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A FEW years ago two executives of an international oil company were working late in its otherwise deserted office

in England. A stunning young Chinese woman arrived at reception. She was very attractive, decked out in Gucci, one of them says. She delivered a letter from Sinopec, one of Chinas giant, state-controlled energy firms, proposing a multibillion-dollar takeover. The executive adds, a little wistfully, that she then disappeared into the night in a car with local licence plates, never to be seen again. His firm was soon bought by another Chinese company. Since then Western bosses have been tapped by Chinese firms at conferences in Toronto and Cape Town and received walk-in offers in Scandinavia. Companies across Europe have solicited Chinese investment. Bankers all over the world have touted lists of Western takeover candidates among Chinas big firms. This year buyers based in China and Hong Kong have accounted for a tenth of global deals by value, including investments in oil and landmark takeovers in industry, such as Geelys purchase of Volvo, a Swedish carmaker. A decade ago China urged its companies to expand under the slogan go out. Now it is really happening. The first fiery breaths

More deals are inevitable, given Chinas rise. Control of the worlds stock of foreign direct investment (FDI), which includes takeovers and companies greenfield investments, tends to reflect a countrys economic muscle. Britain owned 45% of the worlds FDI in 1914; Americas share peaked at 50% in 1967. Today China, including Hong Kong and Macau, has a share of just 6% (see chart 1). Listed Chinese firms, which are largely state-controlled, are already some of the worlds biggest, and account for over a tenth of global stockmarket value. Most are still mainly domestic outfits. Chinas high savings will also spur deals. Companies often have surplus cash and banks surplus deposits. Today those savings are recycled into rich countries via sovereign-wealth funds and the central bank, which act as portfolio investors, buying mainly bonds. But China may and probably

should diversify. That shift will be accelerated by Chinas political aims: to acquire inputs, such as raw materials, labour and land; to build up technical and commercial expertise; and to gain access to foreign markets. Public announcements of such deals are something of a charade. Wooden Chinese executives insist they are acting on purely commercial grounds. Western bosses hail a new era of cooperation. Yet these transactions are tricky partly because of cultural differences and partly because of the role of the Chinese state. There have been fiascos. In 2005 CNOOC, a Chinese oil firm, withdrew a bid for Unocal, a Californian producer, after American politicians kicked up a stink. In 2009 Rio Tinto, an Anglo-Australian mining firm, withdrew from a deal to sell a series of minority stakes to Chinalco, a Chinese metals firm. Rios shareholders opposed the sale but many reckon that the Australian government did, too. The Economist has interviewed, anonymously, executives past and present at 11 Western companies that have been bought by or have sold stakes to Chinese firms, or have been in negotiations to do so. Ten of the deals discussed were worth more than $1 billion. What these people say provides an insight into both Chinas capacity to expand its companies abroad and the opaque workings of its state-backed firms. The impression they give is a mixture of awe at Chinas ambition and technical skill and a far more qualified assessment of Chinese companies ability to run international businesses. The meat of the negotiation often has two parts: marathon sessions at an investment banks offices, often in London, and visits by target firms executives to mainland China or Hong Kong. There they may be expected to make epic PowerPoint presentations to giant audiences, and to attend banquets and intimate discussions, often in hotels owned by the bidder. Most visitors are impressed by Chinese firms technical nous. Both sides try to make friends: Emotion and trust matter, says a Briton, because authority within Chinese firms is opaque and arbitrary. Chinese negotiators often use booze to break down barriersand to try to get the upper hand. This is a well-known tactic, says a European of hazy days he spent in a hotel dealing with the fine print. They would bring in people to try to get you drunkAt one point I was sure theyd brought in a lady from the switchboard. Most targets of Chinese takeovers need an interpreter. It pays to be wary. The head of a mining firm grew fond of his, but jokes, She was clearly an internal spy. Most executives say they trusted their hosts. But not all. A European says, They knew everything about me, and adds, I had 52 hits from China on my home computer. Another boss negotiating a controversial natural-resources deal found the atmosphere sinister. You had to take your battery out of your mobile phone. You were told the rooms were bugged. Chinese companies power structure is a bit of a mystery to outsiders, even the handful of Westerners on the boards of big state-backed companies. A popular theory is that they are controlled by a parallel hierarchy of Communist Party officials. The most senior party man in a firm, the general secretary, is not necessarily the most senior executive. Although one Western executive says this distinction was evident (There were party people and people who did stuff), most are just overwhelmed by the volume of bodies. One arrived, alone, in London to be faced

