"Hello, this is the overseas operator.
Please hold for China calling, person to person?"

August 9th, 2005

As Chris Moneymaker ushered in a new era of online poker two years ago, last weeks IPO of Baidu.com may be the catalyst that propels the importance of ecommerce in China to new heights.

This little tidbit was quoted to me by a good friend last week – “If they're going to send us shoes, furniture, textiles and so on, we give them something in return. We give them little pieces of paper that are called U.S. dollars,” Warren Buffett explained. “Sometimes they buy U.S. treasuries, but other times they're going buy our assets.”

China now has stacks of dollars and wants to spend that capital buying American goods and services. Combine that with the growth of the Internet in China, and we have the potential for an investment situation that may be second-to-none.

So why is China so great?

During the late Eighties, I attended the University of British Columbia and majored in International Relations. (Ed note - The other I.R.) One of the centers of focus for me was China – how it evolved and its geo-political potential. The most important thing that stayed with me was a belief that China has never really been a communist state in the ideological way that Marx espoused, but is more like a Confusionist society that needed its hand held during the past half century of modernization. Now the hierarchy is finally allowing China to bloom and compete on a global scale.

In his book The Next Global Stage, author Kenichi Ohmae argues that one of the reasons for the growth of burgeoning industrial clusters can be traced to then-premier Zhu Rongji who granted unprecedented autonomy over economic policy to mayors and local bosses. “The mayors were told they had to grow by 7% per year or they would be fired. But they were also given freedom to import technology, capital and corporations from the rest of the world. They were allowed to forget about politics and embrace the local economy.”

So now you have a country (China), which in 2002 had more direct investment flow into it than into the United States. And you have a growing techno-savvy population that created 146 new cities with populations exceeding 1 million from 1990 to 2000.

Now let’s touch on the online numbers.

First let’s look at the basics:

(*) For Statistics purpose Honk Kong and Macao population is reported separately

Even with its minimal penetration rate, China already ranks second in the world in total Internet users. According to eMarketer, during the 2004-2008 period, the US Internet population will grow at a 2.6% annual rate. In contrast, China's Internet population will grow during the 2004-2008 period by over 14.3% on an annual basis.

That means in 2008, China will have close to 176 million people online. And I personally think that this number does not take into consideration that there are already 350 million Chinese with mobile phones who spend an average of $10 a month on their cellular services.

Wireless subscription growth rates of 10%-15% per year translate into significant jumps in both the number of subscribers and in the overall penetration rate. By contrast, in Hong Kong, where penetration now has topped 100% since 2003, growth has slowed to a trickle.

With the development of 4G** technology, in less than three years we might be looking at a half billion Chinese citizens as potential customers in the ecommerce space.

“China is not the biggest market — not yet — but it clearly has the most promise,” Jeffrey Grau, eMarketer Senior Analyst remarked in a report on the mushrooming Chinese Internet this year. “A new middle class is emerging eager to consume the myriad products and services that are available online and not just those offered by Chinese e-tailers.”

iResearch, a Chinese market research firm, estimates that China's e-commerce market will be worth $6.5 billion by 2007, nearly a six-fold increase over 2004.

Six hundred percent growth in three years is something to think about.

On a footnote – I plan to speak specifically to the potential of online skill gaming in Asia at the Skill Games Conference on September 9th in Las Vegas. This special two-day conference will study the specialty area of skill games and where they fit in the world of I-Gaming. Please visit http://www.rivercitygroup.com/skills/2005/ for more information.

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** 4G is high-speed mobile wireless access with a very high data transmission speed, of the same order of magnitude as a local area network connection with up to 20 megabytes per second.

Patrick Smyth is the CEO of Gaming Transactions Inc. (NASD GGTS.PK), and has been involved in the online skill gaming, and online casino industries since the mid-nineties. He is a featured speaker at gaming conferences, and is also a contributing author to the International Game Developers Association. The views and opinions expressed are those of the author only.