliable results than Google.”