China Cursed Foreign Internet Giants

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Though the global first deal-of-the-day website Groupon met unprecedented success in the United States, its joint venture in china Gaopeng never had the luck like in the U.S.

Truth to be told, Gaopeng, or Groupon, is not the only foreign internet company having completely different fates in and outside China. eBay was driven out from China in 2006 by the Chinese local C2C website Taobao, which was founded in 2003 and took 53% of the market share within less than two years.

The instant communication software Windows Messenger developed by Microsoft never got the upper hand in the competition with Tecent’s QQ, which took 70% of the market by launching services tailored for local demands and a multi-level membership charging system. America Online also tried to get into the Chinese market twice but was forced out very soon.

Why foreign Internet companies cannot make use of their advantages and enjoy good development like their peers do in the fields of automobile and fast consumer goods.

The Useless Core Advantage

“Foreign companies in traditional industries like automobile and fast consumer goods usually have advantages in capital, core technologies and talents management team,” said Xu Jin, director of the consulting company Booz & Co. In his opinion, foreign Internet companies usually do not have obvious advantages in these fields compared with Chinese domestic companies.

Firstly, venture capital and private equity usually help the development of Chinese domes- tic Internet companies and even spent a huge amount of money in taking a bigger market share. In comparison, foreign Internet companies do not invest too much in the initial phase after getting into China. Secondly, foreign Internet companies usually begin to consider expanding when their business pattern is matured in China, but at that time Chinese local companies have already copied and adjusted their pattern to the local market, with which they take the major market share. What’s worse is that the business pattern has no intellectual property that is to be protected and there are no secrets in the website technology. Thirdly, local domestic Internet companies have a better prospect in going public and their stock option incentives have a higher appeal for innovative and capable talents than foreign companies.

In addition, the Chinese companies have the support of capital from venture capital firms and thus are able to adopt daring and progressive development strategies. In comparison, foreign companies are very cautious in investment. Take the emerging 360Buy for example: this company stood out of the others by investing a huge amount of capital building the first-class information system and large-sized logistics infrastructure.

Another difference between the traditional foreign companies and emerging Chinese companies, according to Eguan Consulting Company’s analyst Chen Shousong, is the Chinese companies’great sensitivity towards the need of local customers, based on which they can develop products that could survive and thrive in the Internet world featured with fast development pace and short living period of products. In comparison, multinationals usually make and carry out global strate- gies, which brought a high communication cost.

“The more important reason is the positioning of Chinese market,” said Chen Jiangong, a fellow from the China Internet Information Institute. “Is China an independent market or a regional market?” He put forward this question. In his opinion, China, where 500 million or one quarter of the global netizens are inhibited, has already witnessed the establishment of Tecent, Baidu, Alibaba and other world-class Internet companies. It is better for foreign companies to position China as an independent market. “I think they could follow the pattern of KFC, who

claimed that ‘our future is with China’.”

End the Curse of Failure

Many foreign Internet companies are considering how to end their “curse” in the Chinese market. Acquisition and cooperation are the common patterns adopted by companies for entering unfamiliar markets. However, Amazon acquired the Chinese second largest e-retailer Joy in 2004, but now it is still wrestling with local competitor Dangdang without achieving the dominant place in China like in other countries.

Another example is Expedia, which acquired online travel agent Yilong in 2004. But it previously appointed foreign executives who changed the management pattern in China in accordance with the international business. The change caused great difficulties, which were not overcome until Cui Guangfu took the presidency of Yilong in 2007. Even though Cui Guangfu took measures to push Yilong back to the trail of growth, it is barely a threat with its 7% market share for C-trip, a Chinese company taking 40% of the online tourism market.

The acquisition did not work very well, which should be attributed to the loss of creative local talents after the acquisitions. Xu Jin said: “Now the overseas enterprises are tending to cooperate with, instead of acquiring Chinese companies.” In 2010, Hong Kong-based Internet company founded an online shopping company named Ule with China Post, hoping to combine the technological expertise and existing online clients of Tom with China Post’s advantages in storage, delivery and payment.

To guide the foreign Internet companies through the maze in China, the key is that different strategies should be taken at different times, Xu Jin said. “For example, the angel fund could be used during the initial time to raise capital. When the development is going on, stock and technology transfer are good methods to consolidate foreign companies’ foothold in China. Later, acquisitions could be taken to increase their presence when they are in a stable development phase. They can also get to know the Chinese market and accumulate the Chinese consumers via other low-cost methods,” said Xu Jin. “Certainly, if foreign companies want continuous success in China, flexible management methods are necessary at times.”

In Chen Jiangong’s opinion, foreign Internet companies should consider them as not only managers, but also investors in China.