Baidu’s Deal Is Proof That M&A Will Flourish in China

Baidu’s $1.9 billion acquisition of app store 91 Wireless this week made me smile, because it solved a Chinese mystery. I’ve always wondered: Why do Chinese Internet giants try to copy the success of other companies, instead of simply buying them out?

Tech companies in the U.S. have long been willing to acquire promising up-and-comers, instead of simply duplicating them. But, until recently, it didn’t work that way in China.

A prominent example is Tencent, China’s largest Internet portal. If there was a startup doing well, Tencent would assemble a team to copy the idea and directly compete with the startup. The result was pretty predictable: the startup died, and Tencent got the startup’s market.

Chinese news sites like to note that China is different than Silicon Valley. They use many cultural, moral, or traditional reasons to explain the differences. So when Chinese media report on big M&A deals in the US, they often include accounts of how a startup died because the Internet giant entered the market.

I’ve always thought that there are reasons why Chinese Internet companies don’t do M&A, and the reasons will change and there will be more and more Chinese M&A in the future. I’ll get to that point in a moment. But, first, it’s important to understand why Chinese companies traditionally preferred competition to M&A.

Weaker Talent Acquisition Means Startups Were Traditionally Less Competitive

In China, big companies historically chose to copy/compete simply because they could. Why bother to pay a few hundred million dollars to buy a company when they could build it themselves? In the old days, most young people preferred to work for big companies. Startups struggled to get the right employees on board. So most startups were founded by inexperienced or grassroot guys. On the other side, the copycat team in big Internet companies were generally better staffed, with reasonably good people. Even without using monopoly power, they could create better products. By the rule that better products win, the big company won!

On the contrary, in Silicon Valley, talent concentrates in startups, and there is no way for big companies to compete with them. They don’t even bother to try — why spend money and, more imporantly, time to build with a high risk of failure, instead of simply buying the startup?

The situation is changing, though. Now, startups are much stronger in China. After 20 years of a flourishing Internet industry, there are enough great engineers and businessmen leaving big companies to start the next generation of Internet companies. Serial entrepreneurs are appearing. They execute better than big companies, and are harder to copy, and that is the start of M&A. The M&A opportunity will, in turn, encourage talent to start or join startups. The positive feedback loop will form. I can only predict many more M&A deals in China.

Less Competition Among Big Companies Means Time is on Big Companies’ Side

There’s another reason why M&A will pick up: Chinese companies are increasingly competing with each other.

In the old days, the competition between big companies was never heated. Each giant worked in a certain field, and didn’t face a head-to-head threat. Sina, Sohu, and Netease focused on portals; Baidu concentrated on search; Alibaba on commerce; and Tencent on communication. When these companies enter the same field, as is the case today, M&A follows. It happened in the game industry a few years ago, and now it moves to mobile.

Before, the war was between big company A versus startup B. Today, the world is more crowded. It’s not just big company A versus startup B; it’s big company A versus big company B, and the key to win is getting startup C. Even though a big company is equally confident that they can build by themselves, and finally win, they don’t want to risk the time cost, and let the competitor get it first. This new situation, just as in the U.S., significantly increases the valuation of startup C and the likelihood of additional M&A.

That brings us to Baidu. A few years ago, Baidu may have had enough time to build its own copycat. Or, at least, it may have tried before using all that cash to acquire 91 Wireless. No longer. In purchasing the startup, Baidu made its biggest deal to date, showing that it wants to quickly strengthen its position in the mobile market.

Optimistic to M&A Market in China

I am optimistic about M&A in China, and the startup scene. After all, China is not different from the rest of the world.

Anyone Still Read Blog?

I am just curious: is there anyone reading this blog at this time? Obviously blog is the “old” way of communication. If you are still here, would you please raise your hand so I can see you? (Well, leaving a comment seems better way for me to see you).

Thanks.

Comment to my eBay Article

I got 80 serious comment from my post on eBay on LinkedIn. Here is a copy.

Daylon S.

Design Founder of CuriousCore / CuriousCatch
@Mark L: Those are some pretty big assumptions you’re making there. Have you worked in China before or with a Chinese Internet company?
Like (1) 4m
George K.

Arbi A.
SALES – International Business Development | LION | +6.5K / +22M Connections |
It all boils down to culture, nationalism, language barrier, internet censorship and localization; A Far Eastern prospect’s likes and dislikes can not be as easily dictated based solely on the US consumer data. Local companies know the culture, speak the language and use chopsticks for lunch; multinationals however tend to force-feed using their tried and true spoon feeding method. How do I know this? I am a Middle Eastern, my ex was Taiwanese, we met in Canada and moved to Taiwan. I don’t want you to run a company in China; just try to attend a Chinese funeral and a wedding ceremony back to back, then talk to me again about cultural common points. As a sales rep working for a Taiwanese company, we would take our western clients to “Fried Bees Lunch” just for fun! My Taiwanese colleague nearly got killed in Cologne, Germany as a result of not being able to digest Tar-Tar. A product as strongly tied to the local culture as Google, Ebay …. must learn to follow the rules when dealing with a +5000 year old culture.
Like 30m

Mark L.
Sales, Marketing and Operations
If Baidu was so great and is such an important competitor, how come it’s non-existant outside of China? The reason Internet outsiders have had little success in China is because of the way that information is controlled and influenced by the government. The government’s involvement has had a dramatic impact on the way foreign Internet companies function and on the decision making process of the Chinese consumer. The Internet is a very controlled environment in China. As we all know “free speech” does not exist and the government possesses its “Great FIrewall of China” to monitor everything. Access to foreign websites is very controlled and closely monitored, and in turn foreign Internet companies cannot function “normally” or “freely”. It is very difficult for foreign Internet companies to apply the same business model they have successfully implemented in other international markets operating within these tight constrains. This severely affects a firm’s marketing strategy, communication strategy, product and service offering, brand exposure, market penetration, etc. within the country, and in turn it’s success. As well, although China is global economic power and influence, its people are still quite introverted and, aside from foreign luxury brand names, are generally ignorant of what’s outside its borders. This is mainly due to the nationalistic and pro-Chinese government, education system, and media (more so than countries like Canada, the UK and the US). In turn, China’s citizens are very “Chinese” and very comfortable with Chinese things, therefore aren’t too interested in what is not. Because if this, more often than not, the Chinese Internet consumer will choose Chinese Internet products or services over foreign ones. It is for tor these two reasons – a highly controlled Internet environment and heavily “nationalistic” Chinese population – that foreign Internet companies have had little success in China.
Like (6) 52m
Deric S., Caroline D., Lisa K., Aun T., and Shruti M K.

