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Net firms deal with pitfalls of expanding in Asia

Online retailers are increasingly looking to Asia for opportunities to fuel their growth, but the path to riches may be as arduous and meandering as the Silk Road was a millennium ago.

Online retailers are increasingly looking to Asia for opportunities they hope will fuel their growth, but the path to riches may be as arduous and meandering as the Silk Road was a millennium ago.

Last week, Priceline.com and eBay announced plans to export their services to Asia, hoping to cash in on the expected explosion in Internet use on a continent that is projected to have one of the largest audiences of middle-class consumers.

In addition, Internet investment company CMGI and Hong Kong-based Pacific Century CyberWorks formed a joint venture last week to create online businesses focused on the growing Asian market.

Despite the expense and risk, expanding into Asia is seen by analysts as a necessary step for achieving the growth rates investors demand.

"If (e-commerce firms) don't tap into the Asian markets, the market (capitalizations) that have been created cannot be sustained," said Alan Mak, an analyst at Argus Research in New York. "Wall Street has made a lot of assumptions about how these companies will grow into their market caps."

But winning the anticipated rewards of moving into Asia will be a daunting task for online retailers. Hurdles to success range from inefficient payment methods--credit card usage is far from widespread--to Internet access costs and infrastructure problems. In addition, the crucial step of delivering goods directly to homes is far from seamless.

Still, Internet use in Asia is expected to reach about 12 percent of the population, or nearly 374 million people, by the end of 2005, according to consulting firm the Yankee Group.

Market research firm International Data Corp. forecasts that the Asia-Pacific region, excluding Japan, will have about 21.8 million people connected to the Net who will spend a total of $2.2 billion by the year's end.

"The growth in Internet usage may be small there right now, but because of Asia's raw population numbers, the growth in percentage of users is going to be tremendous," said Sandeep Thakrar of venture firm Katalyst.

As business-to-business companies increasingly grab the attention--and the checkbooks--of venture capitalists and investors in the United States, business-to-consumer firms are looking for ways to attract a new set of shoppers and investors. With Asian investors still eager for e-commerce stocks, spinning off Asian units on regional stock markets may be a way to rekindle interest in the once favored e-commerce sector.

Yahoo Japan is one successful example. The country's most-visited portal, which is jointly owned by Yahoo and Softbank, trades on the Japanese stock market at multiples common for Internet stocks in the United States.

"E-commerce companies have to find ways to attract new customers because their economic model is in essence built on the number of eyeballs a site can draw" and its ability to convert eyeballs into buyers, said Cathy Neuman, the deputy global e-business leader for Pricewaterhouse Coopers.

Neuman estimates that Asian markets will allow the American business-to-consumer market to double its current size.

Looking at Asia as a growth engine is a recent development, however. Less than two years ago, American companies were nervously looking East to gauge the damage the spreading Asian economic crisis would have on their bottom line. The spiraling recession and currency devaluation led to rioting and shortages in Indonesia, and slapped Korea, Thailand, Japan and other Asian nations with one of the worst economic slumps the region has suffered in recent decades.

The region was nearly laid to waste by one economic disaster after another, as currencies were devalued, higher interest rates halted corporate spending, and some governments were almost unable to make payments on foreign debt.

The crisis even reached the United States several times, dropping the Dow Jones Industrial Average a whopping 6.37 percent and the Nasdaq Composite a frightening 8.56 percent on Aug. 31, 1998. The U.S. markets skidded during the fall of 1997 and 1998, some of the only potholes along this long bull-run.

But the Asian flu faltered, beaten in part with a strong boost from the seemingly unstoppable surge of the American stock market, and a series of economic stimulus packages by several Asian governments, including Japan.

"The Americans realized the importance of the Asian consumer a long time ago and now with the rebound of the Asian economy, they are absolutely reaching out to that market," Neuman said.

U.S. companies will not have the market to themselves, however, as domestic Asian firms eagerly await the rise of e-commerce in their region.

"A lot of companies are starting up, and the scene seems really vibrant," said Manik Gupta, vice president of technology at IntelliLife in Singapore. Gupta and a group of local entrepreneurs have started a buying firm called BuyItTogether.com.

"There is a lot of buzz in Singapore because it is the gateway to Asia," Gupta said, adding that many regional companies are jockeying for position in a race to acquire as many customers as possible.

"Once they have done that, then they hope to sell out to an American company or at least become a force to reckon with," he said.

Gupta's comments touch on the importance of American companies partnering with local players to better understand cultural differences and to traverse a minefield of distribution and payment problems.

Argus' Mak agreed: "(American) companies will need to evaluate the different characteristics of each market they enter since each country has a flavor of its own."

Partnerships like the ones signed by Priceline, eBay, E*Trade and CMGI promise the best results in navigating not only cultural norms but also regional business regulations.

With credit card penetration still low in Asia, analysts expect financial institutions to take a larger role in e-commerce as well, providing alternative payment methods. These could include deductions straight from checking accounts and the popularization of debit cards.

Distribution of goods still presents a formidable barrier, however.

"At the end of the day, business-to-consumer sales involve distribution," Pricewaterhouse's Neuman said. "(American e-commerce players) will ultimately have to either acquire an Amazon-like company or a distribution vehicle."

Such moves would mimic the strategy of offline retailers, which often prefer to acquire their way into a market rather than build a presence from scratch.

"Land-based companies proved that when Wal-Mart acquired its way into the European market," Mak said.

Japan, Singapore, Hong Kong and Malaysia are considered the markets likely to explode first. China and India, which have nearly half the world's population, are expected to provide strong gains once their telecommunications infrastructures improve.

Analysts and venture capitalists agreed that landlines may take years to provide Internet access in certain areas of Asia, opening the door for wireless services to blossom. Internet users currently must pay for local calls by the minute, even if Internet access services are free.

"This is a huge issue in Europe and Asia," Thakrar said. "Wireless could alleviate that as mobile access gets better."