Asia's dot-com community faces a tough new reality. The IPO market is slowing down, share prices of Nasdaq-listed Chinese companies are tumbling, venture capitalists are becoming more selective, and high-profile sites such as Chinese Books Cyberstore are collapsing as the reverberations from mid-April's Nasdaq stock market plunge hit Asia.

"When the U.S. market is hit, Asia feels it very bad," explains Matthew McGarvey, Internet analyst at IDC Asia/Pacific in Hong Kong. The number of Asian companies launching IPOs is slowing down. Case in point: Asia Online, a big ISP. The company has delayed a public offering, even though Mr. McGarvey calls it "a big company with solid business plans, not a little dot-com."

Indeed, given the problematic marketplace, analysts believe few Chinese companies will go public in the next six months -- bad news for mainland China startups launched in the past year with expectations of a listing in 2000.

WHY THE TURBULENCE?

Ironically, the troubles hit as consumer interest in the Internet is skyrocketing. According to the China National Network Information Center, the number of Chinese Internet users nearly doubled in the first half of this year, up from 8.9 million at the end of 1999 to 16.9 million by the end of June.

But the late July closure of Chinese Books Cyberstore, one of Asia's oldest business-to-consumer (B2C) electronic-commerce sites, is an ominous warning that Asia's Internet gold rush has come to an end. Billed as North Asia's answer to Amazon.com, Chinese Books Cyberstore instead has become the Boo.com of Asia (after Europe's first major dot-com failure).

Things probably won't go better for other Chinese startups, especially given the performance of those that have gone public.

"Just look at what's happened to Netease and Sohu.com," Mr. McGarvey adds, referring to the abysmal Nasdaq listings of those companies in June and July, respectively. Today, both are trading for less than half their initial public offering prices.

One bright spot is Hong Kong-based portal Chinadotcom. While it ended the last quarter with an operating loss of $10.6 million on $30.3 million in revenue, its revenues were up 52 percent from the previous quarter. Moreover, Chinadotcom's share price has risen since its IPO price of $20 in July 1999 to $16.50 now after two stock splits -- equivalent to a pre-split $66.

ONWARD AND DOWNWARD

"Last year, the Internet in Asia could best be described by one word: greed. This year, that one word is fear," warns Joe Sweeney, Gartner Group's Asia research director in Hong Kong. "There is still a lot of money, but venture capitalists are rethinking evaluation models, and they are much more selective." He says 85 percent of Asian dot-coms will go bankrupt or be swallowed up by bigger dot-coms or brick-and-mortar firms by 2004.

Sina.com, which claims 7 million registered users and generated 34 million average monthly page views, suffered a net loss of $12.1 million during the last quarter on revenues of $5.8 million, according to president and CEO Zhidong Wang.

Sohu.com reported a net loss of $6.5 million, even though the Beijing-based portal generated $1.3 million in revenue from advertising, Web site design, and registration fees, said CEO and president Charles Zhang. The portal's user base has reached 3.3 million. Netease, meanwhile, generated $1.74 million in revenue during the last quarter, resulting in a net loss of $3.3 million.

The losses are attributed to various factors. Finding content for portal sites is a hugely expensive business in China, as it is elsewhere. Slow-moving marketers and a lack of reliable research data has hurt online advertising.

Moreover, the three large China-based portals compete with nearly 30 others and offer few distinct services. Hampered by low share prices, Sina.com, Sohu.com, and Netease will consolidate within the next 18 months, says leading Internet analyst Rajeev Gupta at Goldman Sachs in Hong Kong.

Hong Kong portals have fared little better. Chinadotcom ended the last quarter with an operating loss of $10.6 million on $30.3 million in revenue. On the bright side, revenues were up 52 percent from the previous quarter.

Tom.com, a struggling Hong Kong portal that has little content but the support of tycoon owner Li Ka-Shing, widened its net loss in the last quarter to $19 million on revenue of $677,792 after heavy advertising expenditure. The losses prompted CEO Sing Wang to fire 80 of his 500 employees earlier this month.

Two other Hong Kong sites, Next Media and SCMP.com, the Internet arms of Jimmy Lai's Apple Daily and South China Morning Post, respectively, also laid off employees in recent weeks.

INSTRUCTIVE FAILURE

The recent failure of Chinese Books Cyberstore may prove instructive. The site debuted three years ago, pitching Chinese-language books to the large group of overseas Chinese communities in North America (which accounted for 70 percent of sales), the UK, Australia, Taiwan, and Hong Kong, where the company is headquartered.

The company went into voluntary liquidation after shareholders refused to provide further funding, despite a last-minute attempt to save Chinese Books Cyberstore by its largest shareholder, ITVentures. "On 21 July, 2000, ITVentures made a last attempt to save CBC with an offer to all shareholders, which was subsequently not accepted by 2 out of 15 shareholders," the company said in a statement.

Chinese Books Cyberstore had marketing deals with popular sites such as Yahoo Asia and strong investments from two dozen shareholders such as ITVentures and Group Sense. It also had a hefty head start over local rivals. The company started out selling books online and later offered music CDs, videotapes, and even Chinese arts and crafts.

But problems quickly appeared. Consumer tastes varied greatly among Chinese in different parts of the world, making it difficult to create a strong sense of community based on books and related content such as reviews and chat rooms.

Moreover, some 300 Chinese online bookstores emerged as competitors, many of which started last year. Efforts to customize the site -- suggesting titles to consumers based on past purchases, as Amazon.com does -- were hampered by old-economy habits of Chinese publishers, who seldom give retailers keywords like Western publishers do. So the site's employees faced the daunting task of leafing through an inventory of more than 230,000 titles to identify the content of each book.

When the U.S. stock market soured in April, Chinese Books Cyberstore was forced to scrap plans in the first half for a public listing in New York or Hong Kong. As investors refused to provide additional funding, the company ran out of money, leading to the departure of CEO Philip Leung and CFO Anna Tham in June.

"Chinese Books Cyberstore, a copycat of Amazon.com, had a bad business model. There are big differences between [Asian and North American] marketplaces, such as use of credit cards and PCs and the age of consumers. But more importantly, there was poor fiscal control. They spent a lot of money very fast," sums up Mr. Sweeney of Gartner Group.

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