Robert W.
International Marketing and Admissions Manager
By the same logic, Alibaba, Taobao, and Baidu should not have as much market share as they do. The author suggests that these failures are essentially due to the relatively low entry barriers compared to the potential rewards. This would apply to both foreign and domestic companies. Since there are internet companies that have become dominate in particular areas, there must be other reasons for the failures.
Like 59m

Carl N.
Director, Marketing & Communications at Capgemini
Well written and thought provoking. Thank you.
Like 1h

睿之寒暄 Oliver Lin 2nd
CPSM, Senior Manager, EMBA program Director at EIPM – European Institute of Purchasing Management
great observation, looking forward the recommendation part – which might worth billions for those bigs
Like 1h

Sairith S.
Research Analyst
Nice Article. Good read
Like 1h

George K.
Marketing Engineer
for the “eBay” part of the article: From my personal point of view and experience, I’ve reached the conclusion that eBay failed due to a very arrogant approach on both sellers and buyers, expressed through poor quality of customer service and biased policies. Sellers and buyers are essential parts of any business like eBay. If you cannot build a critical mass on both of them, you go bust! Recent eBay’s approach and policies, have managed to make eBay marketplace a second or third choice, compared to similar local emarketplaces. Maybe the gradual change of policies was for the best interest of some buyer segments, or against some fraudulent sellers. Maybe they’ve managed to have a better quality of services and be stricter on poor quality or troublesome transactions. For sure, they took several small steps to raise their profitability at the expense of sellers and profit margins. Currently their profitability model is very strictly focused and biased on the sellers. I’ve recently personally reviewed their current policies, and the quality of customer service, and I was strongly disappointed and astonished by the results of my research. I’ve been familiar with eBay and using their services since the year 2000 (13 years now). The experiences of the 100% legit “mystery shopper” account I’ve created, acting mostly as seller (and as a buyer as well) for the last 14 months, was awful: From the sellers point of view: -Excessive fees both on eBay and PayPal (eBay.uk is unbelievable) -Biased policies, always in favour of the buyer on any dispute open -Policies that raise the cost of shipping or falsely documenting it. -Escrow services that did not actually work when needed -Non-existent Customer support: you have to send the exact same question at least 3 times (repeated in the same ticket) to get an answer. CS reps tend to reply in an extensive and overwhelming copy pasting frenzy, never addressing the issues in the ticket but cluttering and overwhelming their client instead. I’ve even been hoarded by CS reps to lie, or to follow procedures that would expose and diminish any of the seller’s essential interests in any dispute with a fraudulent buyer. From the buyers’ point of view: It’s very easy to defraud almost any mass-seller. And eBay tends to guide the buyers to do so, by their policies and their enforcement. As soon as you realize how exposed the seller is, you can defraud almost any mass-seller with no real or serious consequences, even if escrow is applied through PayPal. I really feel pity for the Chinese that are currently trying to maintain large selling accounts, especially those with small value items for sale. They are so intimidated by the current policies that even asking (as a buyer) a question about an item received, makes them refund you almost immediately. I challenge you to give it a try. Maybe Alibaba or other similar platforms are more relaxed, and permit more disputes to be resolved in the favour of the seller, and that drives more mass-sellers to be active on Alibaba instead of eBay, fuelling more transactions, generating more profits for the platform, at a higher but calculated risk for the buyer. But eBay is currently surviving at the expense of sellers up to the point that there will be no more left, and it’s based on a word-of-mouth on the buyers of the “western world”. For how long? To recap: eBay’s arrogance blew their effort. If they’ve done it against their clients (seller & buyers) they’ve probably done it also on every other aspect of their effort to grow in Michael Pagend they lost their money.
Like (3) 1h
Marcus M., David S., and Alexandra C.

Phani Pattamatta 2nd
Executive Search Professional
At the end of the article which spoke very big about doing business in china, why is Jian inviting these 3 internet companies to reconsider China as a market, are those local solutions failing to provide global results for the chinese internet users? Are they throwing only local results?
Like 2h

Edward B.
International Trade / Joint Ventures / Venture Capital / M&A
Ebay has a near monopoly in the US. It had to face real competition in China…from a homegrown start-up. Ebay crashed because it failed to adapt to the market. Did they learn anything from this experience? You tell me.
Like (4) 2h
George K., Chuck J., Zoey N., and Janis W.

Ron B.
Client Partner and Owner, Themed Publications
Perhaps they are “yet to succeed” as opposed to having failed. Great article Jian.
Like 2h

Shariff A.
intl voice and access wholesales, account management
it is not about level playing field in technology, that Chinese web companies beat up Ebay/Google/Yahoo etc. Google is not just about Java and database or Yahoo is not just about PHP that every you and me know. Author should went deeper into brain and logic wrapped inside those technologies. Ebay should has debut as Eibao or something.
Like 2h

Gulab P.
Exchange Architect at Colt Technology Services
Jian Shuo Wang, Is it because china isn’t compatible with rest of the world? Mostly with western countries? I don’t believe it’s because of size. It’s because almost everything is controlled by communist government.
Like (1) 2h
Jarek L.

ayushi S.
Sr. Executive Social Media at Vizz Media
Thanks for the insight. The article was interesting to read.
Like (1) 2h
Nicolae B.

