Mark O'Neill finds out what turned an MIT graduate into a hi-tech pioneer

For Charles Zhang Chaoyang the moment of truth came in July 1995 when he met Peking University's vice-principal during a visit to the mainland, after he had lived for more than nine years in the United States. The vice-principal had light in his eyes and a sense of authority after staying in the mainland for many years. The self-confidence and pride that radiated from him were things Mr Zhang could not find in Chinese students in the US. 'I was stunned by this and resolved that day to come home as soon as possible,' Mr Zhang said. So he threw away a comfortable life at the Massachusetts Institute of Technology (MIT), as its liaison officer for the mainland, to return home and set up a business. After three years of setbacks and globe-trotting in search of capital, he finds himself as chief executive of Sohu, under parent company Internet Technologies China (ITC) which he founded in 1996. The mainland's most popular Internet search engine has 600,000 page views and nearly 120,000 visitors a day. As it ends its first year of operation, Sohu - which means 'search fox' - has become the talk of the town. The press predicts Mr Zhang may become the first Internet multi-millionaire, a mainland Bill Gates. His youth, doctorate from MIT and ability to attract foreign venture capital have made him a hero among young mainlanders. Last October, Time ranked him 45th out of the top 50 digital heroes in the world, with US$4.5 million in net assets. ITC launched its Chinese-based search engine last February and expects to break even in the year, earning $1 million in revenue; all from advertising by mainland and foreign companies. ITC had revenue of $100,000 in 1997. Sohu is a search engine providing directories and guides for Chinese on the Internet. All the pages it leads to are in Chinese. The nature of the Chinese language made searching difficult, Mr Zhang said. 'You have to do several strokes for each character. Our secret weapon was to make directories accessible. We have a classification system designed for the Chinese user, with 18 sections and 100,000 links.' He is trying to cash in on his success with a stock market listing. 'We are looking at a listing next year, on the Nasdaq or Hong Kong's second board. We have not decided which one,' Mr Zhang said. 'We must have a revenue track record and will have a quality initial public offering.' It will not be plain sailing. Other companies are competing to be the first high-technology mainland stock listed on Nasdaq and may hit the market this year. And who knows if the market will be as hot for Internet stocks in a year's time as it has been for the past six months? Many investors are uncertain about the future of Internet in a country with a totalitarian government that controls information, and a legal and financial system that makes electronic commerce unfeasible in the near future. But this is Mr Zhang's gamble - forsaking a regular salary in the US to build a firm and make a fortune in a way he could not do across the Pacific. In a country still 70 per cent rural, an MIT doctorate means Mr Zhang returns as the elite of the elite. His success shows how much the young and talented can do in a new industry dominated by non-state firms. Sohu reflects the blend of the mainland and the US in his life. It is a 100 per cent subsidiary of Internet Technologies China (ITC), a company registered in the US and set up with $2.2 million from Intel, Dow Jones, the Hang Lung group, International Data Group and other investors who put their faith in Mr Zhang. As a US firm ITC will not need Beijing's regulatory approval to list in New York. More than half the advertising revenue comes from foreign companies, mainly multinationals such as Nokia, Motorola and Ericsson, as well as of computer- and software-makers. There is less advertising from makers of consumer goods, who are not so Internet-sensitive. The mainland had 2.1 million Internet users at the end of last year, up from 670,000 a year earlier and almost none in 1995. There are 5,300 Chinese Web sites. Most popular are films, novels, travel, hairstyles, news of film stars and other entertainment sites. Investors considering an ITC stock buy must bet on the future of Internet in the mainland and Sohu's part in it. Mr Zhang is naturally bullish; he believes the number of users will rise to four million by the end of the year and could be 10-15 million by the end of next year. He believes the Internet will make his people better informed and able to think for themselves. ITC is experimenting with a shopping mall to prepare for the day when the Net becomes a commercial tool. China Merchants Bank has an Internet credit card. At present, there is no electronic commerce because the necessary technology, financial and legal safeguards do not exist. Few people have credit cards. 'This is not a cultural thing. In the past 15 years, Chinese have learnt so much from the world, such as pagers and mobile phones. But the banks are state-owned and have not marketed credit cards aggressively, ' Mr Zhang said. Without e-commerce can the Net continue growing at its present rate? How long will mainland banks need to set up the financial and technical systems? How can they protect sellers against fraud? Another question for investors is how the government sees the Net. An information industry ministry official said: 'We cannot go back to the closed society of the past. We want to develop the Internet. Its advantages outweigh its disadvantages. 