with 30-40 people from the Chinese side. I was shocked, he laughs. Meetings in China can be attended by vast audiences, with people coming in and out continually. A core of people ask good questions, but even they, many visitors say, seem to lack the authority, or desire, to make decisions. Power behind the chair The opacity of power is also reflected by the role of the titular heads of Chinese firms. One boss found his counterpart to be an autocrat, surrounded by minions: You feel the deference towards this guy. There are no interjections when he speaks. Yet most visitors to China talk of charming figureheads, for example at Sinopec: There are two chairs in the middle where you and he sitYou say prepared remarks into the microphone and then everybody clapsGirls serve teaThe big chief doesnt negotiate. He just blesses the deal. Another executive says the head of Huawei, a telecoms-equipment firm, was a great gentleman who relied on his lieutenants for information. A natural-resources boss says the head of Minmetals, a big Chinese mining firm, was just there to keep protocol. Who, then, calls the shots? A lieutenant who has lived outside China may lead the talks with the targets top brass. Chinalco, says a Westerner, has used the same 40-something bilingual hotshot on several deals: he was very, very good. But with one exception, those interviewed thought the state was in ultimate control. You can feel it, says one. In China youre dealing with the government, says another. In India youre dealing with companies. However, the state is far from being a predictable monolith. Often, more than one Chinese firm has sniffed out the same target. They compete for the Western firms affections and preferred bidder status with officials back home. The process can be chaotic. A chairman says he negotiated for months with a Chinese mining firm, including site visits by hundreds of their staff, only to see the deal collapse because it lacked political consent.

Likewise, Chinas government-controlled banks, which have been expanding abroad (see chart 2), are often described as indiscriminate financiers of Chinas overseas conquests. Yet the same chairman recalls going to Cuba to meet a senior official of China Development Bank (whose father had, apparently, been an acquaintance of Fidel Castros) and receiving a clear signal that a deal was in doubt. Another executive says a deal with ZTE, a maker of telecoms equipment, that included state-bank financing struggled to win official approval. ZTEs bosses, he says, held little sway with the central government. Once a preferred bidder has been picked, however, there can be a flood of cheap cash. Someone involved in the Rio deal recalls meeting a bank in China and being staggered by their indiscipline. They said, How much do you want: $10 billion, $20 billion? It was unbelievable. The preferred firms negotiators often have some latitude to alter the terms of a deal, but refer big decisions to Beijing. During the auction of a Western oil company, a Chinese state-controlled energy firm went back to the ministerial level to raise its bid, says an executive of the target. At key moments, though, this apparently fiddly hierarchy can be decisive. One oil executive ran an auction of a firm that ended with an Indian and a Chinese bidder (both were state-controlled). The Indians had no concept of materiality, he says, and were mired in nit-picking. In the final stages they returned the draft contract riddled with amendments. The Chinese firm returned it clean, and won. Although to set up a foreign bid a Chinese firm has to jump through lots of hoops, once it has done so it enjoys formidable advantages. It has access to cheap finance. It can ignore its share price, since its majority shareholder, the government, is onside. Politicians may also work to smooth the waters. PetroKazakhstan, a Canadian firm with assets in Central Asia, was coveted by a Russian company. Its takeover by CNPC of China was eased by a state visit by the president, Hu Jintao, to Astana, the Kazakh capital. Chinas state-backed system also has disadvantages. One is that foreign governments are becoming increasingly wary of Chinese takeovers. These include those of Canada and Australia, previously two of the most open markets for corporate control in the world. Another is more subtle: that the style of decision-making can lead Chinese companies to overpay and to struggle to integrate their purchases. Some executives felt that their Chinese suitors had bargained astutely. Someone who has sold four mining firms says the Chinese compared well with Western buyers. Others are less complimentary. To get to the point of executing a takeover, a Chinese company must build up a huge head of steam. Some say they struggle to rein in their investment bankers. They lost control of the situation, says a European chief executive. In future, I hope for their sake that they do a better job at negotiating. Chinese firms also risk political fallout if they fail. Their sense of mission makes them transparent, says one European executive of his experience selling a firm. They cannot take the chance to lose the deal. Another European boss says his Chinese suitor struggled to deal with Western stockmarkets. Their disclosure rules mean slip-ups are made public, and disparate

