China’s E-Commerce Shell Game

All at once, it seems that the promise China held for e-commerce has gone up in smoke. Without warning, the Chinese government has published a sweeping set of Internet regulations that do everything short of mounting a giant “Keep Out” sign on the nation’s Web infrastructure.

The regulations, which appeared this week in China’s official newspapers, are clearly not good news for the high-tech companies that were clamoring for access to the Communist nation and pushing the United States to remove trade barriers, while drooling at the prospect of even a small fraction of its one billion souls becoming Web users.

While the long-term prospects for e-commerce may not be entirely bleak — China has vowed to open things up a bit after it becomes a member of the World Trade Organization — the country’s regulatory action goes beyond market concerns to challenge the very nature of the Internet. Instead of “Will China continue to reject Western investors and influences?” the question is, “Can a single nation foist its will on the entire Internet?”

If so, what does that mean to e-commerce?

Restrictions Abound

China’s intention to monitor and limit online content comes as no surprise. Free speech is only an idea there, after all. But if any significant Chinese Web enterprises are to get off the ground, they’re probably going to need help.

It would be logical for them to turn to the West, where the businesses with the most experience, technology and trained staff are concentrated. That makes China’s rule that all outside investments must be approved by government officials especially stifling.

It has only been a few months since the long-standing “invisible wall” between China and the United States came down. Within hours after the U.S. House of Representatives voted to grant China permanent normal trade relations, Network Solutions stepped up to offer domain names to the Chinese government. The move could pay extra large dividends when China starts picking favorites to admit to its Internet revolution.

Microsoft has also said it will sink $90 million (US$) into marketing in China this year alone, hoping that expanded sales there will take up some of the slack as the software giant stumbles in other markets.

Still Optimistic?

Those investments and goodwill gestures were made on a single assumption: that the Internet in China will simply be an extension of the same familiar Web that connects the rest of the world. But the news out of China shows that simply isn’t the case.

It is true that no amount of government regulation can eliminate underground Web surfing, which will undoubtedly increase in China as the technology spreads. No country will ever be able to control the entire Internet. But it is not at all clear where China will be able to draw the line.

Clearly, the government wants to keep a tight leash on its population by regulating what they see on the Web and avoiding contact with companies it views as threatening. But it is also evident that the government wants China to flourish economically, and that simply cannot happen unless the country embraces modern technology, which means hooking up to the Net. China wants to find a way to do both.

Think Globally, Act Locally

China’s Internet regulations are a wakeup call that should reverberate loudly throughout the e-commerce world. They are a stark reminder that the road to the global Internet’s utopian future has not yet been paved. In fact, there isn’t even a road yet, and it makes little sense for a whole lot of companies to venture off into the wilderness.

Is some investment in China smart? Of course. The country will need a lot more Internet infrastructure, whether its regulatory efforts succeed or fail. But all one has to do is look at what happened to Qualcomm — which had the rug pulled out from under it when the Chinese changed direction on wireless standards — to realize that any promises the Chinese government makes are not exactly carved in stone.

What’s the Rush?

The appeal of being first to explore new terrain is almost irresistible. Business-to-business players see massive opportunities in China, which has decades of catching up to do in the areas of real-world infrastructure and manufacturing know-how. But it makes no sense to blindly chase a market that is still hidden in the clouds.

Rather than bend to the demands of the Chinese regulators — possibly transforming the heart and soul of the Internet in the process — it would make more sense for mature high-tech companies to turn their backs and walk away. It doesn’t make sense to let a rookie make the rules for the other big league players.

If e-commerce success is the goal, it’s important to remember that less than 1 percent of all U.S. consumption takes place on the Web. And with Europe re-inventing the e-commerce model on a wireless platform, anything goes. And so on. Virtually unlimited opportunities still exist in the Western world.

The bottom line is that the Chinese government may have done e-commerce a favor by saying “Go away.” The odds are good that as the country develops as a world trade power, the Chinese leaders will be the ones making the overtures, seeking out the expertise of companies that have joined forces to create a global economy through the interactions of free agents in open markets.