Baidu’s Problems: The Other Side of the Equation

December 4th, 2008

Lately, there has been much discussion about Baidu’s problems re the disclosure that they were accepting payments from makers of less than consumer-friendly products for higher rankings. David Wolf has an excellent posting about how Baidu has hurt itself in the public relations battle, with some significant assistance from CCTV and Google. According to David, Google China has positioned itself to benefit from some advertisers who eschew Baidu’s former position of accepting money for high positioning, without taking a second look at some of those companies which paid for those high rankings.

On one level, Baidu is a victim of its own success. Search engines are really mapmakers: they show what’s in the neighborhood. In its early days, before Baidu became pervasive, it may have been alright to take money for businesses to show up on the map without caring too much about the reputation of the business. After all, search was a comparatively new thing, and Baidu, not yet public, wanted to grow as fast as possible, both in terms of its indexes and database, and in financial terms. But now, everyone knows what a search engine does and expects it to basically tell the truth. And if it doesn’t, they are shocked and outraged. (Whether this is real or feigned shock and outrage is another story. We’ll get into that later.) Unfortunately, Baidu’s management failed to take into account their own success, and failed to make the transition to a more open, fair, ethical and transparent model before it became a full-blown shitstorm. Making the change would have hurt the company’s earnings, something Wall St. analysts would not have taken to kindly, so they were stuck. Instead of acting proactively, they took the other path, which was waiting for something to happen to them.

And it happened.

So does this mean the beginning of the end of Baidu’s erosion as search engine market leader in China? Actually, it’s not that simple.

Ultimately, it depends on Robin Li, Baidu’s CEO, and how he chooses to handle Baidu’s salesforce, who have aggressively brought in the bacon so that Baidu would look good for its investors and Wall St. The big question for Robin Li is: “How can he rein in his salesforce just when he needs them the most?” The Baidu salesforce is the main differentiator for Baidu; it has been able to sell keywords to China’s SMEs, getting it far greater penetration than Google in the Chinese tier 2 and 3 cities and in the countryside. Can you imagine Robin calling in his salesforce and telling them to do business and background checks on customers? That would be a very good way to get your salesforce to rebel in a split-second! Can he afford such a rebellion just when global economies and markets are tanking and Chinese are cutting back on spending, and when Baidu is expanding aggressively into e-commerce and other fields?

I don’t think so.

But then, it’s a stalemate for Baidu’s salesforce too. It’s not like they can up and leave and go to Google China, taking their clients with them. Sure, Google China likes the sales numbers they generate, but they cannot accept their sales practices.

Checkmate.

That is why the only thing Baidu can do is stay quiet, and hope the crisis is soon forgotten by its SME customers, and the wider audience, and can get back to business as usual. Of course, Baidu’s challengers will do their best to keep the issue in the public spotlight as long as possible. That is what the public relations battle which is now shaping up will be all about.

Baidu’s strategy of hoping that the issue will be soon forgotten is not a good strategy, but it’s the only strategy left in the eyes of their current management. But a strategy based on hope is not really a strategy, especially when you are under attack.

It’s time for a change.

If Chinese companies were more like most publicly listed US companies, somebody would step forward and take the knife, setting the stage for widespread change in direction and a whole new team. (Except if you are one of the Big Three from Detroit or a Wall Street banker. But, for the most part, those industries are exceptions and their gravy days are over.)

And that is why Chinese companies cannot make dramatic change, just when they need it the most. And, in short, that is why Chinese companies will not become global leaders.

Why China Is Really Annoyed At US Policies

June 19th, 2008

This is pretty self-explanatory.

Investors who bought notes due February 2018 on March 17, just after the Fed helped arrange the bailout of Bear Stearns Cos., have lost 6.2 percent, according to Bloomberg data.

The 10-year note, at 4.25 percent, yields no more than the inflation rate, leaving investors with real returns near zero. Consumer prices have exceeded 10-year yields by an average of 36 basis points since December, Bloomberg data show. In 1980, inflation reached a 33-year high of 14.8 percent and yields averaged 11.4 percent.

`Out of the Bottle’

Yields on 10-year notes had dropped to an almost five-year low of 3.28 percent on March 17, after the Fed cut the discount rate at an emergency weekend meeting and backed JPMorgan Chase & Co.’s deal to buy Bear Stearns Cos. Rates on three-month bills plunged to 0.39 percent, the lowest since the 1950s, the same day as investors sought the safety of the shortest maturity government debt.

Consumer prices advanced 4.2 percent in May from a year earlier, the Labor Department said June 13. The rate was above the median forecast of 3.9 percent in a Bloomberg survey of economists, and the highest since January.
Economists at New York-based Morgan Stanley say inflation will reach 5 percent to 5.5 percent this summer, the highest since 1991.

