The China Vortex

Alibaba has announced plans to consolidate two of its subsidiaries into one company. Alimama is the company’s ad network for Chinese SMBs, and Taobao is the company’s auction platform, which is best known for dramatically driving eBay China out of the China market after eBay bought Eachnet.

This is likely a measure to counter Baidu’s plans to enter the e-commerce market. According to this report from Keso, Taobao has blocked Baidu’s spiders from crawling Alibaba. Spiders from other search engines are not blocked. It is very unusual to hear of one search engine’s spiders being singled out for blocking; I have never heard of this until now.

Can you say hardball?

Spiders are software programs used by search engines to crawl other websites; they detect changes in websites and report changes back to the mothership search engine which are used to update the search engine’s search index.

According to Keso’s report, Jack Ma of Alibaba believes that Alibaba’s SMB e-commerce platform represent the family jewels, and he already has enough users to allow him to make such a dramatic parting of way’s with Baidu. Baidu is currently China’s largest search engine player, with more than 60% market share.

For Baidu, losing the capability to crawl Alibaba’s sites represents a huge loss, and puts more pressure on their nascent e-commerce platform to succeed. Otherwise Baidu’s e-commerce search results will look very weak, just as e-commerce is showing signs of takeoff.

Now, Google China is the wild card which might benefit from the Alibaba/Baidu faceoff. Significantly, Google China’s spiders are not blocked from crawling Alibaba’s sites. Jack Ma has three options:

• Build his own search engine team which would build its own search engine to crawl Alibaba sites;
• Make Google.cn the default search engine for Alibaba and its subsidiary companys;
• Go to Google China and propose a joint venture company which would have a separate search engine to crawl Alibaba sites. Search advertising revenue would be split between the two companies.

From a technology perspective, search engines are more challenging to build. Specifically, they need to continuously update their search index, although if the search engine is only pointed at the Alibaba community, it would not be as difficult. Search engines need to be continuously updated and modified to get accurate search results, although optimization on organic and paid search are very different in how they are updated and modified.

From the SMB users’ perspective, the key to success is providing a smooth and transparent transition between search advertising and online business transactions. Bad user experience has led to the downfall of many a business, most recently eBay in the US, which has continuously raised fees on its auction platform, driving away its originally fanatical loyal user base, and forcing it into a retail model which competes on unfavorable terms with Amazon, the online retail ecommerce leader in the US.

Things are getting interesting…

The story of western social network sites losing out to local Chinese competitors continues; this time MySpace China joins the list as its CEO Luo Chuan makes it official that he is going to leave to join a local online video startup.

Although it is a well-known fact that local management teams need to be empowered to compete successfully in the Chinese market, western tech companies continue to make the same mistakes over and over again. I believe that the reasons for this are:

• While there is much talk about diversity, there is the firm belief that “brands” must be protected with a unified set of features and look all over the world;
• Most VPs of marketing are not fluent in other languages and cultures, and try to dictate from headquarters. When they visit the local office, they appear sympathetic, but when they return to HQ, everything learned from visits to local subsidiaries is quickly forgotten;
• Local Chinese competitors are unrestricted by these considerations; they just do what they need in order to win users. There is very little if any discussion of “brand” and “look and feel”. These are the horses VCs like to bet on;

When you come right down to it, there is little a global brand can bring to the table in China. Most add a burden of a faraway headquarters without empowering the local management team to be more competitive. This is not a problem which is unique to China, it is also happening in the social networking market in Japan.

My conclusion: The problem does not lie with China, but instead lies with the reluctance of western social networking sites to empower their local management to do whatever they need to win users and market share. By trying to force common features, standards and branding too early from their headquarters way before the market is mature, they cripple their local companies’ chances of success, and cede the market to the local competitors.

That is why the successful local competitors get such high valuations; they make ideal acquisition candidates and give their founders a good exit strategy.

Ask Meg Whitman, former CEO of eBay.

One of the most popular cliches in the west about China is that Chinese are generally good and reasonable people, but when it comes to nationalism, they are unreasonable. On the political level, national sovereignty is not negotiable, and when it comes to business, you need to realize that nationalism is a wildcard, and can throw a monkey-wrench into your best-laid plans. Put into this context, the 2008 Beijing Olympics is all about righting past wrongs, and showing that China is now an equal, maybe even a leader, in the world stage.

Like all bad cliches, this cliche contains a kernel of truth.

In my previous article, I mentioned why it’s so important for any business to be successful in China, decisions must be made locally by local management; it cannot be micromanaged from the US or anywhere else. Established business sectors such as finance, banking, retail, and fast moving consumer goods (FMCG), all understand this very basic rule of international business.

In the venture capital field in China, there has been a large influx of companies and partnerships which have opened offices and partnerships in Beijing and Shanghai. These companies understand that good investment decisions must, for the most part, be made in China where the local partners can understand the business environment, the competition and perform the due diligence to make the right decisions. Smart decisions cannot be made outside China.

And even that is not necessarily enough. Now more companies are going into the Chinese tier 2 and 3 cities and they are realizing that Beijing and Shanghai have more in common with New York, London or Tokyo than with other Chinese cities.

So why do so many US technology companies continue to try to second-guess and micromanage their China local management?

This is a mystery to me, and I continue to be befuddled by it. How can intelligent people continue to make and repeat over and over again mistakes which others have made before?

And then, when the Chinese local management complains that they are not empowered, sometimes they dismiss it as the Chinese “going nationalistic”. Never mind that the people questioning the Chinese management in the US do not speak, read or write Chinese; never mind that the people coming into China spend only a few days on the ground in China and think that they have China “all figured out”, yet they continue to do this over and over again.

Does this make sense? Any sense at all? And should there be any surprise that leading US companies including Yahoo!, eBay and AOL have failed in China?

And yet, these people control the budget and resource allocation for China. Should there be any surprise at all that US Internet companies have not been able to be successful in China?

What value do these people contribute to the success of the business in China? I can’t see any. Then when the company fails, it isn’t because headquarters slowed down the decision loop; it’s because of “poor performance by local management”!

They have set up Chinese local management to be the fall guy even before they started!

If this thinking were only confined to Internet companies and startups in China, it would be bad, but in the overall economic picture, it wouldn’t be that important.

The problem for the west is that it isn’t.

It has affected the west’s popularity in Africa because China offers aid without strings attached. In the mainstream media in the west, this is depicted as a cynical attempt by the Chinese to curry favor with regimes which behave badly.

But could there be more to it than meets the eye?

Could it be that the Africans don’t like to have someone dictate loan and development terms from Washington DC, London or Paris, and setting performance benchmarks for them without understanding the context of development in their own countries and region?

And could it be that the real reason for the popularity of the Chinese is that for better or for worse, they have gone local, setting up their own businesses and factories in Africa instead of trying to dictate terms from Beijing?

Definitely this is something worth pondering…