For Google (GOOG) to build its business in China, it has to go after users like Ye Ling. The 32-year-old native of China's Sichuan province has an MBA from Oxford and is the CEO of an Internet startup called WangYou Media. The company focuses on video clips and social networking, a sort of combination of YouTube and MySpace (NWS).
He's just the sort of savvy, Western-educated Chinese who is a natural for Google. And sure enough, when it comes to online searching in Chinese, Ye—who worked for years at Accenture after business school and who likes to go by his nickname, Buddy—is a Google fan, preferring it over its main Chinese rival, Baidu.com (BIDU).
But even a Google loyalist like Ye admires the aggressive way that Baidu.com is competing against the U.S. giant. Its marketing team "is doing some fantastic job in this country to promote their service," says Ye. For example, he points to the way Baidu has put its logo on the screens of automatic teller machines.
SMALL SHARE. "When I take cash from the bank ATM, I can see Baidu's information on the top of the screen. You can never ignore that message, because you must keep your eye focused," says Ye. "You are 100% focused on the screen, and that screen begins with Baidu and ends with Baidu."
Thanks to that sort of aggressive marketing Baidu remains far and away the No. 1 search company in China. Google, a latecomer to the Chinese market, has made a big push in the country this year, but so far it hasn't made a dent in Baidu's lead. According to Beijing-based research firm Analysys Intl., Baidu has 44% market share, compared to just 13% for Google. Yahoo China—owned by Chinese e-commerce company Alibaba, in which Yahoo! (YHOO) owns a 40% share—is No. 2, with 21%.
Now comes news that the competition for the Chinese search market is likely to get even tougher. Google has owned a small share in Baidu since purchasing 2.6% of the Chinese company before Baidu's Nasdaq initial public offering in August last year. And some thought that Google's position was a first step in an eventual acquisition. The rivalry between the two companies has only increased, though. On June 20, Google seemed to put to rest any possibility of a deal by registering to sell its Baidu stake within the next 90 days.
STILL GROWING. Being an also-ran in China may be a blow to the egos of founders Sergy Brin and Larry Page, but it's not going to have much impact on Google's fortunes in the short term. The Chinese search market is still very small, with total revenue last year of about $140 million, says Richard Ji, an analyst with Morgan Stanley (MS) in Hong Kong.
"Last year, Google generated 25 times more revenue than the entire Chinese paid-search industry," he says. Still, with more than 110 million people using the Internet, China has more people online than any country except the U.S. And the industry is growing. Ji expects compound annual growth rate of 50% over the next three years.
So does China matter? Sure. And in a country where the government is still leery of the Internet and the ability of citizens to access taboo information online, the two rivals have taken very different approaches regarding censorship.
GOVERNMENT INTERFERENCE. Google received heaps of criticism in the U.S. early this year following its decision to place its servers in China and launch a Chinese-language service that censored some results on hot-button subjects like Taiwan, Tibet, and the Tiananmen uprising. Google then antagonized Chinese officials by announcing that its Chinese search engine would notify users about that censorship when it occurred (see BusinessWeek.com, 1/23/06, "The Great Firewall of China").
The problems aren't going away. In early June, Google's Chinese site was blocked in several major Chinese cities, says Liu Bin, an analyst with BDA China, a Beijing-based research firm, because the government wasn't satisfied with the way Google was censoring search results.
On June 7, Google co-founder Brin told reporters in Washington that Google may have erred by being too willing to go along with China's content rules. "We felt that perhaps we could compromise our principles but provide ultimately more information for the Chinese and be a more effective service and perhaps make more of a difference," he said. "Perhaps now the principled approach makes more sense."
NEW PARTNERS. Baidu doesn't have such problems. While other Chinese-based search engines have also suffered interruptions recently, Baidu hasn't been affected by crackdowns. "Baidu works with the government more closely than other search companies," says Liu. "They launch a more aggressive system to censor their key words. They started to censor their search service earlier and more extensively than others. That's why the government likes Baidu."
Other Western companies like Baidu too. This spring, IBM (IBM), Intel (INTC), and Nokia (NOK) all formed partnerships with the Chinese company to develop new search services. (Baidu would not comment for this story.) Baidu also has an edge over Google, thanks to the extensive sales network that Baidu has built throughout China.
GETTING AGGRESSIVE. "In China, small and midsized enterprises don't know much about the Internet," explains Ray Rao, a researcher with Analysys Intl. "They need someone to call out to them and tell them what the Internet is and what Internet marketing is." With more than 1,000 such sales partners, Baidu has a big edge over Google, which has just a handful, he points out.
That situation may not last much longer, though. Google is going to be more aggressive in China. Last year it hired away a top executive from Microsoft (MSFT), Kai-Fu Lee, to run its China operation, after winning an ugly legal battle for the right to employ him in China. Since starting at Google in September, Lee has been busy building up its business in the Middle Kingdom. The sale of the stake in Baidu is just the latest sign that Google is fighting to become No. 1 in the world's most populous country.
Einhorn covers Chinese technology for BusinessWeek in Hong Kong
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