Internet companies foresee a future in mobiles

With China now the world's largest auto market, carmakers are eagerly expanding production while eyeing untapped inland markets. Domestic automaker Geely made its bold move earlier than the rest.

The Zhejiang-based private carmaker set up an auto plant in the capital of Gansu province in 2006, which four years later remains the only plant making sedans in all of underdeveloped northwest China.

The factory is about an hour's drive from downtown, standing out on a vast expanse of moorland with no other buildings nearby. Some say it's a tree in the desert.

With the support from local authorities, Geely is about to plant more "trees" to create an "oasis".

Earlier this month the automaker and the local government signed an agreement to bring in 20 to 30 parts suppliers and build the site into an automobile industrial zone, or in their words, "a modern motor city on the loess plateau".

An Conghui, Geely's vice-president, said in an interview before the signing ceremony that 12 of its existing parts partners will open shop in Lanzhou to take advantage of Gansu's raw materials and also help develop local suppliers.

Geely also plans to invest 2 billion yuan ($293 million) and increase production capacity of its Lanzhou plant to 120,000 units per year that will include 100,000 Free Fleet and Gleagle subcompacts as well as 20,000 mid-class Emgrand models.

Nearly 20,000 cars rolled off the production line at the plant last year. An said the capacity will increase to 40,000 units this year and 80,000 to 100,000 units in 2011.

Geely's chairman Li Shufu admitted the facility has not yet made a profit mainly due to high logistics costs and small production volume. He is confident that bringing in auto parts suppliers and expanding production capacity will greatly reduce costs and make the factory profitable.

Li also noted the initial motive to build the Lanzhou plant was in response to the government's call for developing western regions.

"Business opportunities usually lie in national strategies," he said.

The Lanzhou plant is far from the largest of Geely's nine facilities across China, but its positioning is important. The location in a transportation hub city will play a crucial role in exporting Geely's cars to Central Asia and Eastern Europe.

The company's other major export base is the coastal city Ningbo in its home province Zhejiang where most of its shipments to southern countries and regions originate.

Despite tumbling exports in the wake of the global recession last year, Geely is building more overseas plants that will be unveiled soon, according to An. The company now runs production lines in Russia, Ukraine and Indonesia. A Malaysian plant is set to begin operations soon.

An said that the company will reach its goal to produce and sell 2 million cars by 2015 ahead of the schedule. Yet given the stagnant overseas demand, Geely's blueprint was adjusted to reduce the proportion of exports to one-half of the total sales, down from the original two-thirds.

Rapid development

Geely is riding high these days with sales surging by 48 percent to 330,000 units last year. It purchased the Australian automatic transmission supplier Drivetrain Systems International (DSI) last March. It received wide media exposure in its bid to acquire Volvo, a deal expected to finalize this year.

Compliments as well as questions surround to Li Shufu, but he remains cool-headed.

"The auto industry is like a marathon race - the key is not to run too fast at the beginning," he said, underscoring Geely's emphasis on technological innovation and training of professionals.

Earlier this month, Geely won the second prize in the 2009 State Science and Technology Award for its innovation, with no first prize awarded. For the past two years, only 12 out of more than 5 million candidate companies received the prize.

The State-level award is not about a single patent or design, but the entire system that cultivates more talent and new technologies, said Zhao Fuquan, Geely's vice-president in charge of research and development.

According to Zhao, the award marks a great leap in Geely's capacity for innovation after the company strategically switched from merely competing with pricing to making quality cars.

China's Internet companies are excited at the prospect of increasing their presence on mobile platforms.

The sector is enjoying rapid development following the introduction of third generation (3G) networks. But before they can replicate their success or experiences with traditional Internet platforms, they are having to cope with new challenges.

Tencent Holdings, the owner of QQ, the most popular instant messaging (IM) service in China, said it had to make a painstaking turnaround to meet the needs of mobile Internet users.

"In the past, we always wanted our products to be fancy because we believed this would create the best user experience," said a manager from Tencent who declined to be named. "But later we found that things worked completely differently in the mobile Internet world."

Though users of the mobile Internet and PC-based Internet have an overlap of about 50 to 60 percent, according to research firm Analysys International, mobile Internet users tend to use quick and convenient services because they usually access the Internet for very short time periods.

"As a result we have to let our products 'lose weight' now, to make them as simple and easy to use as possible, which was a hard lesson to learn," added the Tencent manager.

Tencent entered the mobile Internet five years ago and has by now put most of its PC-based Internet services on the mobile platform, including the IM service QQ, a mobile portal and mobile gaming. Its mobile QQ had about 81.2 million active users over the last quarter of 2009, ranking it top in the mobile IM market, according to Analysys International.

To gain an upper hand in the mobile market, Internet companies have to largely increase their research and development input though most of them are still looking for a way to make profits.

Alipay, the e-payment arm under the Alibaba Group, said the company spent three to five million yuan every year just in developing client software for different mobile phone operating systems.

"To come out with suitable solutions for each different operating system has become a big technological challenge for us," said Chen Lei, director of the wireless department at Alipay.

The number of China's mobile Internet users increased by 120 million to reach a total of 233 million in 2009, according to China Internet Network Information Center.

Subtle relations

Internet companies may dominate the traditional Internet, but in the mobile industry they have to work with other leading characters and sometimes play a supporting role.

These companies have to work with not only content providers but also cell phone makers and telecom carriers, which link their products and Internet users.

"Telecom carriers, to a large extent, influence the way we do business," said Wang Xiaochuan, chief technology officer of Sohu, one of the largest portals in China, referring to the resources carriers control and their dominant position in telecommunications networks.

The company is considering launching a media platform integrating different kinds of information, and is in talks with carriers about fee charging.

"If we are to charge fees for the service, we have to consider how carriers' charging systems work and how we should design our products to fit them," said Wang.

Tencent said it had to closely keep pace with carriers when launching their products.

"There are growing needs of our users, but sometimes we have to constrict the needs a little to follow carriers' development steps," said the manager from Tencent. "We will not make a new application available on all operating systems and different types of cell phones all at once because this may cause a big burden to the telecom networks. We have to do it step by step."

Tencent said its mobile QQ users more than doubled earlier last year because the carriers changed their policy for GPRS Internet connection, which largely reduced the cost of the service.

"It (the change) really stimulated users' needs," said the manager.

Telecom carriers can help Internet companies gain more market share, but the two may also generate competition.

Fetion, an IM service launched by China Mobile in 2006, claimed a 21.6 percent share of the mobile IM market, only behind QQ's 59.6 percent.

"The carrier doesn't want to see its domains, such as short message services and voice calls, affected by the popular Fetion, so it had to launch a similar service to hold on to its users and keep its position in the IM market," said Fang Li, an analyst with Analysys International.

Despite restrictions, Internet companies are likely to see a more open mobile market.

"Take the channels for Internet companies' applications for example," said Fang. "Two or three years ago, these applications largely depended on the carriers' channels, but now there are more and more free WAP channels and those offered by cell phone makers, such as Nokia's Ovi Store, so the carriers' influence becomes less, which will lead to a more open market in mobile Internet," said Fang.

Source: China Daily