Chinese tech stocks must overcome sector vagaries

About 20 businesses from China are expected to launch US IPOs this year amid rising investor confidence in Chinese companies, particularly those involved in the Internet and e-commerce industries, Reuters reported Friday, citing statements from a top IPO analyst at Ernst & Young.

So far this year, eight Chinese companies - including social network operator Weibo Corporation, online cosmetics retailer Jumei International Holding Ltd, and e-commerce platform JD.com Inc - have debuted for public trading on US markets. In the case of JD.com, the company's shares soared nearly 20 percent upon their trading debut Thursday, propelling its market value to more than $30 billion.

Still though, quality concerns continue to overshadow many prominent Chinese companies, particularly those operating in the tech sector. Such anxieties are perhaps to be expected considering the accounting tumult which led several China-based firms to delist from US exchanges starting in 2012. But for investors in the US, sources of worry don't end there - questions over profitability and strategic development are ringing alarm bells as well.

Let's take JD.com as an example. The company had accumulated a deficit of 3.52 billion yuan ($560 million) by the end of 2012, according to its own figures. JD.com remains in the red and listing documents filed with the US Securities and Exchange Commission in January warned investors that a shift into profitability from operating activities was far from a certainty. Indeed, once the initial euphoria died down, the company's stock closed out trading Friday below its IPO price.

As China's first generation of Internet giants comes of age, many are now realizing that long-term success in this crowded and highly competitive field is often illusive. Indeed, recent experiences from the West show just how easily prominent consumer technology brands can fall from grace. For example, Finnish communications and information technology firm Nokia Corp was the world's leading manufacturer of mobile phones until 2012, when the company's emphasis on low-end handsets and late entrance into the smart device segment saw it lose favor with the market. Around the same time, BlackBerry's star faded considerably as companies like Apple Inc and Samsung filled the mobile business and productivity-oriented niche that had once been dominated by the Canadian device maker.

China has experienced its own recent share of tech sector reversals. During the early days of the country's social network market, Kaixin quickly emerged as a leading figure. Since 2010 though, the former titan has seen daily user traffic decline by 65 percent, according to media reports. Meanwhile, New York-listed Renren Inc, a competing Chinese social network operator, posted a 40 percent decline in revenue during the first quarter.

Such results come as new tools like Weibo and WeChat provide Chinese Internet users with a host of fresh and exciting ways to connect with friends and share information. In a sector where a company is only as good as its latest innovation, it is hardly surprising that newly launched entities are replacing their older peers at a fairly rapid clip. Needless to say, China's tech popularity churn is hardly the sort of thing that will impress value-focused US investors.

Today's leading technology brands - including Apple and rising Chinese smartphone maker Xiaomi Technology Co - are constantly focused on upgrading their products and delivering innovations. To win favor with investors and consumers, China's ambitious tech giants need to follow their lead and work toward long-term development goals.

In the past, access to resources was the biggest determiner of success in China's nascent tech sector. The country's speedy entrance into the information age quickly raised the bar. Those who were less adept at satisfying rapidly changing demands were quickly eliminated.

Looking ahead, competition in China's tech sector will only become more intense. Companies with their sights on a US listing should look to the recent past for examples that can guide their own development in a positive direction.