Forbes: Why Google is Quitting China

Why Google Is Quitting China
by Rebecca Fannin
It's not censorship. The search giant just couldn't compete with Baidu.
It's easy to give up if you've already lost the battle. And Google is doing just that in China. Eric Schmidt's move to quit offering a censored Google.cn search engine to the Chinese market has been read by idealists as the right thing to do. But it is first a business decision.
Even though Google's market share climbed from 15% in mid-2006 to 31% today, the company had hoped for a bigger share by now. Kai-Fu Lee, Google China's former president, told me in 2006 that Google not only wanted to have a competitive product to Baidu's, the local search leader, but a superior product. This didn't happen: Baidu has only increased its market share, going from 47% in mid-2006 to 64% today. That's a big lead.
Baidu, started by China-born entrepreneur Robin Li in late 1999 just as Larry Page and Sergey Brin were cranking up Google in Silicon Valley, understands the local Chinese market better than Google's Mountain View team.
Google fumbled with an initially inferior Chinese search engine launched in 2000, while Baidu grabbed the lead in China--and kept it--with several innovative search features customized for local tastes. Baidu introduced community-oriented services that appealed to Chinese Internet users, including bulletin boards where leads on information could be exchanged--a service that Google China's former president Kai-Fu Lee dismissed as having nothing to do with search. Baidu also offered instant messaging, a hit with China's Netizens.
Plus, Baidu was first to the market with mobile search and information offered up in multimedia, including video clips. Baidu also set up a national network of advertising resellers in 200 Chinese cities to educate businesses about the power of online advertising--a step that Google did not take.
Baidu's search feature for music also proved highly popular. Google, realizing the potentially illegal nature of the free music downloads, opted to provide links to music stores instead. Baidu later began collaborating with music labels on authorized downloads.
One other key factor put Baidu in the lead: Its search technology was considered superior to Google's in the Mandarin language. Scrambling to catch up, in 2005 Google hired the experienced Lee as its president from Microsoft. Then in 2006 Google launched its first Chinese-language search engine run from China, Google.cn. With Lee at the helm, Google recruited dozens of top engineers and linguists to its Beijing headquarters to perfect search results on Google.cn. Working at the towering headquarters of Google China at Zhongguancun Software Park in northeastern Beijing, some 100 engineers wrote codes to deal with inputting Pinyin or Roman letters to signify Mandarin sounds and such intricate tasks as delineating words in Chinese characteristics that don't clearly define white spaces.
The efforts paid off with speedier and more precise search results as well as more reliable service. But no matter the global brand name, the maximized effort and the financial resources, Google's Chinese search engine couldn't trump Baidu.
Perhaps Google should have turned over its business to local rival Baidu and let Baidu run with it. There is a precedent. Back in 2005 Jerry Yang turned over the management reins for Yahoo! in China to Jack Ma, the charismatic leader of China's e-commerce powerhouse Alibaba. Yang knew that Ma, thinking local, acting local, would have a better shot at getting the right formula for China.
Granted this is still a work in progress as Yahoo! refines its features for the Chinese market. But as Zeng Ming, former president of Yahoo! China, told me, "The net is about culture. You can't have expats running it."
Indeed, why give up now--unless you realize there's no way you're ever going to win the race. After all, Page and Brin had already crossed the line back in 2006 by agreeing to have their new Google.cn, run from China, subject to censorship. They didn't have much choice. All companies doing business in China follow the same Chinese government rules. Yes, Baidu's search results are also censored.
It wasn't all that long ago--2004--that it looked like Google might use Baidu as its entry route. Google invested $5 million in Baidu for a 2.6% stake but shifted strategy in mid-2006 by selling those shares for more than $60 million and rolling out Google.cn the same year. In hindsight, and given its bumpy history in China and this latest jockeying with the Chinese government, maybe Google should have pursued the go-with-Baidu strategy.
If Google exits the $300 million Chinese search market now, it's giving Baidu runway to be a monopoly. And if that happens, Baidu has a shot at becoming the world's dominant search company (it's already entered Japan) by sheer arithmetic alone.
By serving China's nearly 300 million Internet users and 670 million mobile phone users--both the world's largest markets--Baidu may someday be bigger than Google globally, something Robin Li once told me he has no doubts will happen.