Gulab P.
Exchange Architect at Colt Technology Services
Jian Shuo Wang, Is it because china is compatible with rest of the world? Mostly with western countries? I don’t believe it’s because of size. It’s because almost everything is controlled by communist government.
Like 2h

Jonathan C.
Online & AFK Community Mgr – Social Media Club – @SMClubSG. Social Media Student @BCUMedia & Advocate. Retiring Techy.
eBay is only really in UAE – hardly Middle East in coverage. Shipping between Middle Eastern countries despite cheap air fares and close proximity is cost prohibitive, plus each Arabic state has its own customs and contraband controls which does not unify and assist the regional model. I don’t think eBay Middle East is a good illustration of a success. The Social Networks granted have seen recent user spikes indeed in the wake of the events of late 2010, early 2011 but eCommerce and social media advertising still remains infantile in comparison with the west, as it does here in Singapore. eBay would fail here (Singapore) due to the populous wishing to buy new – an interesting social departure from its trading past.
Like 2h

VIKAS C.
National Sales Manager at Paladion Networks
chaeng the work ?+*>>>nua
Like 2h

Kok K.
Assistant Sales Manager at Silka Maytower Hotel & Service Residences
iMPRESIVE!
Like 3h

Martin L.
Personal Achievement Coach | Business Advisory
The main reason eBay failed in China, as did the other major listings from the US is due to a cultural difference of business modelling. The systemic problem in economically developed eastern countries predominantly asian in culture is an unwillingness to allow their economic culture to be defined by western cultural paradigms of thought. China, along with many other asian countries, is a very proud country steeped in 5000 years of cultural development compared to the US – approx 200 years. China will be sore to allow the world’s superpower to define it’s economic culture with Western judeo beliefs defining its business model based on established democratic principles, within a communist-led economy. Like any smart (but unwise) country, it will seek to model popular/best practice business models, and then determine how it can improve upon them, essentially as it emerges as a dominant economic force. As Sun Tzu illustrated in his book ‘The Art of War’, applying this methodology in an economic environment on a world trade stage to establish an entrance into global trade and economic exchange, and find your ‘enemy’s’ strengths, duplicate them and then use them to disarm him, is a suitable analogy for the mindset of business that is predominant in China. The real reason eBay failed in China is simply due to a void of economic collaboration and the attitude to cultivate a win/win long term relationship on the world stage of economic development. Until China understands this, they will be doomed to running headlong into their own brick wall and wonder why the Western economy is cautious and mistrusting. As the saying goes, “Contempt breeds mistrust”.
Like (2) 3h
Bill A. and Alexandra C.

Sarah-Jane L.
Consultant at Grovelands
Interesting article. I think censorship also plays a large part in China having its own search engines and social networking sites etc. I dont think its all necessarily down to sites like Baidu or QQ being ‘better’.
Like (4) 3h
Caroline D., Janis W., G V S., and Michael B.

Sarah-Jane L.
Consultant at Grovelands
Interesting article. I think censorship also plays a large part in China having its own search engines and social networking sites etc. I dont think its all necessarily down to sites like Baidu or QQ being ‘better’.
Like (4) 3h
Caroline D., Janis W., G V S., and Michael B.

Alejandro B.
Director, Business Development & Organization Learning Solutions at SMG Consulting (China) Co
Fully agree with all the comments about not equal rules of play applied. Mainly censorship based in favouring local companies against foreign ones. Not for political reasons but economic and protectionism ones. But let us see what happens when they want to go abroad and compete in a free market. Then the conditions will be equal, and China can not afford to still only look to internal demand anymore if it wants to keep growing and consolidate his position internationally. The answer is to become competitive following free market rules. The key of success will rely on Chinese companies being or not, so skillful to develop the competencies that will allow them to implement international expansion strategies, competitive and value generating ones.
Like (1) 3h
ayushi S.

Alejandro B.
Director, Business Development & Organization Learning Solutions at SMG Consulting (China) Co
Fully agree with all the comments about not equal rules of play applied. Mainly censorship based in favouring local companies against foreign ones. Not for political reasons but economic and protectionism ones. But let us see what happens when they want to go abroad and compete in a free market. Then the conditions will be equal, and China can not afford to still only look to internal demand anymore if it wants to keep growing and consolidate his position internationally. The answer is to become competitive following free market rules. The key of success will rely on Chinese companies being or not, so skillful to develop the competencies that will allow them to implement international expansion strategies, competitive and value generating ones.
Like 3h

Evans Jia 1st
Angel Investor
Internet company is so successful from economy of scale in what they are good at, hard to realize the beauty of decentralization by learning from P&G, Johnson & Johnson. Their organization just don’t have that gene, and not ready to learn it.
Like (1) 3h
George K.

Gilles C.
Managing Director Asia at Second Bureau, a Sales and Marketing Services company
This post is a joke or a honeypot.
Like (1) 3h
George K.