institutional investors are unpredictable. As a result Chinese buyers prefer targets with a single big shareholder who can negotiate bilaterally. However, buying such firms can be costly because they command a scarcity premium. The price China pays is often dismissed as inconsequential: what are a few billion in the grand scheme of things? But even for rich countries, systematically overpaying for foreign assets is a bad idea. After a binge in the late 1980s and early 1990s, Japanese firms retrenched. I love you. Tell me your name Integrating an acquisition is just as important as price. Once the deal is donea text message from China confirming a higher offer is not unknownthere may be a signing ceremony in the target firms country and then a banquet in China, attended by central bankers and government ministers. More grog is compulsory. You will leave the dinner completely drunk, says a survivor. The bought firms bosses may be asked to linger in well-paid but largely symbolic roles. Those interviewees who experienced Chinese firms integration efforts mostly reckon they began well. They had done their homework, says one. Their approach was very clever at first, recalls another. The buyers message that it would keep all staff was extremely simple and well received, he says. Usually the acquired company keeps some autonomy, with its own legal status and name. Only one executive, at a North American firm, felt this initial group hug was insincere: the Chinese took over the day I walked out of the buildingCritical positions were replaced instantly. An ex-colleague disagrees, saying the Chinese just took firm control. Over time, though, business plans change. Natural-resources firms can become captive suppliers to China, rather than selling on the open market. An executive of a Latin American mining company recalls a blazing row between the two groups of geologists which was resolved when the Westerners realised their new objective was to maximise production, not profits. In the longer term the DNA of Chinese corporationsa sense of mission, consensus, deference and opacitycan cause difficulties. These can be compounded by a dearth of English-speaking managers familiar with working outside China. An architect of a failed deal says, There would have been some great opportunitiesand some really big problems. The former boss of a European firm now owned by a Chinese giant says he liked his new colleagues but adds that the lack of open discussion caused friction. Nobody contests what their immediate superior says. Never, never, neverThe decisions are taken somewhere else. The firms engineers became frustrated as plans were sent to China and amended. It is difficult for Chinese firms to run foreign ones, he says: It is a very stratified society. Another veteran of the same firm jokes about the Beijing effect and says that having sold a business to them and worked for them for a year I dont really have a clue how they work. He adds: Virtually all of the senior management have left and at the next level down people are looking [for new jobs]. This isnt true of all deals, but nor is it unique. The former boss of another European acquisition says of the integration plan: On paper it looked quite good but it failed totally. Decisions took

months for even the simplest things. He says that almost all the key people left and adds that there is no company left at the headquarters, just a shell. The Chinese way

Does any of this matter? After all, Western takeovers can be brutal, too, and a buyer is by and large entitled to do as it pleases. Several mining and oil bosses also argue that a healthy process is at work, in which China buys firms and the capital and skilled people thus released are recycled into new start-up companies. Yet from Chinese firms perspective an inability to retain staff is a problem. Technical and local expertise accounts for much of a companys value. And as China moves beyond digging stuff out of the groundat which it is fairly adeptto more complex consumer industries, let alone creative ones, better management will be essential. In this, companies from other emerging markets, such as India and Brazil, have the advantage of private-sector credentials and more cosmopolitan cultures. The most durable multinational firms, such as Nestl or Unilever, often transcend nationality. A pessimistic view is that China will have to find other ways of going out. It could make passive equity investments through China Investment Corporation, a sovereign-wealth fund. Executives from two firms attest that its representatives take a back seat at board meetings. Joint ventures are another option. The boss of an oil firm with a Chinese partner says that its motivation is not to take control and that the relationship is harmonious. Alternatively, Chinese companies could grow without buying. Until the wave of cross-border deals in the 1980s most firms went global by building operations from the ground up. Chinese firms are becoming good at this. One of them, COSCO, has a concession to run part of Greeces biggest port. Chinese construction firms have won contracts across Africa and eastern Europe. Huawei has developed without making large acquisitions.

