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.