Rebecca A. Fannin is an internationally recognized author and journalist who has been writing about entrepreneurship and innovation for nearly 20 years. Her book, Silicon Dragon, was published by McGraw-Hill in 2008 and translated into several languages. During the height of the dot-com boom from 1999-2001, she was international news editor at Red Herring, later joining the Asian Venture Capital Journal as international editor and writing for several leading business publications, including Inc., The Deal, Worth, CEO and Fast Company. She also authored "A New Dawn" for KPMG in 2009. Fannin has lectured at several universities in Asia and the U.S., and has made numerous public speaking appearances worldwide.
See Also:
Google's China Blues
Google Takes on China
Baidu Rises on Google News

Sillicon Dragon: Google's China Blues

Commentary: Google's China Blues
Rebecca Fannin, 12.21.09, 06:00 PM EST
Will the search giant shutter its local operations in China?
Rumors have been flying about Google's future in China ever since the company's China head, Kai-Fu Lee, resigned in early September to start an incubator lab in Beijing. His departure seemed awfully abrupt.
Lee scurried to set up an office for his incubator, raise a fund and assemble a team from thousands of job seekers. Lee's PR reps in China and the Valley hyped his new project as his fulfillment of a dream to coach young Chinese entrepreneurs and support their best start-up ideas.
My venture investing sources in Beijing and Shanghai suspected then that there was more to Lee's departure than was being told. Maybe Larry Page and Sergey Brin want to exit China and Lee knew this, my sources speculated. Certainly, the rush to the exit door by Google staff in Beijing since September suggests that.
Indeed, Google has been trying to become the top search engine in China for nearly a decade, without success. Google hasn't said it is shuttering its local operations in China, but the company plans to power its Chinese search business from its Mountain View, Calif., headquarters.
Why did the mighty Google fail in China? For years, the company fumbled with inferior search results and unreliable service, not to mention censorship issues and that annoying upstart Baidu, which raced ahead with innovative technology that had a search algorithm for generating results that were more relevant in Mandarin.
To compete with Baidu head on, Google set up business on Chinese soil, recruited former Microsoft exec Lee, and began to gain traction. Lee hired more than 100 Beijing-based engineers and linguists. The effort moved the needle on Google's market share to 31% in 2009 from 21% in 2007.
But Baidu couldn't be crippled. The Chinese search company widened its market dominance of Chinese search to 64% from 58%. Not only was Baidu considered superior to Google for Chinese search, the team led by founder and CEO Robin Li proved nimble and innovative at introducing new popular features.
For example, Baidu began offering mobile search in China in 2006. It took Google nearly a year to catch up. Baidu also was first to use social media for conducing searches. It beat Google to the market with video clips too.
It shouldn't be all that surprising to see a big American brand being one-upped by a local competitor. Indeed, the story of a home-grown Chinese start-up triumphing over an iconic Internet rival is by now a familiar theme.
Just like Chinese search engine Baidu trumped Google, online bookseller Dangdang outsmarted Amazon in China with better merchandising skills while Alibaba-owned Chinese auction site Taobao took the lead from eBay by giving sellers a free listing of their goods and charging only for premium accounts.
In all three cases, astute local managers who were attuned to the culture and able to gauge consumers' buying and surfing habits on the Web were able to grab first place.
What helped was being on site to respond to China's fast-moving marketplace rather than in a faraway office on the other side of the Pacific.
But Google had the formidable Lee in China building a strong team. Still, the company's efforts proved too little too late to grab market share from Baidu.
Who could really blame Google for shifting gears? The censorship of the Internet in China has been a big enough headache for Google, let alone competing with Baidu. It was tough for top management to agree to Chinese government censorship in order to do business in China. Moreover, Google's standard, English-language Google.com site has continually faced blockages and search directs to other sites.
Google faces major challenges in China that are not going to disappear anytime soon. Stay tuned for the next chapter on Google's saga in China. I wouldn't be shocked to see Google retreat from China.
Rebecca A. Fannin is an internationally recognized author and journalist who has been writing about entrepreneurship and innovation for nearly 20 years. Her book, Silicon Dragon, was published by McGraw-Hill in 2008 and translated into several languages. During the height of the dot-com boom from 1999-2001, she was international news editor at Red Herring, later joining the Asian Venture Capital Journal as international editor and writing for several leading business publications, including Inc., The Deal, Worth, CEO and Fast Company. She also authored "A New Dawn" for KPMG in 2009. Fannin has lectured at several universities in Asia and the U.S., and has made numerous public speaking appearances worldwide.
See Also:
The Man Who's Beating Google
Google China Will Lose Head, Gain Bodies
Why China Will Win The Web