For all that, it is hard to believe that Chinas companies and politicians want to operate with one arm tied behind their backs. And although many of the countrys big firms may never resemble Western ones, with diffuse private shareholders and independence from the state, they may have to edge more towards this template in order to succeed at large cross-border deals. In a speech this month a senior Chinese official emphasised the role abroad of Chinas private firms, which typically have less overt state direction. To address other countries concerns about political control, China may also have to loosen its hold on its giant state-owned companies and ensure that their power structure is more transparent. Most of the executives interviewed by The Economist also felt that the next generation of Chinese executives, in their 30s and 40s today, with more international education and experience, would prove far more effective than the present cohort of chiefs. Over the past two decades the old guard has taken a rusting industrial base and from it made gleaming corporate giants. Yet if those firms are to achieve their full potential abroad their creators may have to relax their grip. MUMBAI: As Indian e-commerce looks to accelerate from a slow trot to a gallop, the innovation that got the sector up and running - cash on delivery - may prove to be a handicap. The expenses involved in physically collecting cash, higher rejection rates and longer turnaround time to receive money make cash on delivery a less efficient model to sell merchandise online.

"Cash on delivery defies the e-commerce model; it locks up working capital and increases your risk exposure. No merchant likes it," said Akhilesh Tuteja, executive director at audit and advisory firm KPMG. "It is not sustainable." Cash on delivery was meant to create confidence among Indian consumers to buy online. The expectation was that eventually consumers would start paying online to buy things. But analysts say that it is leading to significant cash burn, besides causing delays in booking revenue. In developed Western markets, nearly 80% of online transactions are paid for by credit or debit cards, net banking and alternative online payment channels such as PayPal, according to a report by Nielsen. Only about 15% of deals were settled by cash on delivery. In India, on the other hand, cash on delivery is the payment method for up to eight in 10 transactions. "Cash on delivery is the most inconvenient payment option. It allows customers too much time to change their mind," said K Vaitheeswaran, the founder of Indiaplaza.com. Rejection Rates at 45%

Indiaplaza.com, which sells books and electronic goods, was the first to introduce the payment method more than a decade ago. It realised in about a year that cash on delivery was "painful". Rejection rates are at about 45%, partly because there is no upfront cash commitment, according to Vaitheeswaran. Most online retailers won't admit it, but industry insiders say those who depend heavily on cash on delivery will inevitably have their gross margins in negative territory, meaning the money they make will not even be enough to cover costs. Online lifestyle retailers such as Myntra.com and Fashion and You say that at least 60% of their transactions rely on cash on delivery. Flipkart. com, one of India's most prominent online retailers, declined to comment for this story. Typically, online retailers incur an additional expense of Rs 35-65 for every transaction involving cash on delivery, according to a recent study by the market research arm of Avendus Capital. which estimates India's ecommerce market to quadruple in size to $24 billion in 2015.

The expense could be as high as Rs 100 if there is rejection or if multiple trips are needed to deliver the order. And then there is the risk of fraud by cash collection partners, which typically have high employee churn rates. On the other hand, in an online payment model, around 1-2% of the transaction value is charged as service fee by the online payment partner. That means, unless the transaction value is fairly high, cash on delivery eats into retailers' margins. Furthermore, cash on delivery blocks working capital that could be better used for growth. That means only those players that can afford the cash burn will likely survive in the medium term. "As long as you have an investor who doesn't mind writing you a milliondollar cheque every now and then, you will be fine," said Dhiraj Kacker, cofounder and chief executive at Canvera. com, a Bangalore-based online digital photography e-commerce site, in which venture capital firm Draper Fisher Jurvetson has invested. As e-commerce firms learn to live with cash on delivery as credit/debit card ownership in India is low and its usage for online transactions even lower, they are trying to optimise the model and mitigate risks involved. Fashion and You, for instance, requires its logistics partner to call the customer before delivering the product in an effort to avoid multiple trips to deliver the product. If a customer defaults on the order often, he or she is blacklisted by the company. Myntra founder Mukesh Bansal claimed that the cost incurred by his firm is lower than his profit margin and hence he is able to make it work "We do not want to incentivise paying online because we believe that cash is a big part of the Indian economy and the consumer mindset, and so we are working towards making cash on delivery more efficient." However, Canvera's Kacker is of the view that tweaking the model can only help so much. "Trying to optimise cash on delivery is like trying to make the horse run faster. What we really need is an automobile," he said.
WHEN Huang Bing graduated from university in 2005, he promised himself he would make his first 1m yuan (about $155,000) within three years. It took him a bit longer, but no matter: if his business, a collection of online cosmetics stores, maintains its current trajectory, he will soon count his first billion. In a few years he expects annual revenues to reach 10 billion yuan. Mr Huangs company, United Cosmetics International, is only one of thousands on Taobao Mall, a huge online shopping centre. He spotted a demand from women in Chinas hinterland for branded cosmeticsand advice on how to use them. A lot of women in rural areas dont have access to quality products, he explains, guiding visitors through the firms headquarters in the outskirts of Hangzhou, two hours drive south-west of Shanghai. On several floors, at desk after desk, beauty consultants busily type answers for customers.

