Tech Boom Sweeps China, But Some Sense a Bubble

By Ariana Eunjung Cha
Washington Post Foreign Service
Friday, December 28, 2007

SHANGHAI -- For entrepreneur Gary Wang, the next new thing in China is a place where the country's growing middle class, or "couch potatoes," can watch free videos to their hearts' content. His company's Web site, Tudou (Chinese for potato), has become insanely popular insanely fast -- more than 15 million users as of this month -- and Wang dreams of the day when the company will have an IPO.

Flush with $30 million in venture capital, Wang has hired 95 employees, engineered a slick Web site and leased thousands of computer servers across the country.

But there's one thing the company hasn't managed to do: make a profit.

Wang's company is typical of China's dot-com boom.

Over the past decade, start-ups have proliferated throughout China, thanks to an aggressive government campaign to attract private investment. Many of the new companies focus on Web sites, but there are also computer-chip and telecommunications equipment designers, biotech development labs and medical-device makers.

The state has created dozens of "new Silicon Valley" districts -- glittering high-tech zones and incubators as big as cities, with such incentives as no corporate income tax for the first three years. The largest is Beijing's Zhongguancun, home to 20,000 start-ups, most of them information-technology companies, with nearly 800,000 employees that together received more than half of the international venture capital invested in China last year.

The money flowing into China is transforming small towns into tech centers and a Third World economy -- based on churning out such products as cheap TVs and socks -- into a world player in innovation.

Some fund managers are wary of what lies ahead in the short term, however, and worry that China is creating a tech bubble similar to the one that burst in the United States at the start of the decade. But venture capitalists, entrepreneurs and competitors point out that Silicon Valley remains a prominent tech center, despite the bust. They say the tech sector in China, which has an estimated 162 million Internet users, will be a force to be reckoned with.

China's tech boom began in much the same way the one in the United States did, with venture capital from Silicon Valley. The frenzy of investments here began in early 2005, when venture capitalists were getting excited again about dot-coms after Google's eye-popping initial public offering a few months earlier.

David Su, a partner at KPCB China, a branch of Silicon Valley venture-capital powerhouse Kleiner Perkins Caufield & Byers, said that led to some irrational exuberance and too much money chasing too few quality ventures.

"A lot of people got excited, and way too much money went into making copies of the same thing -- there were 20 YouTubes, 50 MySpaces. Obviously most of the players are going to lose out," Su said.

Several top venture-capital and private-equity investors said that until this year they were making more money by financing entrepreneurial companies in China than in other parts of the world. Now some are beginning to scale back their investments.

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