Silicon Valley Takes Off its Blinders

It’s taken a long time, but Silicon Valley has finally taken off its blinders and recognized that there are other tech clusters out there. Today, nearly every venture capital firm along the famed Sand Hill Road is in China, India – or both. Bring up the topic of Asia tech today in the Valley, and it’s no longer an instant conversation stopper.
It’s with good reason that Valley investors are no longer in denial. Chinese and Indian startups offer venture investors an opportunity to cash in big. Over the past four years, 14 Chinese tech startups have gone public with market valuations of more than $1 billion on the NYSE, NASDAQ and the Hong Kong Stock Exchange. That compares with 11 tech startups in the same league from the U.S. India, meanwhile, is coming up fast, with recent bull runs and acquisitions of its Internet and mobile communications startups.
Venture capitalists may be optimists but they look at hard numbers to gauge where to place bets. An analysis recently shared with me by a top-tier venture firm made this telling point: it takes 12 times more dollars and five times more deals to generate the same investment returns from U.S. startups as it does with China startups.
Talk of Asia tech is no longer a turn-off in the Valley for another key reason – China and other Asian upstart nations are emerging as innovation powerhouses. Consider that China moved to 6th in the world in 2008 – up from 10th place just three years ago -- for the number of new patents applications, with a Chinese company, Huawei Technologies, in the lead spot last year among all corporations globally. Moreover, India too is in the running, and already ranks third among developing countries on the patent scale.
So it’s little wonder that these two giant Asian economies also capture the bulk of venture capital investment in Asia. In fact, China weighed in with 41 percent of the $23 billion that venture capitalists invested in the region last year, while India captured 38 percent.
Now I’m not saying that Asia has a lock on future innovation. Far from it. In fact, the U.S. still reigns as the biggest patent force in the world – with about one-third of all new patent applications. And the U.S. remains the biggest venture investment market globally, too – with nearly $29 billion invested in startups businesses in 2008.
But as innovation goes global, the U.S. lead is being chipped away. Suddenly, the talk is about whether Silicon Valley still has “legs.” Sure it does, but America’s share of global investment has slipped to 68 percent of $42 billion in 2008, from 71 percent in 2005.
The venture capital business in the U.S. now faces a low point. Investment returns have dropped by 58 percent, as few startups go public or get acquired in the tough economy. Venture firms are downsizing, and the industry is in meltdown as fewer players can raise new funds – with their own investment backers such as the giant pension funds struggling with massive declines in net assets.
The silver lining of this downturn is that it’s a good to invest. Microsoft and Apple came out of the mid-1970s recession, and major new tech brands will emerge from this bleak period too. Just don’t be too surprised to see some of tomorrow’s new brands developing from China and India.
China and India already have passed the copycat stage – where Chinese and Indian versions of eBay, Google, Monster, Yahoo, Amazon, Travelocity, Facebook and MySpace were launched. China’s trading site Alibaba and the $3,000-priced Tata Nano car are but two examples of Asian brands that have global impact. Now, investors from Silicon Valley are looking not just to the U.S. tech hotspots but also China and India to generate the next double-digit investment returns – from clean tech and biotech to new types of ‘killer aps’ on mobile phones.
The stakes are high. Just consider this one fact alone: superstar startups Microsoft, Apple, Google and Starbucks created 10 million jobs for the U.S. economy. Today, technology from China and India is an engine of their own nation’s growth – one more indication of a shift in economic power to the east. – Rebecca A. Fannin