As goes United Cosmetics, so goes the Chinese internet. It is growing by leaps and bounds (see chart 1), as ever more people log on from phones, homes or offices, or in huge internet cafs (pictured). The China Internet Network Information Centre reckons that the online population, already the worlds biggest, has risen by 6% to 485m this year. And almost two-thirds of people are not yet online. Just as striking, as the countrys internet grows larger it also grows more distinctly Chinese. The beauty of the internet is that it easily adapts to local conditions, says Paul Zwillenberg of the Boston Consulting Group (BCG). The Chinese internet is the best example of the argument that, far from creating uniformity, the global network is shaped by local forces. Consumers, firms, economy and state Those forces can be divided into four: the demands of Chinese consumers; the attitudes of Chinese entrepreneurs; Chinas offline economic development; and the role of the state. Start with consumers. Chinas internet users are younger than the Westerners who first logged on about 20 years ago. They are hungry for entertainment and mostly poor (but fast becoming richer). Foreign internet companies have struggled to replicate their success in China (though they have done quite well as investors, a current quarrel between Alibaba Group, one of Chinas internet giants, and Americas Yahoo! notwithstanding). Chinese firms, most of which began by copying Western models, prospered when they devised clever adaptations. Take Tencent, Chinas second-biggest internet firm by market capitalisation. It started as a clone of ICQ, a chat service, but quickly outgrew the original by offering Chinas youthful

masses a cheap way to communicate and have fun. Tencents chat service, which boasts 674m user accounts, and most of its other offerings are free. The firm makes most of its money by selling virtual goods (a dress for an avatar, a weapon in an online game) for play money that users buy with real cash. Similarly, Taobao, which is owned by Alibaba, was launched to compete with the Chinese service of eBay, an auction site. It quickly overtook its rival by not charging transaction fees. But its main achievement has been to overcome perhaps the biggest barrier to online shopping in China: lack of trust. Alibabas online payment system, Alipay, the worlds largest by value of transactions, has an escrow function that withholds payment until goods have been received (most deals are still cash on delivery). Taobao today boasts 370m registered users. It accounts for three out of four online sales in China and reportedly one out of two packages posted. Vancl, a start-up that intends to go public soon, is satisfying both consumers desire for instant gratification and their growing brand-consciousness (or dislike of pirated goods). Its well designed but cheap clothes and shoes can only be ordered on its website. In the big coastal cities they are often delivered the same daya service most big e-commerce sites now offer. A recent addition to this innovative group is Sina Weibo. Run by Sina, another leading internet firm, it is often billed as the Twitter of China, but it allows users to attach comments, pictures and even videos to their messages. Sina has also recruited thousands of celebrities to use the service. Chinas internet entrepreneurs are different, too. There are lots of part-timers. Students have taken en masse to selling on Taobao: many university dormitories double as storerooms for goods awaiting orders. Full-time entrepreneurs may have less experience than their Western counterparts, but make up for that with sheer effort. They do not want to miss their chance to make it bigwhich is why they work like crazy and practically abandon life, explains Kai-Fu Lee, who used to run Google China but now heads Innovation Works, a start-up incubator in Beijing. This drive to win explains why Chinese online entrepreneurs are often more pragmatic than Western ones and do not mind adapting something invented elsewhere, says Hans Tung of Qiming Ventures, a venture-capital firm. They tend to be less enamoured of technology. At Google in Silicon Valley, maths problems are pinned to some toilet doors, so that brains need never be idle. The headquarters in Beijing of Baidu, which has 75% of Chinas search market, feels much less dominated by engineers. Were focusing more on products and