Daniel B.
Owner at MCC CODE
nice article, I would that as a Westerner, seems to me that China has its own internal set of standards, not necessarily in tune with western philosophy, same as The Western standards have been based out of US better and more common business practices, yet this process took decades, while China was not really part of it. Now that China has grown and becomes an essential part of the world’s economy, western companies try to enter the market however, we simply lack of its understanding, our practices do not match. Within the next decade i believe a common approach driven by necessity will come to be.
Like 3h

martin D.
PROJECT MANAGER at Fleming Europe
Great article!!!
Like 3h

Pradeep K.
Associate Vice President at SatNav Technologies
Its well said that one should never rest on laurels and always try to figure out what is the next best thing to do with the business or work as its the best way to be productive.
Like 3h

Janet H.
Sales Operations Manager at Lycamobile
Great article! I’m keen to read your insights into how Internet companies can succeed and hopefully draw some parallels to other offline organisations.
Like 4h

Andrew B.
Paralegal at Bernhardt Law Firm LC
Lots of businesses fail in the USA and China; lots of businesses flourish in the USA and China. Opening any business anywhere is an exercise in risk management, and involves decision making, rationale, and is an “experiment” every time; Some economists may call it a game, or game theory. Success or failure may come down to the micromanagement of the location of the enterprise, business, or corporation, or even may be coincidental due to the economic cycle and when the founder strikes- at e.g. the top or bottom of the cycle, or somewhere in between on the upturn or downturn. Behavioral Economics and estimating accurately what 310 million people in America will do, or 7.5 billion worldwide will do impacts success and failure; e.g. if you think, and if everyone thinks, that their home will decline in value, then it will! This hypothetical decline in real estate can impact a lot of other sectors and facets of the economy, in a similar fashion as 2007-09. Timing can be everything, despite popular belief. You don’t sell e.g. much high end luxury jewelry in the mist of, or during a huge economic recession (see Tiffany’s stock- it’s quite cyclical [TIF]). The study of the success of businesses, and ultimately their bankruptcies is fascinating. Nothing lasts forever, companies change over time too, due to mergers & acquisitions, and spinoffs and divestures. The study of total economic collapse and catastrophe, leading to a total default of an entire nation’s credit markets, and the failure of their equity markets, and of their currency is also a great topic. Debt and currency crises and their root origin of events should be studied more thoroughly. It happens more than people would believe in the USA. Total apathy of enormous deficits and a mountain of debt is not a good strategy for our Congress to engage in, nor is the “regulation-gone-wild” attitude when things turn sour. Despite popular belief, you can’t regulate economic cycles or business success. Legislatures (and the masses) worldwide should grow up, and stop being so corrupt.
Like (2) 4h
Sharmistha G. and Andrew B.

Naida F.
Senior Specialist for credit risk controll
This is realistic We need to think not only global Necessarily is to involv cross cultural mining into product and sales management
Like (1) 4h
Brijesh C.

Gopalkrishna K.
SSE at SAP Labs
A very impressive writing. I think above all China is a patriotic country.
Like (1) 4h
Reginald F.

David L. F.
Consumer Product Marketer, Strategist and International Development Professional
This ‘analysis’ of why American internet companies failed in China is pretty weak. The main reason they failed? -There is in the final analysis nothing really unique about these American companies in technology or design that could not be easily (and were easily replicated) be done specifically for the china market by Chinese companies. -The Chinese government totally supported the development of China companies internet efforts and threw up roadblocks, both political and technical/internet to penetration by American companies. -The Chinese government showed absolutely no regard to said Chinese companies from poaching and using with impunity any design, UX or intellectual property from foreign internet firms. Cultural? That’s pretty funny.
Like (6) 4h
jamil K., Kirstie B., Jarek L., Mark S., and Reginald F.

Bella Z.
Commercial GM at JT International Brazil Chinese Office
Patience is quite necessary to gain in China. Actually, Chinese endusers are very open to foreign companies and products. The problem is there must be something really attractive and better than competitors for users. Google’s withdraw fm China partially due to political reasons. While others all act slowly in doing better than local competitors. One feature of Chinese culture is agile, flexible and hard-working which form incredible speed faster than foreign companies. Internet is one obvious example.
Like (1) 4h
Brijesh C.

Rakesh R.
CO-Founder Director & CMO at Nifty Window
IPR is the key differentiation for success and failure in China as there you know that judiciary is not strong enough to punish the copycats. Why are they successful in India ( which has more people than china) because India has a robust judiciary and good law enforcement system when it comes to corporate governance and the brands are ready to invest for long term goals as they are sure to be protected of their IPR and interest
Like 4h

Charles Z.
Partner, Microntek
patent/piracy and capital is where they got win and where they got loss. They will be back soon.
Like 4h

Alvaro S.
Specialist in Solution Selling, ERP, CRM, Business Software Solutions
Jien, thx for the article. Interesting debate too. Jien it would be interesting if you can make a detailed analysis on Chinesse goverment behaviour and actions undertaken on some (most of) international companies traying to work in China. Btw, I am on the opinon that -reciprocity- should apply = we have our free trade norms, but for China we should use exactly the same norms and actions they apply with the rest of the world. Rgs
Like 4h

Michael Z.
Account Manager at Hot Group Inc, Problem solver, long term business development analyst, and CIMA student
Agreed with the majority comments, they failed not because of their impatience, but by the gov strict action. Google’s incident is a shame thing to be ever happened.
Like 5h

He L.
Business Executive at Intelligent Automation(China)
Very impressive!
Like 5h

Bobby Q.
Change & Release Manager at Fujitsu Australia Limited
I think the key is the ability to recognize and and adept to the audience. When facing a country with 20 million people, it is easier to just show them what is already working and hoping for the end users to adept to the existing system; but when facing a country size of China, it suddenly makes different sense to observe what people do and carefully adept to that. The reason eBay didn’t work out well, is because there were others that adepts better. It simply understands the merchants better, understands the transaction better as well as the end users. China is not that much different, but it is there after all, even very subtle. the key is to adept, not expect the difference to dissolve over time.
Like 5h

Caro L.
Product Operations Marketing Manager/Product Manager
wow, very interesting and informative article. thanks for the share. I sure got to understand quite a lot about Chinese market and foreign multinational competition here through this article. But just one thought, isn’t the internet space also heavily regulated by the government here? And also I feel that there’s some or probably a lot of protectionism going on to favor Chinese companies more. Personally, I wouldn’t use Baidu, but I’m forced to at this point since I’m living here, and any other foreign websites are either blocked or are slow or difficult to access without a VPN. And I don’t use one… So basically as I understand it, Google was forced and squeezed out from China because they did not want to play to Chinese terms.
Like (2) 6h
Pratik G. and Mariusz M.

isaac F.
Sales
@Lyailya Y., yes McDonald’s & GM do well in China, but I can’t think of the last time some one tried to censor a cheese burger. Large information based companies are the ones that can’t do well in China because of the restrictions placed upon them by CHINA.
Like (2) 6h
Dhayan M. and Jonathan S.

