China Start-up Profits?

By Wayne Mulligan, on Thursday, June 11, 2015

Recently, there’s been a lot of talk about China in the business press—especially as it relates to the technology sector.

Last year, for example, Alibaba (NYSE: BABA) conducted the world’s largest IPO ever: it raised $25 billion on the New York Stock Exchange.

And as The New York Times reported last week, Uber is investing millions of dollars in an attempt to penetrate the Chinese taxi market.

Looking at all this activity, many investors are wondering if they should be placing strategic bets in China—including making investments in start-ups.

To answer that question, let’s take a walk down memory lane.

A Profitable Truce

I’ve spent quite a bit of time in Asia.

In 2005, for example, I moved to China to enroll in a language program at Peking University.

Each day, I’d start my morning the same way:

A kettle of fresh tea and a handful of Chinese newspapers would be delivered to my room. Then, while enjoying a cup of Longjing green tea, I’d practice my Chinese by browsing the papers’ business sections.

For the most part, the news featured Chinese finance, media and technology companies—most of which I didn’t know.

But early one morning, I saw an article featuring a familiar purple logo:

Yahoo!

The gist of the article was that Yahoo was “partnering” in China with a small domestic competitor called Alibaba.

Yahoo may have “spun” the story like a victory in the U.S. press, but in reality, it was making a strategic retreat from the Chinese market.

You see, throughout 2004, Yahoo and Alibaba had been fighting a bitter war:

Yahoo assumed it could leverage its brand and balance sheet to push its way into the Chinese market...

But as many U.S. companies have discovered, it’s not that easy.

Alibaba went after Yahoo! with guns blazing:

Accusing it of unfair trade practices, it attempted to have Yahoo! shut down by Beijing’s courts.

Ultimately, instead of continuing to fight, Yahoo agreed to invest $1 billion in Alibaba for a 40% stake.

This truce turned out to be very profitable for Yahoo:

When Alibaba went public, Yahoo’s stake turned into an estimated $35 billion.

History Repeating Itself

Like Yahoo before them, Google also attempted to enter the Chinese market.

The year was 2006.

Initially, things went well for the Internet giant—its search engine market share peaked at 36.2%—but Google soon came under attack.

In 2009, the Chinese government began to censor Google’s YouTube site after the site hosted a video of Chinese security forces beating Tibetan citizens.

After more censoring, and accusations of hacking by the government, Google exited the market almost entirely.

Today, its search engine market share sits at just 1.7%.

Will it Be Different This Time?

And now The New York Times is reporting that Uber, one of the hottest companies in Silicon Valley, is trying to take over the Chinese taxicab market.

Uber has raised nearly $6 billion from venture capitalists—and it’s using part of that war chest to try and buy its way into the Middle Kingdom.

By offering Chinese drivers bonuses that add up to 300% of their fares, Uber is trying to gobble up market share ahead of local competitors.

But if history is any indication, it’s likely that these local competitors will eventually take back any market share that Uber grabs.

The Safer Way to Invest in Chinese Tech Stocks

Given the complexity of entering the Chinese market, investing in U.S.-based companies attempting to crack the code in China seems like a risky bet—and investing in start-ups going after this market seems doubly risky.

Instead, if you’re seeking to capitalize on this fast-growing market, take a look at some Chinese Technology ETFs:

For example:

The Guggenheim China Technology ETF (CQQQ), which is up nearly 20% this year.

Or the Global X China Technology Fund (QQQC), which is up about 30% year-to-date.

These ETFs provide U.S. investors a diversified way to get exposure to this exciting market.

Happy investing.

Best Regards,
Wayne Mulligan

Founder
Crowdability.com

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Tags: Uber Tech Sector Etfs Technology China

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