satisfying our users needs, says Robin Li, Baidus boss. He is making a big bet on what he calls box computing, which turns Baidus search box into a window to all kinds of applications and services. The will to win and the abundance of venture capital make Chinas internet a ferociously gladiatorial environment, says Richard Robinson, an American who has founded several start-ups in Beijing. Rivals spring up literally overnight. There are 80 social networks, 200 online-video services and 2,000 online-coupon sites. Questionable business practices, such as kickbacks for online advertisements, add to the competitive frenzy. The founders of companies that come out ahead in this battle often prefer to enjoy their new wealth rather than become serial entrepreneurs, as successful Silicon Valley folk are wont to do. Others set out to build sprawling online empires, which is one reason why Chinas biggest internet companies, more than their Western counterparts, fight each other directly and on several fronts. Alibaba, Baidu and Tencent are becoming internet conglomerates offering similar sets of services. Filling the void Chinas relatively underdeveloped economy also plays a role. In the West online companies often disrupted existing industries. In China they are more likely to fill a void. The internet will be a much more robust force in China because offline businesses are much less efficient, argues Duncan Clark of BDA, a telecoms consultancy in Beijing.

Except in big cities near the coast, conventional retailing is fragmented and underdeveloped. Yet much of the country has been covered by fast internet pipes. A basic broadband connection costs less than 100 yuan a month. The result will be a huge leapfrog effect, says David Michael of BCG. The consulting firm recently predicted that the annual value of Chinas e-commerce market would quadruple by 2015, to $305 billion. It may then be the worlds largest (see chart 2). The size of the market makes it possible to try new business models. Although Taobao and its sister site Taobao Mall, where only professional sellers are allowed, somewhat resemble eBay and Amazon, their executives have a grander ambition. They want to build an operating system for e-commerce, as Richard Wong, a Taobao executive, puts it. Taobao sells no goods, but supplies the services that make it easier for others to trade: payment, instant messaging and even logistics. In January Alibaba said it would invest up to 30 billion yuan in new warehouses. The media industry, with its lumbering state giants and fragmented private sector, has created another opening: for online-video sites, such as Youku. It looks (and sounds) much like YouTube, but Victor Koo, its boss, likens it to Hulu and Netflix, American sites that deliver television programmes and films over the web. Since most Chinese are just discovering digital video, says Mr Koo, users generate only about a quarter of Youkus content. The rest is made professionally, for instance by television stations or Youku itself. Youku also illustrates the fourth feature of Chinas internet: the role of the state. Until 2007 regulation was rather lax, allowing start-ups to dominate the industry, notes Bill Bishop, a longtime China-watcher. Yet as the internets economic and social importance has grown, so has political intervention. In June 2010 the government published a white paper outlining its regulatory plans. In May it said it had created a central agency to oversee the internet. Regulation mostly involves licensing and self-censorship. Youku needs several licences. The rules on censorship are vague, and firms err on the side of caution. You have to know what is sensitive, says an executive at a big internet firm. Youku has developed a sophisticated monitoring system: dozens of editors watch new material and classify it, building a video database that can be used to find good content, but also to block undesirable clips. Even though complying with such rules can be costly, hardly anyone complains, even in private. Regulation also makes life harder for would-be competitors, foreign or Chinese. People take the government as a given, says Mr Lee of Innovation Works. He adds that he had to think more about censorship at Google.

