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Feasibility Study for the implementation of a new popular search engine in China

Introduction According to a BBC World report that was broadcasted on the 5th April, 2011; Google has becomes the largest global advertising giant with 90% market share of online advertising in the United States. Today it employs 25,000 staff worldwide, and has an astonishing company value of $600 per share. Despite this remarkable commercial and corporate success in a very short period of time under the leadership of outgoing CEO Eric Smit, Google made an announcement on January 12, 2010, on its official blog, that it had detected several unusual security incidents in mid-December 2009 1 (the so called “Aurora Attack”) and that it would review the feasibility of its business operations in China; not excluding the possibility of having to shut down in case it would not succeed to discuss with the Chinese government the basis on which it could operate an unfiltered search engine within the Chinese law. In view of these announcements, this paper looks at a feasibility study for a possible implementation of a new popular search engine in China, in case such a business opportunity would present itself if indeed Google would formally exit from the Chinese market.

A. Situation Analysis Google entered the Chinese market in January 2006, though only obtained its official operating license until September 2007 due to the lengthy approval process demanded by the Chinese government. Nevertheless it reached 31% market share and annual revenues totaling more than US$300 million in 2009 2. Compared to the performance of Google outside of China, and in the United States in particular, these figures are relatively insignificant taking into consideration: (1) that Google reached a 65% market share in the US in 2009 3 and (2) that the total global turn-over for Google in 2009 reached a staggering US23$ billion 4; thus the contribution of the Chinese Google subsidiary in 2009 only represented less than 1,5% of total turn-over. Therefore the announcement of a possible exit from the Chinese market only had a small effect on the Google stock price, indicating that such an exit might not be a huge concern for the shareholders. Why would a globally extremely successful company like Google “underperform” in such a promising internet market like China and ultimately even consider pulling out?

shows that people in the 60 largest cities in China spent approximately 70% of their leisure time on the Internet. the commercial opportunity on the internet in China is huge. All these factors explain why the online advertising market in China has been growing at between 20 and 30% per year with a market size of approximately US$3 billion in 2009. who with more than 60% market share dominates the Chinese market reasons for this perceived “failure” are multiple. Any new entrant into the Chinese internet market space would have to learn from this successful model. from this lucrative and expanding Chinese internet market. but only a distant second to Baidu. twitter. as it could be a move to put pressure on the authorities to obtain some concessions that could help it to compete more like Patricio Robles. (3) Furthermore. A possible exit by Google. has allowed Baidu. would inevitably open business opportunities to new entrants to take on the competition with sketching software and access to scholarly papers. their habits and the Chinese language and culture. In both cases Google showed little understanding of local culture and refused or took long before apologizing to the public. translation to give their customers a simple but reliable search experience. with its 31% market share. believe that Google’s threat to close down its Chinese operations has little to do with human rights but all the more with business. 8 Interviews held in Beijings’s downtown and university districts by journalists from the New York Times. Over a short period of time it ran into open conflict with the regulator concerning access to pornography via its search engine and with Chinese authors concerning copyright infringement accusations. following the announcement by Google of its possible exit from the Chinese is not the market leader in China. Proposed Solution . an independent technology reporter. Google also has faced a number of issues with the regulatory and government authorities in communist China. which caused them to lose market share. Google. though some analysts. B. (2) Besides the tough competition from Baidu. This thorough understanding of the Chinese users. revealed that many of the internet users are young and well educated and particularly interested in services like facebook. contrary to its competitors. outperforming Google.6 With a total population of more than 1 billion people and already 384 million internet users by the end of 2009 7. The key success factor for Baidu’s undisputed leadership in its home-market is its focus on developing the best Chinese-language search engine to suit the needs of local as the market share figures show. Chinese government’s regulations of partial censorship of search results is in contradiction with Google’s core company values of free speech on the internet in support of fundamental human rights. Furthermore. google’s maps. (1) Contrary to most markets in which it operates. any new entrant would have to learn from Baidu’s success and Google’s mistakes and get a full understanding of the particular interests and behaviors of the Chinese internet users in order to be as successful or even outperform the market leader. research done by McKinsey & Company in 2009.

that in order to be successful in the Chinese internet market one has to have a very strong understanding of the Chinese language. tailor-made for the Chinese users. formally apologized to the public. which caused them to lose some market share. Probably the most important thing that can be learnt from Google’s venture in the Chinese market is that their market share almost doubled from 16% to 31% after they launched the Chinese website. As soon as in 2005. Google established a Research and Development center in China. Even though Google agreed to block certain websites. thus attracting the best and most competent engineers in the local employment market. culture and behaviors. has been the controversy about the availability of pornography through its search engine which is against the Chinese law 10. it challenged this auto censorship going to the extent of turning off this search filter in January 2010 9. Despite their perceived failure. and lowering the access threshold to the internet by for example introducing phonetic searches. while competitors Baidu and Sina who understood the “modus operendi” that needs to be applied in China. nor explanation.Baidu was founded by two Chinese nationals in 2000 and had already obtained a 50% market share before Google entered the Chinese market in 2007. which allows users who are not so confident about the exact Chinese character keyword to input the phonetic version of the search using the English alphabet. Another example of its tense relations with the authorities and internet regulators. Baidu has still been able to keep and even expand its market share over the years. This performance based advertising service is much more costeffective and measurable than the traditional flat fee services. before it formally launched its local commercial services. the world’s largest mobile telecom service provider. Google also develop a strategic partnership with China Mobile. both Baidu and Google developed their business along similar strategies. together with some other sophisticated search technologies. in return for being able to run a local Chinese service. This allowed them to customize Google. even big multinationals have to “think global but act local” by providing tailor made services that appealed to the market. have allowed Baidu to develop a simple and reliable search experience. . Google was not comfortable with the move as it contravened its values and beliefs in freedom of speech. which enables online marketing clients to bid to determine how much they are willing to pay for each time someone clicks on their listings in the search results. though Baidu being the first entrant into the market they had the advantage of first arrival while Google the challenger only arrived latter. Nevertheless an important difference between both competitors has been their relationship with the local communist government and internet regulators. Baidu was also the first to introduce in the Chinese market a new revolutionary auction-based “pay-for-performance” (P4P) platform. Google on the other hand refused to do so and was subjected to punishment by the regulator. though it switched it back on again five days later without any formal communication. again confirming – like for the success of Baidu . The key success factor of Baidu is its focus on developing the best Chinese language search engine. utilizing a list of prohibited keywords maintained by the Chinese government. which turned into one of the most desired places to work for Chinese information technology elites. Furthermore to these technological according to Chinese users’ language conventions and specific local needs. As can be seen from the above. This new feature. a new entrant to the Chinese market can also take some key positive learning from Google’s experience.