“The global inflation genie is out of the bottle,’’ Morgan Stanley analysts led by Joachim Fels, co-head of global economics, said in a June 11 report. Even if the pace moderates in coming months, “we are likely to see higher average inflation rates,’’ they said. Inflation averaged 3.1 percent during the past two decades.
`Unsustainable Levels’

Inflation is also eliminating the rewards of owning U.S. stocks. Standard & Poor’s 500 Index shares yield 0.2 percentage point more in profits than the interest on 10-year notes, the smallest advantage since 2004, data compiled by Bloomberg show. The last time corporate earnings returned less than bonds, the index posted its biggest monthly decline in five years.

“What did you say? You wanted us to buy more US assets?”

Oh, and I forgot to mention, this is in straight dollar terms only. You need to also figure in how much the US dollar is going to depreciate against other currencies in the coming ten years.

“Ouch!”

I wonder how the Chinese government is going to explain this to Chinese citizens, since it is their official responsibility to protect Chinese investments and assets? And that the situation, particularly re inflation, is going to get much worse before it gets better?

And it really doesn’t matter who becomes US president either, at least with regard to this set of issues.

Not even a US president can do anything about this.

China Marketing: Think Deep, Not Big, and Add A Twist

March 30th, 2008

One of the things which I frequently hear from first-time visitors to China is that “It is so big!” Sometimes, I hear this even from Texans, an American state which takes pride in being bigger than almost any other state, with the exception of Alaska.

Westerners are not the only ones to fall victim to this thinking; Chinese also are enamored with these numbers. When I hear presentations, the most frequently heard numbers show 420 million mobile phone subscribers, 250 million IM subscribers, at which point the China virgins go gaga and start counting the yuan they are going to make (in their dreams) and planning their retirements (also in their dreams).

By now, I’m sure that you’ve figured out that I don’t buy into this view. Yes, China is big, but so what?

Instead, when you start looking at real revenue and earnings numbers, China is still way down there. And for many companies, both Chinese and western, it’s a difficult nut to crack.

But I don’t think that it needs to be. First of all, let’s get past the population and subscriber numbers. Yes, they are very big, and the only country which can even come close is India. All the thoughts, fantasies and conversation about projections should end there, and marketers should dig deeper to look at revenue and earnings projections, since they are the only real numbers which count.

Marketing 101 says that it isn’t the size of your market and number of units sold, it’s really all about your margins and accessories you can continue to cross-sell or up-sell to your customers after the initial sale. There is the often quoted example of “give away the razor, and sell the razor blades (where you really make the money).”

Since my field is the Internet, I frequently come across all kinds of interesting ideas where Chinese entrepreneurs are seeking funding. Let’s say that I’ve seen a lot of ideas in my lifetime, and I’m picky about what strikes my fancy. When I talk to people, I’m often looking for a “je ne sais quoi” which is different about them, or their products and services, and their ability to execute. China subscriber and user numbers don’t impress me, and make my eyes glaze over very quickly.

I’m much more impressed when people talk about revenue and earnings projections. I’m even more impressed when I find out that these numbers are not pulled out of thin air, and can relate to something the presenter/entrepreneur has worked on and delivered in the past. At this point, we cross the line from fantasy to a doable reality.

The trouble with many Chinese startups is that the founder is so focused on raising money that he forgets to even spin a good story about what he’s going to do with the money! And yet, China is such a hot place to be now that there are people with money who are willing to part with significant amounts of money without even asking for a good story about how they are going to execute!

Part of the reason so many poor ideas get funded is because the burn rate is so low in China that even if the startup fails in the initial stage, the burn can be kept so low that if/when the startup founder has to do a reboot (usually by coming up with a sensible idea), that there is still money left in the till for a repositioning and second chance. In reality though, I think that this is a bad strategy for investors. After all, if the founder/s did not come up with a good idea the first time, and it got funded, what is the incentive for him to come up with a good idea the second time around?

This is why countries like the US and Sweden and other countries continue to be competitive in the Internet startup field even though their initial startup costs and burn rate are much higher than in China. Being cheap and being good are too entirely different things, and often being cheap actually prevents you from being good because it allows, and even encourages, sloppy thinking and poor execution skills.

This is not healthy for the western investors and for the Chinese. This is a sign of a bubble, and is oddly reminiscent of that situation in the US just a few short years ago when many people thought that they could buy a house without a down payment and a job. Fortunately for China, the Internet sector is still a relatively small part of the economy, and while US and western funds may eventually come up $50 billion or so shorter in a few years, it won’t be significant enough to put a crimp in any venture capitalist’s or private equity fund manager’s retirement plans.

What is needed now, at least in the Internet startup area, are entrepreneurs who have actually had experience selling something, and actually understand the purchasing habits of Chinese consumers, and know how to provide a useful service to earn that money and are willing to put revenue projections into their pitches.

There are plenty of opportunities and China is still a big market. I can think of several things right off the bat.

But let’s stop talking population and subscribers, and start talking revenue and earnings, shall we?