China's Web Retailers Beat U.S. Rivals At Their Own Game

As China's Internet booms, homegrown businesses are often reaping the biggest rewards -- a departure from many other consumer industries in China where foreigners have dominated.

Peggy Yu and her husband, Li Guoqing, founded online bookseller Dangdang.com in 1999, when online commerce in China was more hope than reality. Today, China boasts 123 million Internet users -- second only to the U.S. -- and a growing share of them are using the Web to shop. Dangdang has expanded into a range of new products and claims to be China's biggest online retailer. Its success has enabled Ms. Yu and Mr. Li to fend off competition from a deep-pocketed foreign rival, German media giant Bertelsmann AG, and to rebuff a takeover offer from Amazon.com Inc., which later bought Dangdang's chief Chinese rival.

Historically, foreign companies have taken the lion's share of many of China's consumer-focused markets, like those for cola, cars, and cellular phones. Dangdang's story -- and others like it -- demonstrates how local competitors in Internet businesses are battling back or even beating foreign rivals such as Amazon, Yahoo Inc., Google Inc., and eBay Inc.

Part of the reason for the locals' success is that China's Internet regulators have made it difficult for foreigners to participate in Internet businesses -- setting limits on foreign ownership, for example, and forcing companies that provide online content to adapt to Chinese censorship rules. Equally critical to success, analysts and executives say, is the ability of domestic companies to understand and adapt to some of the other peculiarities of China's market. Ms. Yu says Dangdang had to make adjustments to the model pioneered by Amazon.com and others. For example, the vast majority of Dangdang's Chinese buyers of books pay cash on delivery -- a result of the fact that credit cards still are relatively uncommon in China.

A typical buyer is Sandy Liu, a 27-year-old accountant with a trading company in Shanghai. She started using Dangdang in March based on a colleague's recommendation and has shopped there several times since. This month, she paid cash for two books and a tray table. She likes Dangdang because "it's very convenient," Ms. Liu says.

Edward Yu, president of Analysys International, a Beijing technology-research company, says foreign Internet companies sometimes don't give local managers enough leeway to adapt their businesses to local customs. Web companies from abroad also can find it difficult to establish local partnerships and distribution channels, he says. Those factors "definitely hurt their market performance when they are trying to compete head-to-head in the local market."

Google, which launched a major expansion into China last year, has continued to lag in popularity well behind Baidu.com Inc., the Nasdaq Stock Market-listed Chinese search-engine company. EBay, which bought a Chinese company in 2003, still trails rival site Taobao.com, which has dominated eBay in large part by offering its service to sellers free. After resisting that model for years, eBay late last year started offering free service to sellers, too.

Yahoo, one of the earliest foreign Internet companies to invest in China, announced a year ago that it was handing over control of its China operations -- along with a $1 billion investment -- to Alibaba.com Corp., the company that owns Taobao....