'It is not government policy to limit the numbers. There are many reasons for the slow speed of connection, including equipment and software. It is harder to develop the technology to control religious, pornographic and anti-government content on the Net than in the print media,' he said. The main government role is to prevent access to sites it considers undesirable, in line with regulations published by the public security ministry in 1996. The rules outlaw material that attacks the people's democratic dictatorship, the socialist system, the leaders of the Communist Party and state, undermines national unity and national security, promotes feudal superstition, pornography, violence, instigation of crimes and anything that endangers social order. Mr Zhang is very conscious of these limits. 'It is important for us to work with the government. It takes time for the government to be market-driven.' For this reason, while marketing and sales of Internet companies can be unified in the mainland, Hong Kong and Taiwan, content must be different, to meet the requirements of the three different entities. One mainland banker said he would not buy ITC shares as the risk was too high. Most Internet service providers were losing money and the future of e-commerce was not certain. In addition, most Internet users were young and poor. The mainland's rich did not use it. Talk of Wall Street finance and trading in the stratosphere was a world unimaginable when Mr Zhang was a child, dreaming of revolution and romance in ancient Xian where he was born in 1964; the son of two doctors. The Cultural Revolution, from 1966 to 1976, closed the schools, so he enjoyed a leisurely childhood, with much play and little homework. In 1976 he started to study in earnest, qualifying for one of Xian's top secondary schools. He studied physics from 1981 at Qinghua University in Beijing, the country's top science college and alma mater of Premier Zhu Rongji. In 1986 he won a scholarship to study in the US, obtaining his doctorate in physics at MIT at the end of 1993. Mainlanders who study in the US are a tiny elite. Most choose to stay there. 'Most of the male students in the US from the mainland are educated to achieve big things. But there you cannot be a big player. 'It is not because Americans look down on you but because you did not grow up there, you do not have that culture and do not belong to that group of people,' Mr Zhang said. 'The majority stay but feel a sense of loss and regret that they have forgotten the ambition of their youth. But to come back you have to overcome that inertia and give up what you have built up there. 'When I came back in 1995, I talked to taxi drivers and waiters and saw that they were happy in the culture they had grown up in. They did not suffer from the loneliness felt by me and other Chinese students in the US.' His first job in Beijing was as representative of Internet Securities, a US firm providing mainland business data. He decided to become an Internet content provider and during 1996 spent six months persuading foreign investors to put up the money, flying round the world four times. By October he had raised $225,000, from MIT Media Laboratory director Nicholas Negroponte and another MIT faculty. By August 1997 he decided content was an unprofitable idea as users did not want to pay, and a search engine - financed by advertising - was a better bet. Sohu went online on February 15 last year. Mr Zhang chose the 'search fox' name as the animal is smart and cunning. The name is also similar to Yahoo!, which is transliterated into Putonghua as 'gentlemanly tiger', causing the domestic press to call rivalry between the firms, the battle between fox and tiger. The Sohu launch stimulated a rush of investor interest and he was able to secure $2 million in April, helped in part by US media coverage. The China Business Times this month asked: 'Who will be the mainland's first Internet mogul?' in a profile of Mr Zhang and Sina president Wang Zhidong, 31. Sina runs the world's biggest Chinese Web site and is also seeking a Nasdaq listing. Mr Zhang said: 'In the electronics world, products change quickly and companies rise and fall. In the US I developed a sense of crisis. 'It is still there in my heart. If I can quote Andrew Grove, the chief of Intel, only the paranoid survive. I am always paranoid.' Born in Xian in 1964, Charles Zhang went to study physics at Qinghua University in Beijing, the country's top science university. In 1986 he won a scholarship to study in the United States, obtaining his doctorate in physics at MIT at the end of 1993. He returned to the mainland in November 1995. In 1996 he founded his own firm, Internet Technologies China, with seed capital from the United States and in February last year launched Sohu, which has become the country's most popular Internet search engine. We are looking at a listing next year, on the Nasdaq or Hong Kong's second board. We have not decided which one. We must have a revenue track record and will have a quality initial public offering We cannot go back to the closed society of the past. We want to develop the Internet. Its advantages outweigh its disadvantages. It is not government policy to limit the numbers