Karthick B.
Product Manager – Internet – Mobile – Voice – VAS
Thanks for writing the insightful article, so my understanding is large internet companies not having enough patient to penetrate huge country in terms of geography. They should set realistic timeline, returns, profits, user base rather than quick money…..
Like 6h

Bill Y. T.
A True Leader
China, with current political system and ever growing middle income class, has become a unruling monster with deep pocket. The internet boom in China is very different from the West. It’s very much the wild wild west yet without much of law…coz there are so many loop holes that local competitors can use while don’t worry about getting punished. Yes many foreign companies are impatient, but they have been not able to compete with local companies on an equal footing from day one. Google is actually doing very well until it got adverse attention from the government, and its unbended attitute is respected by lots of people. Most of my friends in China love using Google, but they have no choice but use Baidu or Bing instead due to obvious reason. yes, it takes time to build a brand and success, the timing of entry is very important. China is so big and has so many people, but it doesnt necessary mean all rosy cloud for business all the time. Unfortunately the companies mentioned by this artical are all public companies at the mercy of wall street, i can’t blame their impatience if the situation doesn’t improve and can’t use legal protection to go against competitor. I would say the situation may change dramatically in another 10-20 years if there is enough social change to support a mature and civial business environment.
Like (1) 6h
Pratik G.

Frank S.
general service at T&T Supermarket
The most important reason for these internet company losing in China is that all of these companies didn’t respect Chinese needs as that successful companies who spent so much time and money to understand this huge market, and these winners’ leader are more open to adopt new society system, they trust Chinese and only employ the person who know China well.
Like 6h

isaac F.
Sales
You keep talking about Google as if they just didn’t try hard enough. They drew an ethical line at how much censorship they would participate in and the Chinese government charged right on past it. So Google left, and good for them to stick to their own ethical limits. The same stands for any good company that is based in online information. If you’re not willing to help the government shape (and hide) it’s image, then you can’t do well in China.
Like (6) 6h
Viktoras V., Martin L., Ajay S., Dhayan M., and Jonathan S.

D K S.
CEO, ABACUS MANAGEMENT CONSULTANTS PVT LTD
If it was just about size these companies would have not really made it in other geographies of size! And stomach for failures..?? Surely these intrenet companies you talk of could take knocks and for longer than they did. In China the atmospherics are entirely different…with the state giving a big push to heave out such business adventurists. They would want their own at any terms..and if they have a choice they exercise it. Simple! These compaies in case were thus easy push overs…the GMs you talk of would also go…let the Chinese unthread the wool-ball! No! China IS very different and has the legendary Great Wall at more places than just the borders!
Like (1) 6h
Mohit N.

Calvin L.
Internet Professional, Website Developer, Programmer, Designer
one word – nationalism. internet services are unlike cars; they don’t need to be picky.
Like 7h

Balaji P.
SAP certified SD Functional Consultant at Infosys
Freedom of thoughts & ideas is the oxygen of any knowledge based company. In order to prosper & blossom in todays knowledge based society, you need innovation & out of box thinking and less inteventions by local government. These factors are missing in China. All these companies are huge success in country like India because of freedom & liberty these companies enjoy. That Oxygen is missing in China.
Like (3) 7h
Narendra K., Rui Ray W., and Ajay S.

Trey H.
Managing Partner
Foreign tech companies will never be able to compete with Chinese tech companies in China because foreign companies are subject to a different set of rules. Companies such as Baidu and Alibaba.com are so lodged into the state censorship apparatus that they have more flexibility and freedom to expand their businesses, develop products, and attract financing. They get free passes because they are as much a part of the system as the Ministry of Propaganda. What Western tech company wants to have a baiju-drinking official attend all of their product development meetings? How can Google compete with Baidu if domestic regulations trip up Google’s expansion? The big difference between tech in China and the United States is that entrepreneurs succeed despite the government in the United States, whereas entrepreneurs succeed because of the government in China.
Like 7h

John C.
Managing director
The two most important reasons have not been mentioned in this fine article: 1. Market protectionism to the highest degree to keep foreign competitors out of China. 2. Political reasons and strict censorship is another one: Facebook is simply banned and not allowed in China…
Like (7) 7h
Viktoras V., Martin L., Mohit N., Atanu R., and Ganesh N.

Lyailya Y.
Student at Shanghai University of Finance and Economics
Trade is the significant key in Chinese Economy . China has Taobao – internet Service, which is more convinient to vast majority, even for me, when i was a foreign student there, because firstly it’s in China, so deliver of goods takes not so long time, (especially if you need to return or change product), even if you want order express deliver the price will be very cheap ; payment method is more easier; and it is easier to chinese people negotiate in their own language ; all prices are shown in RMB and so on… What about Mc Donalds and GM – they are a big companies, which provide their own Product with good quality or taste, which prefer the whole world, include China. I think China can copy, can re-sell good, but it’s very hard to them to build a new brand, provide a new excellend product, which will dominate in a world market. People just give money and buy products of GM , Intel , it’s not so hard. But if workers in Mc donalds spoke in English (like Ebay) , don’t think it still would have a popularity.
Like (1) 7h
Anthony O.

