Google: Still Trying to Click in China

Despite an off-key name, censorship issues, and strong local rivals, the U.S. search giant remains confident it can be No. 1 on the mainland

by Bruce Einhorn

Kai-Fu Lee was last in the spotlight a year ago, rejoicing outside a courthouse in Seattle after winning his freedom from Bill Gates and Steve Ballmer. Lee was a longtime Microsoft (MSFT) vice-president and expert on speech-recognition technology, who abruptly resigned in mid-2005 and joined the company's most powerful rival, Google (GOOG). Although Microsoft argued that a non-compete agreement meant that Lee couldn't go to Beijing for Google, a judge in September, 2005, disagreed.

As my colleague Jay Greene wrote in a BusinessWeek cover story a few weeks later, "When court adjourned, Lee smiled broadly and threw both arms in the air. 'I feel great,' he said. 'I can't wait to start work tomorrow morning.'"

Today Lee is in Beijing, busy recruiting Chinese engineers and building a Chinese operation for Google that could rival that of his former employer. Yet in China, Google is in the unfamiliar position of being the also-ran, lagging far behind local champion Baidu.com (BIDU).

A Step Backward

Lee insists that he's not too concerned—and he confidently declares that it's only a matter of time before Google grabs the top spot. "We don't really obsess ourselves with the competition, but we certainly think a lot about our core strengths," he said. And what makes Google so strong? "We just have better search," Lee says.

Up to now, though, not many Chinese have agreed. Baidu has over half of the Chinese search market. A recent survey by the China Internet Marketing Information Center put the Chinese company's market share at 62%, compared to just 25% for Google China. Worse, Google has actually gone backward this year, losing 8% of its market share.

And the market is only getting more crowded, with local companies such as Alibaba, Tencent, Netease (NTSE), and Sohu (SOHU) all planning to launch new search initiatives to compete with Baidu and Google. "I believe that 2007 will be a watershed year," says Richard Ji, an analyst with Morgan Stanley in Hong Kong. "There will be a search war on a scale that we have never seen before."

Baidu Problems

Still, Lee says that whatever problems Google China has are nothing that the cash-rich company's money and engineers can't solve. Google has struggled, he argues, because the Chinese-language search was developed by just five Google programmers, working back in Mountain View. Now the company has over 100 engineers in Beijing working on developing something that better suits the needs of local users. "Any imperfections that we may have had because of lack of resources are going to get fixed," Lee vows.

Baidu isn't home free either. It is facing a legal challenge in China over allegations of click fraud (see BusinessWeek.com, 9/22/06, "Click Trickery Claims Land Baidu in Court").

And the Chinese search company's shares took a thrashing after it announced stellar third quarter results, but offered lower-than-expected guidance for the last three months of 2006 (see BusinessWeek.com, 10/31/06, "Baidu.com 3Q Profit Up Ten-Fold").

Goodbye, Dalai

Baidu said that it earned $10.8 million, an increase of over 900%, on sales of $30.3 million, up 169%. However, Baidu also said that it expects fourth quarter revenues of $33 million to $34 million, compared to the $35 million that most analysts expected.

Even so, there's no denying that Google China has had a rough year.