Managing China From Silicon Valley Doesn't Work

Like Google, U.S. Internet Firms Like Yahoo, EBay and Microsoft Have Struggled to Master the Market

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HONG KONG ( -- Google is making headlines worldwide for taking on China's censorship policies, but the search giant isn't the only U.S. internet company that has failed to take a leadership position in China.

Market shares for search, instant messenger and online auctions experienced high volatility in recent years, with local players such as Baidu, Tencent and Shanda rising to the top.

"Once known for a copy-to-China business model, the speed and innovation of China's local players have reshaped the market, said T.R. Harrington, co-founder and CEO of Darwin Marketing, an online search marketing specialist based in Shanghai.

In August 2009, only one of the top 10 websites in China, ranked by the number of unique visitors to each site, was not run by a local company. Google's Chinese site,, was ranked sixth.

The other nine sites, according to eMarketer, were Tencent's (No. 1), followed by,,, Netease's, Alibaba's,, and

"There has been a complete turnover of the Chinese internet market space with local Chinese brands clearly the victors of the last few years' online marketing battles," Mr Harrington said.

Centralized U.S. operations
Why have American internet companies such as Google, eBay and Yahoo failed to dominate China's online market and pulled out of the market?

The retreat is partly explained by unfair competitive practices. Foreign and local companies haven't operated on the same level-playing field.

But Western companies compounded the locals' advantage by keeping control of their businesses in Silicon Valley.

By and large, decision-making in China by U.S. internet giants "was still running through headquarters back in California that largely thought about things from a global perspective," Mr. Harrington said.

"When the core of your business is operating in mature markets with similar user habits, this strategy can work. However, applying this strategy to a rapidly developing, dynamic market with vastly different online behaviors spells disaster, a sixth-place finish and a quick market exit," he said.

Too much was happening too quickly at a local level in China for executives in the U.S. to handle. Decisions took too long and in many cases were not reflective of the local market in China, Mr. Harrington said.

"Rather than developing trust in their local China teammates to make local context-based and market-facing decisions, U.S. teams dominated strategy from afar and were outmaneuvered by some very strong and talented Chinese competitors."

EBay lost market share to Taobao
The trend started in late 2006, when eBay decided to replace its Chinese auction site with a joint venture operated by Tom Online. EBay effectively gave up on China's e-commerce market with that move, even though it had a hefty head start and the assistance of a local partner.

Alibaba didn't set up Taobao until 2003, a year after eBay acquired a stake in Eachnet, China's then-leading online trading community. Eachnet was founded in Shanghai in August 1999 by two U.S.-educated Chinese entrepreneurs, Bo Shao and Haiyin Tan.

When the Eachnet deal was announced in March 2002, eBay bragged that the pact would provide a "foothold in one of the world's fastest growing internet markets."

But Ebay never achieved more than a foothold in China.

"Taobao was a relative latecomer to the market," Thomas Crampton, Ogilvy PR's Hong Kong-based director of 360 digital influence, Asia/Pacific, said in a recent blog post, "yet succeeded in rapidly taking on, and humiliating, eBay in this market by adopting a 'free of charge' strategy to compete with Eachnet's listing fee model."

Alibaba opposes Yahoo's support for Google
In August 2005, Yahoo merged its China operation with Alibaba in a $40 million deal that gave Yahoo a 40% stake in the Chinese e-commerce company, while giving Alibaba control of Yahoo's China site.

"Alibaba runs everything at Yahoo China. We only have an investment in the operation," Rose Tsou, Yahoo's Taipei-based managing director, Asia told Ad Age last November. "China is very difficult for foreign companies in the internet space. We're better off letting Alibaba handle mainland China for us."

The relationship between Yahoo and Alibaba soured last weekend, however. The Chinese company issued a statement through John Spelich, Alibaba Group's VP-international corporate affairs, criticizing Yahoo for publicly backing Google in the dispute over government censorship in China. The statement called Yahoo's support "reckless."

"Alibaba doesn't share this view," Mr. Spelich said. "While we oppose cyber attacks, we also feel it is premature to point fingers without definitive evidence."

Microsoft hopes to grow MSN and Bing
Microsoft Corp. is also still searching for ways to expand in China. Its operating software is commonly used in China, and deals with PC-makers such as Lenovo Group have helped control piracy. But other services have been slower to take off. Microsoft's MSN instant messaging service, like Google's search site, is popular with affluent, urban white-collar workers but the market is overwhelmingly dominated by

Microsoft launched the Chinese version of its Bing search engine last year, but like, it lags far behind Baidu.

Compared to local rivals, American online companies are down in China right now, but that could change quickly.

For U.S. companies to return to being "feared" online competitors, Mr. Harrington said, they will have to learn to adjust their strategies according to rules of the game and the market demand.

With just a quarter of China's 1.3 billion population online, and new online business models emerging, both from China and around the world, "there's still time for a comeback," he said.

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