Don P.
Contributor at Seeking Alpha
I disagree with the assessment for the reason(s) why most companies of western origins failed in China. If not for the type of industry which is IT or telecommunication security…and given the effort and the inherent need to protect proprietary information by the China and companies themselves; I would say that failure was mutually assured and an intended consequence for the industry given the national security concerns.
Like 7h

Aaron H.
Due Diligence Research
How can you say Yahoo failed in China when it’s stake in Alibaba is the only thing that has given it enough cash and strength to stay relevant in the US?
Like (2) 8h
Pratik G. and Jun C.

Tony Ho 2nd
Entrepreneur,Wearable,Mobile,Vertical Search,Big Data
Agreed on the market size argument. Large enough market attracts big competition. However, China is more an exception than norm, considering all these companies succeed in many other major economies. Personally, I think government control and significant differences in market and culture are the major factors. These global companies failed to understand, or at least underestimate, the effort to adopt to Chinese culture and user behavior.
Like (5) 8h
Mariusz M., Jalaj S., Yu-Tian L., Daniel C., and Joey K.

Denny K. C.
Consumer Project Lead/ Semiconductor FAE/ Market Analyst
Western enterprises also have an unwritten rule of operation: if a service or priduct can no longer generate certain percentage (30%?) of profit, it’s time to drop the product/service and seek alternative or greener pasture. That can explain the topic in question, and the birth of mega OEM houses at fist in Japan, later in Taiwan and then China, who are happy to win businesses with less than 10% margin. Only higher margin can support healthy cashflow, good benefit, R&D, and lasting enterprises. There is a limit to sacrifice profits for scale of opertations.
Like (2) 8h
Jun C. and diane Z.

Ming Fu 2nd
FP&A Head, Greater China at Google
I don’t think Google “failed” in China due to the reasons listed in the article. Google was actually doing very well in China until it made a conscious and hard decision to pull out based on a “moral principle.”
Like (7) 9h
Martin L., Ganesh N., isaac F., Paul T., and John C.

Denny K. C.
Consumer Project Lead/ Semiconductor FAE/ Market Analyst
Well, at least at one time Alibaba and AliPay gave sellers and buyers free pass on fees. The no-fee competition must have been too much for eBay to bear, on top of the efforts needed to fight transaction fraud in large scale. Money changes hand by bank/ATM transfer is so popular in China, Taiwan and Japan with little or no cost to users, that also caused Paypal’s fee-based structure harder to prevail. I think Japan is another major country that eBay does not have domestic presence. Yet, eBay is still a major channel for Chinese & Asian sellers to market their stuff overseas. That has not changed.
Like (1) 9h
Jun C.

REDPOT CRM -.
www.redpotcrm.com
There is a difference between selling a Burger and Selling Internet & Related Business. Burger doesn’t change – but technology, people usage patterns for digital media keep changing, and for China like country it might be impractical to expect success like other countries
Like (1) 9h
Jun C.

Ayodeji I.
public policy analyst
well thought out…quite enlightening
Like 9h

Helen C.
Advanced Controls and Automation Engineer at Air Products
It took me some time to figure out Taobao (the successful Chinese competitor to eBay) because it is only available in Chinese. Now I’ve figured it out, I feel they actually do a better job than eBay. For example there is no need to trust the vendor/seller because Taobao offers a free escrow service on every transaction. Also, shipping is incredibly cheap!
Like (1) 9h
Jun C.

Saif K.
Risk Management Consultant at Enginvest
Thank you for the enlightening article. It really helps understand the dynamics of the business world and markets in the East.
Like 9h

Prangyavit S.
Process Developer at Great Food and Beverage UK
ebay, google and yahoo all r in their young days or in OLC they r in mid stage..So they lack a mature organizational culture which generally seen in old companies . although I agree the over optimistic and pessimistic nature of these companies ,who like to conquer the giant market within a shorter period of time .
Like 9h

Vicky L.
Secretary at Natixis Beijing Representative Office
i think ebay is a wonderful C2C website, i love buying things from this kind of wedsite…because i don’t know if i can buy a real american milk from China…but for me, ebay is not convient, sometimes i don’t know how to use it…so if this kind of website can have a easy operation as TaoBao, that’s will be wonderful…
Like 10h

Brett N.
Managing Director at Once Wed
Does the “Great Fire-Wall of China” and a given internet co’s willingness to go along with this censorship not matter in those “failures”? Mr. Wang, could you please send me a screen cap of an internet search for the term “Tiananmen Square” on any search engine within mainland China? How about unwritten law that China can hack any Western Co’s systems and dares anyone to complain about it? How about the certainty that any company with a physical product will have the specs / designs lifted and copied in China within 12 months regardless of International IP law? That isn’t to say that you can’t win as a foreign Co. in China – Yum Brands seems to be cleaning house. It’s just that you need realistic expectations. Namely that your IP will be enthusiastically lifted / stolen with total impunity, remedy of business issues within the courts will be a joke and the Chicom gov’t will always favor your local competitors in any matter or law / regulation. If you’ve got a business plan that can win against that stacked deck, my hats off to you. To the author of the article – just don’t pretend that western internet companies are all bungling impatient stooges.
Like (9) 10h
Anthony O., Honey M., Solairaja A., John C., and Warini M.

Naresh Reddy R.
IBM BPM Consultant
The censorship is the real road block for the major US tech companies, I partially agree the influence of culture and big market size.
Like (1) 10h
Daniel Roth

Aaron C.
Management Consultant at BDO International
An example that I always tend to use is Wal-Mart. When it entered China in the late 90′s it faced very tough government regulations (could only establish in 11 cities and only operate 3 stores per city). Even when these sanctions lifted upon China’s admittance into the WTO, Wal-Mart continued to have serious problems including the recent “copycat” that is now beating the original. The case of Wal-Mart is riddled with problems from the inability to implement its core advantage in most countries, an efficient logistics system, to serious accusations of human rights violations. The point is that in China a firm should not cut loses at the first sign of trouble, perseverance is a key element of success for the China market.
Like (1) 10h
Anh (Addy) D.

