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Search engines searching for success
(China Business Weekly)
Updated: 2005-08-15 14:02

It has almost become something of a clich these days: Baidu, "the Google of China." But like most hackneyed expressions, there's an element of truth to it.

The name is on everyone's lips and with good reason. On August 5, Chinese Internet search engine company Baidu.com posted the highest first day trading gains on the NASDAQ since 1999. In fact, these were the biggest gains ever recorded by a foreign enterprise in the history of the US securities industry.

Baidu saw its American depository share rise by 454 per cent on its debut. Total market capitalization reached almost US$4 billion, although the firm only made US$303,000 in profits on revenues of US$5.2 million in the first quarter.

One of the main reasons Baidu is attractive to investors is its relationship with the celebrated US search engine. Google holds a 2.4 per cent stake in Baidu. There has long been much speculation that the US firm will eventually acquire Baidu. And Google's stocks have already risen by 344 per cent since its initial public offering (IPO) on August 18, 2004.

However, while the Chinese company received an enthusiastic welcome from US investors, Google is facing more headaches as it tries to crack into the world's second largest Internet market China.

Quick moves

Google said on July 20 that it would open a research centre in China this quarter so it can tailor products and services for Chinese users and Google's other markets. This marked the company's formal entry into the country, but the search engine's impending arrival has been a hot topic for the past year.

The announcement coincided with a scandal and lawsuit involving former Microsoft executive Lee Kai-fu, who Google had hired to head its Chinese operations. News of Google's plans came just one day after the company and Lee were sued by Microsoft for violating a non-compete agreement Lee had signed with his former employer.

Google has not revealed the details of their research plans or the location of the centre, but the announcement is believed by some to be a hasty move to deflect attention away from the lawsuit.

But other analysts say it came at the right time. The Chinese search engine market, which grew by 74 per cent last year to 1.2 billion yuan (US$148 million), is forecast by research company Shanghai iResearch Co Ltd to maintain an annual growth rate of over 70 per cent in the next three years and reach US$660 million by 2007.

"As the last US Internet giant to enter China, the market has become mature enough for Google to make its decision now," says Henry Yang, president of the Shanghai-based consulting firm.

Search engine providers Baidu, Sohu, and 3721 under Yahoo! China, have built a comprehensive distribution channel over the past few years and have promoted search engines as a publicity tool to small and mid-sized businesses.

Yang says the risks are low and it is a good time for Google to establish a Chinese presence.

Google has offered Chinese language searches since 2000 and has been watching the market for several years. It invested in Beijing-based Baidu to get a feel for the Chinese market, which boasted 103 million Internet users by June 30, according to the China Internet Network Information Centre.

The search giant also obtained a licence to set up offices in Shanghai.

Lee is another plus for Google's entry into China. The executive, who in 1998 founded Microsoft's research and development centre in Shanghai, has enjoyed wide respect in the local research, technology and education community.

Lee's involvement might ease Chinese Government concerns about sensitive content that appears in Google's search results. It will also help Google pull in more Chinese talent.

Google's search methods, which are mainly based on user frequency, will be welcomed by some Chinese website owners. Most domestic search engines use a paid-listing model, in which websites pay a certain amount to rank higher in search results.

An anti-Baidu alliance of webmasters formed in July claimed the company asked them to pay for results, saying their web links were deleted from when they did not pay the appropriate fees.

Challenges ahead

Although Google's entry has been anticipated by the domestic industry for a long time, it does not guarantee future success for the US giant in China.

Lee could be both a blessing and a curse for Google.

On July 19, Microsoft sued him and Google in the Washington State superior court, where the software company is based, and tried to block the executive's defection to Google. Microsoft claims Lee violated a non-compete agreement. It is concerned about leakage of its trade secrets.

Microsoft says the top computer-user interface technology scientist is familiar with the company's strategies for the Chinese market and its plans for developing search technologies.

The court issued a temporary restraining order to prevent Lee from working at Google and required Microsoft to submit a list of jobs that Lee can do. He is also forbidden from working on any Google jobs related to his activities at Microsoft.

The legal battle has brought a lot of negative attention to the search engine's plans to open its Chinese development centre in the autumn.

And despite Lee's good connections in the local research community, his role with Microsoft Research in China was mainly on the engineering side. He does not have much actual business experience.

Rumours suggest that Google will recruit a different business operations manager, but it won't be easy to find a qualified candidate with sufficient knowledge of the Chinese Internet market.

Zhou Hongyi, who will leave his post as Yahoo! China president on August 31, says the Internet industry is fundamentally a culture-based business. Even big foreign names like Yahoo! need to adapt to the market and cater to the habits of Chinese users.

Zhou founded channel distribution of search services with Charles Zhang, chairman and chief executive officer of Chinese Internet portal Sohu.com. Most Chinese search engines have adopted their innovations.

Their model encourages search engine firms to sign distribution agreements with partners in different regions. This helps small and mid-sized enterprises to use paid listings or publish advertisements.

China's 10 million small and mid-sized businesses are the most important target of search companies, but these companies often experience difficulty penetrating the Internet. Because these companies are scattered all over the country, it costs too much time and money for search engines to track down these enterprises by themselves.

Google, on the other hand, mainly sells advertisements through the Internet with a higher penetration of the worldwide web in the United States.

But many big US dotcoms are slow to adapt to local market conditions. These firms usually adopt a unified global strategy.

Yahoo! China was in the red after its entry in 1999. When Zhou, a native Chinese with no overseas experience, took over the reins in late 2003, the company became profitable within a year. His aggressive and localized approach paid off.

Amazon.com, which bought the top Chinese shopping website Joyo.com last year, tried to apply its global strategy to the domestic market. It has since faced several key personnel changes, and now employs Chinese managers who understand the domestic online shopping market, even though they also lack foreign experience. Joyo's competitor Dangdang.com has taken advantage of the temporary blunder.

Another difference in the Chinese market is that young people account for over 80 per cent of the Internet population. Music and movie downloads are one of the most frequent search engine queries, because search engines are not bound by any legal liabilities regarding pirated content. They simply provide links.

Jim Sun, an analyst with London-based Evolution Securities, says Internet traffic from music downloading accounts for almost 30 per cent of Baidu usage, leading Google with a market share of 45 per cent, compared with Google's 30 per cent in 2004.

Yahoo! China's search engine service Yisou.com ranked third in the market last year and music downloading was a big factor.

Google is thus likely to face the choice of whether to include the download links. If they don't, they will lose traffic.

But the most difficult and sensitive challenge for Google is how to mend relations with the Chinese Government.

Google's Chinese search service has been blocked several times in the past few years by Chinese authorities because it included search results forbidden by Chinese law. This content included anti-China articles and information about religious cults.

The Chinese operations of Yahoo! and MSN both chose to use only content from Chinese partners to avoid violating Chinese laws or offending local sensibilities. Google will have to decide whether to block questionable content or risk reprisals from the government.

"A top Chinese executive can ease government concerns, but it is unlikely that Google will be immediately trusted, because search engines have become a medium as important as, if not more than, Internet portals," says Lu Weigang, an Internet analyst in Beijing.

Although former Microsoft executive Lee is Chinese and has good connections in domestic research organizations and the technology industry, he was born in Taiwan and educated in the United States.

Perhaps Google needs to find a more suitable person to head their business operations, someone better equipped to bridge the gap with the Chinese Government, analysts say.

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