Yahoo! China, Out of the Game?

The search engine's mainland arm has tried management changes, outsourcing, and local tie-ups. Nothing seems to work

by Bruce Einhorn

If there was any U.S. Internet company that should have had an advantage establishing itself in China, it was Yahoo! (YHOO). For one thing, the company's co-founder, Jerry Yang, has the advantage of being an ethnic Chinese. Yang was born in Taiwan, where his father had moved from the mainland in 1968.

As a driving force behind one of the world's premier Internet companies, Yang has a huge number of fans in China. "Because of his ethnicity, he is seen as a local hero," says Duncan Clark, managing director of Beijing-based consulting firm BDA China.

Yet when it comes to Yahoo! China, the accomplishments are anything but heroic. The latest in a series of setbacks came this week. On Nov. 27, the company released a statement saying that Yahoo! China President Xie Wen had left "for personal reasons," only 42 days after he had joined the company.

Differing Visions

In what seems to have been a hastily written press statement cluttered with grammatical errors, Alibaba.com CEO Jack Ma said that Xie had resigned "for personal reason [sic]." (Alibaba controls Yahoo! China and is 40% owned by Yahoo!) Added Ma, "Even though he worked for Yahoo! China for a short time, Xie Wen's insights into China's Internet industry and his honest character has [sic] left a deep impression on our team."

What's behind Xie's sudden departure? Yahoo! China would not comment beyond a terse press statement. But many people who follow the industry believe that Xie left because he and Yang couldn't see eye to eye about Yahoo! China's future. Xie had proposed a change in focus for Yahoo! China, which has been struggling in the Chinese search market and is not a leader among the portals either.

Xie wanted to try a Web 2.0 strategy, addressing the exploding demand for user-generated content. Yang wanted to stick to the company's portal model and, unimpressed by Xie's strategy, forced him out.

Local Ties No Answer

Unfortunately for Yahoo!, this is just the latest in a series of problems that it has endured in its attempt to establish itself as a significant Internet player in China. "It's [been] a bunch of headaches," says Clark with BDA China. "They seem to have put their foot wrong on a number of occasions."

The first misstep came at the very beginning, back in 1999. Yahoo! was one of the first U.S. Internet companies to move into China, but Beijing was skittish about the Internet and especially wary about foreign involvement. To compensate, the company cultivated local ties by forming a strategic partnership with PC maker Beijing Founder Electronics. But that didn't provide much of a boost for Yahoo!

Moreover, the company was already a latecomer to the scene. Local portals Sina.com (SINA), Sohu.com (SOHU) and Netease.com (NTSE) had already won the loyalty of Chinese Net users. All three had successful initial public offerings in 2000 that helped provide them with enough cash to survive the crash of the dot-com bubble.

Taking It to Court

By 2003, those three were thriving while Yahoo! China was still going nowhere. So the company changed directions and purchased a popular local search company, 3721.com, for $120 million. As part of the deal, 3721 founder Zhou Hongyi became general manager of Yahoo! China. But Zhou had major disagreements with headquarters about the direction to take Yahoo! China and he left in mid-2005.

Zhou, who now runs a search startup called Qihoo.com, and Yahoo! China are now fighting in court. Zhou filed a lawsuit in August claiming that his former employer had defamed him with comments alleging that he had tried to undermine the company. Yahoo!