Aaron C.
Management Consultant at BDO International
Great article, excited to read your suggestions in the next of the series. I think after reading the article and the comments made by other readers, I can agree with most of what is being said here. Companies need to have a long-term orientation for expansion into China, regardless of industry. At the same time, it can be said that internet based firms are facing much censorship and regulation in China now. It’s important not to forget that this was also the case for many companies in many industries in the past.
Like (1) 10h
John C.

ZHANGXIN FRANK L.
PhD Candidate (Finance) – The University of Queensland
One obvious different between the internet companies and those manufacturing giants such as GM is that, one can help boost the GDP growth while the others don’t.
Like (1) 10h
Daniel Roth

ZhongNi X.
Undergraduate at Singapore Management University
Totally agree with John. It make sense to say that US companies may not understand the landscape and environment perfectly enough as local companies. But the REAL problem is Government Censorship and Scrutiny. What does Alibaba, Alipay, RenRen, QQ, We-chat, Baidu stands for? Nothing more than a copy-cat that is presented in Chinese. But luckily we did that, imagine if all the e-commerce and social media info are held by US companies, China would completely lose the edge to compete in Tech or at least boost national economy. Censorship and Red Tape is, in nature, bad, but seriously, China needs to do so..
Like (3) 10h
Mauro C., Warini M., and Anthony O.

John L.
Head of Procurement and Responsible Care at Methanex Asia Pacific Ltd
The internet is a powerful medium for social awareness and potential change. It is well known that Western firms have problems with censorship. The same doesn’t apply for cars or hamburgers.
Like (2) 11h
John C. and Warini M.

Preston Smalley 2nd
Product Guy and Entrepreneur @ Comcast Silicon Valley
As someone who spent the 2006 summer in China with eBay Inc trying help it avoid failure, I agree with your main premise that US companies need to invest for the long-term. However, to say that its not *that* different from the US is just not true. eBay’s playbook for country expansion which it employed in Europe was predicated assumptions that 1. buyers and sellers would trust each-other without meeting, 2. buyers could electronically pay sellers, 3. sellers could ship products. In China none of these three were true, at least in 2006. Finally this was an example where the local managers in China already knew this and in fact just didn’t listen to their concerns given the past success the country expansion playbook.
Like (6) 11h
John C., Warini M., Nichole B., Michelle N., and Paul B.

Paul B.
Experienced Finance Executive in Asia Pacific, Asia Literacy Ambassador & Board Member
The author argues eBay failed in China because the country is too big. But eBay also failed in Japan over ten years ago. May point to a lack of cultural awareness of Asian values on the part of western companies, losing out to nimbler local competitors who can tailor their offerings to local tastes better than the big foreign ones
Like (1) 11h
Hang N.

ZiKang C.
Software Engineer
There are many invisible barriers set by local authorities in China like GreatFireWall blocking FaceBook,Google,SlideShare… Most strict censorship and moderation, which is hardly seen in western world. Eachnet failed for Chinese customers are willing to see a worry free online purchase while Taobao has much better user experience, allowing shops to customize the page layout, setting up a virtual credit system for both sellers and buyers, what’s more, they are willing to accept the rule.
Like (2) 11h
John C. and Jay Wong, CPA

Christine W.
Confidential
China has a protectionist policy when it comes to doing business and the legal structure is very biased. You almost have to bribe the officials, which is just not the American way. Try to deny it, it won’t be because that is not the case, it would be because you’d rather be hush about it.
Like (4) 11h
George K., John C., Frank R., and Matt B.

Vivek S.
Managing Director – Global Supply Chain Group; Trusted Advisor; and, Author of “The 5-STAR Business Network”
What is the role of the Chinese state policy in ‘encouraging’ local players that are knock-offs of larger global players
Like (2) 11h
Vikrant D. and Frank R.

Lance F.
Experienced Global Air Transportation/International Logistics Solution Provider
Good insights. I think one of the reasons why they failed is a lack of understanding of local language & culture and lack of willingness to embrace and capitalize on them. These foreign brands should not be seen by Chinese consumers as overly foreign but instead should be viewed as blending in/actively pursuing their interests and needs (not the other way round).
Like (2) 12h
John C. and Joseph R.

Alfred J.
Director at AME Musica Global GmbH
Endurance was developed in the east, to kill and make a quick buck is the motto of the west.
Like (4) 12h
George K., Jalaj S., Blaine C., and Ibrahim X.

Tony P.
Senior Project Professional
An excellent, fresh insight!
Like 12h

How **** can Win in China?

How about Censorship?

Censorship is another widely spread out excuse for the failure of the Internet giant. Not true. It is part of the reasons, maybe 10%, but not all. There are examples of Google, and Facebook. Yes. They were blocked partially or completely, but that is the only only fatal attack they face. LinkedIn was not banned, but it didn’t grow as fast as people think. eBay was not banned, and majority of the Internet companies were not. Although they survived from the first challenge – whether people can use it – they didn’t survive the sequential challenge that both local and  international Internet companies face: the challenge of a good product, the challenge of a first-class team, the challenge of marketing, and the challenge of competition. Lift the censorship is the first step to success, but not last step.

The management of Internet companies and media tend to put more attention to problems like censorship or other political issues than they actually deserve. It is like that foot is important for a person, but not all. I once broke my ankel and were in wheel chair for 3 months. Everyone noticed that I am so different from everyone else, but only I know that the broken ankel does not affect my life that big as people expect – at least when I use computer, or sleep, or talk with people – these activities occupy majority of my life. Censorship makes situation so different from other places, but I would strongly encourage people to focus on business challenges.