Some big internet firms even seek the governments input before launching a service, in effect involving it in product development. When designing Weibo, Sina apparently worked closely with regulators. The service is capable of quickly stopping certain users from logging on and blocking posts containing certain terms. When protests broke out in Inner Mongolia in May, the name of the province could no longer be searched for. At the same time the state sees benefits in microblogging and social networks. They allow citizens to vent their grievances and give prompt warning if, say, corruption in a provincial city is getting out of hand. Beijing has a political interest in keeping Chinas internet commercially healthy, Mr Bishop wrote in his blog, DigiCha, in February. Will Chinas internet continue to have distinctively Chinese characteristics? Some differences from the Wests will fade as the industry and Chinas economy mature and the countrys internet population grows older and richer. Other features will probably persist, for example the dominance of three digital conglomerates, Alibaba, Baidu and Tencent. The influence of the state is likely to reinforce these three mountains. They are well versed in dealing with state agencies and they can spread the costs of regulation over a broad revenue base. If anything, the three will probably become even more dominant. Rather than buying promising start-ups, they tend to build their own version of a popular new service. Western firms build too, but also buy. If Chinese start-ups are likely to be crushed, finance will be hard to come by. Sina, boosted by the success of its microblogging service, is considered a test case for whether smaller firms can catch up with the big three at all. Abroad, Chinas internet firms are largely untested. Tencent is the most daring: it owns a stake in Mail.Ru, a Russian portal, for instance. Baidu is planning to offer its services in a dozen other languages. We are going to expand into many other markets, Mr Li said recently. Expanding abroad will not be easy. Being Chinese, a cultural advantage at home, may be a disadvantage elsewhere. Still, Chinas internet will have global influence. In some ways it already has. Tencent has made money from virtual goods and currencies; Silicon Valley is following. Twitter has been looking at what Sina Weibo does. Some European e-commerce sites are said to be interested in Vancls model. Expect more of Chinas online characteristics to be adopted in the West.

E-commerce in China

The great leap online


China will become the worlds most valuable market for e-commerce

WHEN it comes to e-commerce, America is still top dog, with some 170m punters scouring for bargains on the internet. However, China is not far behind, with 145m online shoppers, and it could become the worlds most valuable e-commerce market within four years. In a new report, the Boston Consulting Group (BCG) calculates that every year for the foreseeable future another 30m Chinese will go online to shop for the first time. By 2015 they will each be spending $1,000 a yearabout what Americans spend online now. BCG calculates that e-commerce could rise from 3.3% of Chinas retail sales today to 7.4% by 2015a jump that took a decade in America. The Chinese government has heavily subsidised the rollout of high-speed access, so internet penetration now approaches rich-country levels. That boosts e-commerce, of course. But so, too, do the shortcomings of Chinas costly, inefficient bricks-and-mortar retailers. For example, a quarter of Chinese shoppers seek products online because they are not available at physical stores. Also, until recently, China lacked a reliable and cheap method of shipping packages, so the e-commerce industry has invested in developing one. Purchases on Taobao, an online Goliath that is a division of Chinas Alibaba, are thought to account for a staggering 50% of all packages shipped in China. The cost of shipping parcels is now a mere one-sixth of what firms in America have to pay.

The biggest snag holding back e-commerce for years was a lack of trust. Consumers worried (quite rationally) that online firms were fraudsters, or that their credit cards would be abused, or that purchases would get swapped for counterfeits during shipment. Alibaba overcame this by creating Alipay, a clever online arrangement thatunlike eBays system releases payments to vendors only after clients confirm that they are satisfied. Chinese e-shoppers are also big users of social media. Precisely because they do not trust sellers or advertising much, they devour online customer reviews of the sort made popular by eBay and Amazon. According to BCG, over 40% of Chinese online shoppers read and post product reviews online, making them twice as likely as American online shoppers to do so and four times as likely as Indians. The future of e-commerce is Chinese.

Outsourcing: A Passage Out of India


For years there was pretty much one choice for U.S. companies seeking to move jobs offshore: India. Outsourcing grew to a $69 billion business there and transformed backwaters such as Chennai and Hyderabad into teeming cities. That wave has crested. In 2011 companies in Latin America and eastern Europe opened 54 new outsourcing facilities, vs. 49 for India, according to industry tracker Everest Group. The two regions are challenging the subcontinents dominance in outsourcing as American corporations increasingly ship higher-level jobs offshore. India had substantial advantages in offshorings first phase: plenty of English speakers to staff call centers and enough tech talent to run remote data-processing and computer support centersall at about a 60 percent discount to stateside workers. But having wrung substantial costs out of back-office functions, U.S. companies are exporting skilled white-collar jobs in research, accounting, procurement, and financial analysis.