Silicon Dragon has fun in Beijing

Ok, I admit to having a little fun during my recent trip to Beijing. For one thing, I had a chance to stay at the new Park Hyatt and check out the gym, the high-tech toilets (yes!), and even attend the opening of the hotel's spectacular new rooftop bar, Xiu. There I heard a Canadian band performing western rock tunes, in China. See photos. I wondered why the Hyatt didn't hire locally, but then again the band was superb and they'll be there for another few months.
What did I like about the hotel? The wrap-around, picture windows that offered a 360 degree view of Beijing--and on a long holiday weekend, when the air was exceptionally clear. I saw the mountains that ring Beijing! Stunning. I also liked having breakfast on level 66--that's the top floor of the Hyatt. The reception, by the way, is on the 63rd floor.
What is also great about the Park Hyatt is its location. It's at the intersection of two main thoroughfares in Beijing--the East Third Ring Road and Chang'an Avenue.
This is the most popular business meeting area in town, with convenient access to the airport from the newly opened Subway line 10. Several of the people I wanted to interview came to meet ME at the Park Hyatt, and we sat in the lounge chairs, chatting on the 63rd floor, undisturbed. I even did some video interviews there with Silicon Dragon subjects. I'm used to doing all the treks to their offices, so this was a pleasant change and could spoil me for future visits.
What I didn't like about the Park Hyatt is the elevators, or lifts. To get to my hotel room on the 46th floor, I had to take one bank of elevators to reception, round the corner and take another elevator down to reach my floor. Going to the main gym and spa requires similar maneuvers. Anyhow, it's not a big deal, but IS a time waster.
The rooms are light and airy with several special touches like the rain showerhead and the deep soaking tub, as it's called. I particularly liked the walk-in dressing room, the mood lighting and the electronically operated blinds--fully open! Everything with high-tech worked well in the room--flat-screen TV, high-speed Internet connections, DVD. I bring this up because usually there is a problem figuring out how everything works (or doesn't), even in a five-star luxury hotel.
Business guests who really want to wow a would-be client might consider inviting them to a meal in one of the level 5 private dining "suites"--some with their own terrace. Here, guests can select from traditional Cantonese cuisine, and be catered to by their very own butler. Talk about being spoiled!
Lest you think that's the only fun I had, I did venture out one summery night to have dinner at a new restaurant, aptly named The Meat and Wine Co. My taxi driver had some trouble finding the address, Ch'ien Men 23. Understandable, because it's the former site of the stately U.S. Embassy compound transformed into a restaurant and bar complex. Memorable tasting times: the New Zealand pinot noir and the extra-tender steak I just couldn't resist ordering.

China outsourcing interviews

Few things are more fun for me than doing interviews in China with the new capitalistic group of business leaders. I love being "in the field," and out of the office, doing my journalistic work. Here are some photos taken during my interviews with the CEOs of China's leading outsourcing companies.


Dr. Liu Jiren, founder of Neusoft, China's leading outsourcing company. We met in the lobby of the China World Hotel in Beijing. What was remarkable is that he arrived solo, and left solo, with no PR handlers. This would not happen in the U.S.
Ben Wang, co-founder and CEO of Beyondsoft, one of the many "softs" in China's outsourcing universe. Beyondsoft does work for Microsoft.
Chris Chen, founder of NASDAQ-listed company Worksoft, with his translator. He spoke English well, though and didn't really need a translator. We met at the Beijing Airport. He was flying to Shanghai. I had just arrived in Shanghai. We met in a cafe at the airport.

China outsourcing

Some of my handiwork can be spotted in KPMG's recently released thought leadership report on China outsourcing. See "A New Dawn" in the Information, Communications and Entertainment section of the KPMG virtual library:
www.kpmg.com.cn
The report includes seven case studies based on interviews with CEOs of the leading Chinese outsourcing companies, including Neusoft chairman Dr. Liu Jiren (shown here with yours truly). Much of the research was done at site visits in Beijing, Shanghai and Hangzhou, where there was an opportunity to tour software parks and meet with government officials. There was even a dinner banquet with the deputy mayor of Hangzhou (see photo). Hangzhou is eager to attract more outsourcing companies to come join e-commerce leader Alibaba here.
What was interesting to me in doing the report was the close parallels I found between the rise of China outsourcing and the growth of "Silicon Dragon". These factors all point to China's push from "made in China" to "invented in China."
You only need look at the statistics to see a clear trend line in China's move from a manufacturing economy to a service economy. China has the fastest growth in the world in new patents applications, public offerings and venture capital investments. It also has the world's largest number of mobile phone users, Internet users and engineers.
If the trends continue, I have little doubt that someday China will have an outsourcing company that rivals Indian giants Infosys or Wipro. Certainly, there is a case to be made that China sourcing is "on the ascendancy," as Edge Zarella (pictured with deputy mayor Tong Guili), KPMG's IT "rock star," likes to say.