Another similar argument was that Taobao was free but eBay was not. Similarly, that is only one of the many challenges. There are many other free sites but why Taobao dominate eventually? It is just small part of the story.

The Details

 

Dinner with Adam Lashinsky in Shanghai

I am a typical ENFP – Perceiving type, and I hate plans, and I love last minute meetings. Interesting, I found many of my journalist friends are of the same time – Lynn, Alexandra, and this one: Adam.

This was what happened. There are some random email going back and forth these days between me and Adam, and one email reads:

Adam: “Where are you?”
Jian Shuo: “Shanghai, China. +8 time zone”
Adam: “I am in Shanghai. Want to catch up?”
Jian Shuo: “Sure. I am on my way to Grand Hyatt lobby”.
Adam: “See you”.

Then the dinner happened. I bought few copies of his new book: Inside Apple and had him signed.

 

Why eBay Failed in China?

Let me give you some background information. Almost all US Internet companies failed in China in the last 10 years. Yahoo! entered China by acquiring 3721.com (some argued it was a keyword based search engine that dominated the space before Baidu.com came out), and turned it into nothing, before Yahoo! China was sold to Alibaba. eBay acquired EachNet.com, the largest C2C website, and spent few hundred million dollars on marketing, and successfully turned its market share from 90+% to less than 10%, and then sold it to Tom Online. Google entered China and with years’ of efforts only to turn its market share from 30% to 10%, and claimed to move China site to Hong Kong. Who else?

Here is the question: Why eBay failed in China? Why Yahoo! failed in China, and why almost all US-based Internet giant failed miserably in China?

China is NOT that Different

The quick answer can be: China is different. China is different in culture, in economics, in political system…, people argue. But the problem is, although China is different from US, China is not that different. Google/Facebook/Yahoo!/eBay succeeded in middle-east. They succeeded in Africa, and they succeeded even muslin and arabic countries. Compare to the economic and culture difference they have with US, the gap between China and US cannot be claimed to be bigger. Why they succeeded in so different countries, but not in China?

China is Different Only in One Way: It is Too Big

Because China is so big, it makes perfect sense to have a meaningful competitor. For example, Google provides Dutch search engine in Netherlands. Theoretically, Google cannot be the best Dutch language search engine human can build. There is possibility to build a better search engine for Dutch if someone really wants to put the resources. But the problem is, after someone hired 1000 engineers to build it, they face the question: “Then, so what?” There are just about 16 million people in Netherlands, and it does not make sense economically to build one. The same story happens in most smaller countries. The story was, although there is space to improve, because the market is not big enough, the economic return does not justify the effort.

In China, that is completely another story. If someone (now we know it is called Baidu) build a search engine that works even just a little bit better than Google, they can get the China market. The so-what question has an answer. “So what? More than 50% of global Internet population is in China and growing so fast.”

Because China is so big, it attracts talents, capital, entrepreneurs or any resources needed to compete with global Internet giant. Very soon, a better search engine, a better social network, a better marketplace, and a bigger B2C site emerges. Sometimes more than one. All these competitors makes the life of multinational Internet companies very hard.

My conclusion: Although competition does not guarantee failure for these big companies, the bottom line is, it does not guarantee success.

The Composition of Value

People may ask, why just Internet companies? General Motor, Intel, McDonald’s were all huge success in China.

That comes to the composition of the value these companies bring. Let’s take Intel’s CPU chip as an example. Although there is value of marketing, sales, channel, partners, etc, the majority, let’s say, 80%, of the value is technology, which is embebed in the chip. Even though the 20% of the value is average, or below average, they can still succeed in China. The same happens with engines of GM cars, or the ability to standardize processes of McDonald’s.

The Internet space is different, especially for companies like eBay. The technology value is not that high – everyone can use Java or database, and the value of scale of marketplace in US does not extend to China. The brand of eBay is even less valuable because few people recognize it or even pronounce it.

So multinational Internet companies came to the leveling playing field with no advantages. There are few advantages that support them to win. They have to fight at basically the same starting point as local players: In eBay’s case, build the platform, use marketing to attract their first batch of users, and build the critical mass of marketplace. There is little advantage. Period.

Swinging from Over-optimistic and Over-pessimistic  

Most of the multinational Internet companies swing from over-optimistic to over pessimistic and never swing back.

The fact is the new comers have little advantage, but the management of the companies do not think so. They start off with over-optimistic views. eBay wanted to conquer China in three months, and Google had very ambitious plan to do something big in China with a big fat launch. When they face competitions and drawbacks, they suddenly become over-pessimistic. eBay sold out their business after three years, and Yahoo! sold their China business. Google even went far enough to quit from China.

Internet companies are young and are not patient enough. Many consumer product companies invested 20 years in China making any profit. When Microsoft’s revenue from mainland China (1.2 billion people) bypass Hong Kong (6 million), they have been operating in the country for 10 years. Lack of patience is one of the key reason they failed. For a big market like China, if someone can really calm down, and spend time to build business from scratch up, the return is much more than a raid to market, and disappear.

What they need is neither of the two – they just need to be realistic.

Note: In my next article, I will share my suggestions for international Internet companies to win in China.

 

I am Back

It has been uneasy three years for me. The blog was affected by the unstable mood of myself, and was a honest, and solid reflection of who I am – good times, and more importantly, the bad times.

I am back to blog again. This is different from the previous back. It has been quite some time since I last blogged – that is exactly 4 months ago. It was quite dramatic in the last four months, and I experienced things. This time, it was a calm back, and I don’t think I can easily defeated, or went down. The confidence was rebuilt, and I am sure this new version of myself is better, more confident, and more lovely.

Blogging is dead, at least in statistic or media revolution terms. But life is not. Thoughts are not. I will shift with the new technology trends, and adapt that, and move on.

Thanks for everyone who has supported me, and trusted me. People see things. People experience things, and we grow.