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The Shattered Ceiling

Q&A with Charles Zhang

Charles Zhang founded Internet Technologies China in 1996. Two years later his company launched SOHU.com Inc. Last month SOHU.com acquired ChinaRen.com. The merger is expected create the largest Internet portal in mainland China with a user base of over 7.8 million. Zhang predicts the company will break even in 2002, and achieve profitability in 2003.

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Age: 35

Background: Grew up Xi’an, China. After finishing graduate school in the United States, Zhang worked as a liaison officer between Massachusetts Institute of Technology and China. Later, he returned to China to start his business.

Education: Undergraduate degree in physics, Beijing University; Ph.D. in physics, Massachusetts Institute of Technology.

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AsianWeek: What is your background?

Charles Zhang: I grew up Xi’an in the Midwest of China. Thirteen dynasties established their capital in Xi’an. It’s a very ancient city. I believe the theory that where you grow up will definitely influence you—the land’s color, everything.

The land, the weather, the natural things in Xi’an influenced me. It’s not desert but the color is yellow, the sky is high. Compared to people on the east coast, where there is a lot of color, a lot of water, a lot of sun, people from the Midwest in China tend think in a slower, more fundamental manner.

I chose to study physics because it is quite fundamental. It tells the story behind nature. So I went to Beijing University, the “MIT of China,” and later I went to MIT to get my doctorate degree, graduating in 1993.

In China I was a theoretical physicist. But at MIT I became an experimental physicist. Everyday I went to the lab and did experiments. I set up lasers. I had to make the samples and do the calculations. Everything was hands on and very practical. Overall, the MIT spirit is practical—make something useful. The point is to get things done and get results. So I was affected in that way. When setting up a company, I consider very detailed things. I always consider the bottom line and the can-do, just-do-it spirit.

AW: What do your parents think of your success?

CZ: At the time I decided to come back to China, my sister was in New York. My parents were staying in New York with her. They all tried to persuade me not to go back. Everyone—including my classmates who were staying in the United States—said I was crazy to go back. But later they understood what I was doing. So now they are very, very happy.

AW: Other people said you were crazy to go back to China. Do you consider your choice to be somewhat of a sacrifice?

CZ: No. I’m someone who follows my own instincts. Also I’m from Xi’an and I think things out in a more fundamental way. When I realized I just wanted to live in China, where I grew up—I feel more comfortable there—I didn’t care what other people thought. I didn’t think it was a sacrifice. I was so happy. I was so much looking forward to returning.

AW: What was it about China that made you feel more comfortable?

CZ: I spent 21 years in China before I went to the United States. The culture, the language, the people around me, I felt more connected with society than I was in the United States.

And then the second reason is I saw more opportunity. Going back to the first reason, being more connected, I realized there were more opportunities.

When I returned to China for short visits as a liaison for the MIT president, I had access to top journalists and very important officials. I thought about all the people I had met in a short period of time. I was so involved and connected. I thought if I returned to China, the effectiveness of my actions would be much bigger than if I stayed in the United States.

AW: When did you start SOHU.com?

CZ: Our company, when it started, was called Internet Technologies China (ITC). I registered the company in August 1996. The funding came from angel investors Nicholas Negroponte, who is the author of Being Digital, and Edward Roberts of MIT’s Sloan School. We wanted to do something in China.

I was at MIT for many years and in 1994, I saw Yahoo! and Netscape and all these things. I just wanted to do something for China, where the Internet was at a very, very early stage. The business plan was very simple. We wanted to do Internet services, ISPs and integration and other things. It was very vague.

In China and we tried different business models. Then in 1997 we decided we wanted to build Web sites. We also saw the need to help people find things, with search engines and directories.

We officially launched SOHU.com on Feb. 25, 1998, as our brand. And later in ’99, the parent company, ITC, was changed to SOHU.com.

AW: Why did you acquire ChinaRen.com?

CZ: Starting in February 1998, SOHU started with search engine directories, later adding 15 channels, covering news, sports, entertainment, automobiles, women and other channels. So it developed into quite a comprehensive portal.

Before the acquisition, SOHU already had 26 million page views per day, and 4.5 million registered users. It has become the leading brand and one of the largest Web sites in China. Then we acquired ChinaRen last month. ChinaRen is the largest user destination. The analogy is Yahoo! acquiring Geocities. This is similar to that deal because SOHU is generally regarded as the Yahoo! of China. We have a lot of search engines, we have a lot of content offerings, and now we have acquired a major Web site community.

ChinaRen is a community site for young people in China. The combined entity—because the users of ChinaRen and SOHU don’t overlap—will have 44 million page views per day, and 7.8 million registered users. Clearly, it is the largest Web site in China.

AW: How much did it cost to acquire ChinaRen?

CZ: We issued 4.4 million new shares. At the current price of $7.50 per share, it’s about $30 million.

AW: In the coming years, do you expect increased competition?

CZ: The company has been very intense in the past year, and it’s going to become more intense. The Internet users in China have been growing continuously in the past three years, and doubling every eight months. Now China has about 15 to 20 million users, and by the end of the year it will have more than 20 million. By the year 2004, China will have 110 million Internet users and become the largest Internet population in the world.

Because of this and the increasing purchasing power of the Chinese people—especially the Internet users who are well educated, and have the disposable income to consume—this will become the largest market in few years. A lot of companies, both domestically-grown companies like SOHU.com and multi-national companies like Yahoo! and Lycos, are all looking at the big market potential and are trying to become dominant. It’s becoming very intense.

AW: What are some of the company’s plans to keep its advantage in China’s Internet industry?

CZ: After the public listing on NASDAQ in July, the first public listing in SOHU’s history, we had quite an adequate cash balance of close to $80 million. That enabled us to move faster. We are undergoing a lot of deals. ChinaRen’s management team is very young and dynamic. Three are Stanford graduates, and they will be integrated into the management team of SOHU. They will enhance our Internet savvy and product innovation. Also, with the combination of ChinaRen’s and SOHU’s technology, we have an engineering team of close to 80 people. The combined force will shorten our time to market of our new products, and improve existing products. ChinaRen has several existing products that are very popular. One of them is the alumni club—a big community for college students. They’re from the one-child generation. And their parents are willing to spend money on them. When they become the future leaders of China in a few years, they will continue to use SOHU.

AW: Where will your profits come from?

CZ: In the next few years our advertising will be increasing very quickly. After China enters the WTO, our advertising will continue to be an important source of revenue, as domestic companies and multi-national companies all try to find a more sophisticated way of marketing and promoting themselves.

Also, we now have 7.8 million registered users. Our goal is to turn some of these 7.8 million users into customers. We launched our e-tailing channel a month ago, where we are offering computers and mobile phones. We are going to increase the offerings and provide more and more daily necessity products that will move us into e-commerce on full-blown scale.

AW: Who has inspired you to do what you are doing now?

CZ: There are all these success stories in U.S. I wouldn’t say they are role models, but we follow a lot of successful business models—Jerry Yang, Michael Dell and Bill Gates. But if you are asking who I admire and who do I think is the greatest, I would say Deng Xiaoping (chairman of the Chinese Communist Party) because of his endurance. He changed China completely. Without Deng Xiaoping, I think China would still be in the dark ages—well, not the dark ages, but the opening up of China would probably have been postponed for quite a few years.