Because these jobs arent mass-processing functions, Indias forte, there are greater opportunities for countries such as Argentina and Poland, which have higher labor costs than India. Using an outsourcing firm to hire an entry-level accountant in Argentina, for example, costs 13 percent less than a similar U.S. worker, while an Indian worker would cost 51 percent less. But many employers moving higher-end jobs offshore care about more than just getting the lowest wage. The higher-value outsourcing jobs require a greater understanding of business context and a higher amount of interaction with clients, says Phil Fersht, chief executive officer of HfS Research, a Boston outsourcing research firm. Cities such as So Paulo have large groups of young people with engineering and business school degrees who speak English and are capable of doing everything from developing video games to analyzing mortgage defaults for U.S. companies. Brazil has the most Java programmers in the world and the second-most mainframe (COBOL) programmers, according to Brasscom, a technology trade group in So Paulo. IBM (IBM) located its ninth research center in the city in 2010, the first since 1998, when it opened a center in India. It helps that the regions time zones are more in sync with those of North America. Thats why Copal Partners (MCO), which since 2002 has built up its investment-research outsourcing business in Gurgaon, India, added an office in Buenos Aires. Its only a two-hour time difference for Copals clients in New York. If youre working with a hedge fund manager where you have to interact with him 10 to 15 times a day, having someone in about the same time zone is important, says Rishi Khosla, Copals CEO. Even Tata Consultancy Services (TCS:IN)Indias outsourcing leader, with estimated sales of $9.8 billion in 2011has 8,500 employees in South America, including Peru and Paraguay. And Genpact (G), the subcontinents biggest business-process outsourcer, opened a finance and accounting center in So Paulo last year for U.K. drugmaker AstraZeneca (AZN).

Such nearshoring of jobs is also benefiting eastern Europe. The economy of Wroclaw, Polands fourth-largest city, revolved around heavy industry during the Communist years. Now its an outsourcing center, with 30 local colleges providing a skilled labor pool. Local outsourcing jobs doubled from 2008 to 2010, when centers were opened there by IBM, Microsoft (MSFT), and Ernst & Young. The auditing firm in 2011 added a second center in Wroclaw, where workers provide legal, real estate, and human resources services to European clients. E&Y employs 1,300 people in six Polish centers. Polands Gen Y population is highly educatedabout 50 percent of its 20- to 24-year-olds are in college, says Hersht, vs. 10 percent in Indiaand prolifically multilingual. The 26 languages spoken at Hewlett-Packards (HPQ) Wroclaw center make it ideal for serving its European, African, and Middle Eastern operations, says Jacek Levernes, who oversees outsourcing for those regions. The Wroclaw center employs more than twice as many workers as HP expected when it opened in 20052,300, vs. 1,000and they perform higher functions. The Polish workers originally provided basic financial and accounting support; now they handle marketing services and supply-chain analysis as well. Frances Capgemini Consulting (CAP:FP) has staked much of its outsourcing future on nearshoring, including financial and accounting centers in Guatemala City and Krakw, Poland. Bottler Coca-Cola Enterprises (CCE) pulled jobs out of its Tampa, Dallas, and Toronto offices in favor of Capgeminis Guatemala center, for instance, and out of Paris, Brussels, and London in favor of Krakw. HfSs Fersht, whos visited both, says each could pass for a U.S. office, except for the rich stew of languagesmore than two dozen in the Krakw center and conversations in both English and Spanish in Guatemalaand the workers nearly uniform youth. The average age is 26, reports Capgemini, which hires from the pool of 30,000 graduates produced annually by Krakws colleges. Capgemini has staffed up from 180 business-process outsourcing employees there in 2003 to 2,500 now. Hansjrg Siber, head of Capgeminis global business-process outsourcing operations, says the Guatemala center employs college graduates who can analyze the bottlers vendor agreements and optimize its procurement costs. Such jobs also require interacting with clients, an area in which he says nearshoring beats offshoring. The Guatemalans speak English with an American accent, which is very well accepted, he says, and not an Indian accent, which is not. Fersht cites another benefit: Capgeminis clients get the services of Polish and Guatemalan college graduates for the price of U.S. high school grads. The bottom line: As U.S. corporations try to outsource more-skilled white-collar jobs, theyre looking beyond India. Savings can reach 50 percent.

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