If the company values and mission statement are fundamentally in contradiction with the policies of the country in which it wants to operate. while learning from their bad past experiences and avoiding making the same mistakes their predecessors made in a bid to obtain successful establishment and continuity in the target market. Recommendations We recommend that the new entrant into the Chinese internet market. In view of the above. to develop a business model that combines all the good the practices and experiences from Google and Baidu accumulated over the years. taking the space Google China would leave behind after a possible exit: • • • • • The Company should be incorporated as a Chinese company.In order to be truly successful in the long term. as most of the existing internet users are young graduates concentrated in the main urban areas. the proposed solution for a successful new entrant into the Chinese internet market would be. so that it can attract and better understand the needs of the growing but more demanding on-line advertising clients all over China. they will have to weigh these against their universal believes of freedom of speech and human rights. It should try to become the “employer of choice” very quickly. • • . C. It should implement new features that can allow to further increase the internet penetration levels by lowering the access threshold this would aim in particular the rural areas of China while expanding to trap the elderly customer base. instead of trying to combine the impossible. one should question the decision to go into that market vis-à-vis the operating environment and maybe stick to the company values. as average urban internet users spend up to 70% of their leisure time on the internet this could be coupled with offering travel packages that can be accessed with ease. it should develop more advanced features in-line with the introduction of the phonetic search by Baidu a few years ago. so that it can attract and employ the best IT talents available in the Chinese employment market and deliver world class research and development adapted to the specific needs of the market It should have a set of core company values that can allow it to operate within the strict policies of the communist Chinese government without violating the fundamental and universal human rights concerning freedom of speech It should establish a network of local sales and marketing offices spread out over the whole country. any new entrant in the Chinese internet market will have to understand the volatile environment they will fond themselves working in and they will have to find the right balance between restrictions and censorship imposed by the communist government of China and the regulator. The company should develop partnerships with reputable local third parties like mobile phone operator China Mobile or other highly advanced consumer technology companies like Chenszenbased telecom equipment and handset vendors Huawei and ZTE as these will increase their product offering to cover a larger market thus winning market share It should develop additional services focused on “leisure” and “entertainment” applications. and preferably have some Chinese shareholders in order to secure the “local” connection and also to have enough understanding of the unique Chinese operating environment.

who are expecting top quality but free of charge browsing and search service. has an enormous advantage over any new entrant as it has been in the market for many years and it has a proven track record that it can resist to (new) competition as shown when Google entered the market but did not manage to overtake their leading position Having to work within the strict legal framework imposed by the communist government authorities could lead to a situation where the company would be obliged to violate fundamental human rights in order to comply. they should develop smart performance based billing platforms for its online advertisers. later on more alternative and complementary services can be offered to its loyal customer base The internet adverts being their largest revenue producer. Baidu. this possible market saturation. Risks The main risks of this new business venture. this could be unethical but could also lead to serious reputational damage and block the company from entering into other markets.• • It should develop the best and most user friendly Chinese language search engine. there is already a high internet penetration level of more than 30% (384 million users out of a population of about 1. especially in the early years of the venture. to comply with international group (accounting) standards and best practices as local (minority) shareholders tend to often have different short term and long term objectives than the international (majority) shareholder. as in the internet world the revenue streams are merely generated by the advertising companies (up to 97% of Google’s total revenue in 2009 comes from on-line advertising 11) and not by the actual internet users.1 billion). . Another important item on the start-up budget would be the set-up costs of a local R&D department. being an affiliate of a bigger multinational. it can also be an obstacle for the local company. • • • Constraints • Budget: the required budget to start a new internet search engine in China would probably not be the most important constraint. as this is the key to success as proven by both Baidu and Google. while resisting or challenging local regulations could expose the company to penalties or also potentially lose market share in its home market Though having local Chinese shareholders on the board of directors is an advantage in view of a better management and understanding of local politics. can be summarized as follows: • Though there is still huge potential in the Chinese internet market. the main competitor and (dominant) market leader with 60% market share. combined with the time-line constraints could impact the anticipated return on investment. a slowdown in users growth rates could equally slow down the future growth rates of the online advertising market. which might be important as the market is no longer in its “infant” growth stage where companies usually can “invest as they grow”. which would only start generate returns after a certain period in time. that could ultimately lead to its failure if not managed and understood properly. nevertheless enough cash should be available to support the initially required infrastructure investment in servers.

Even if one could establish a successful superior business model. should be extremely cautious to go into the Chinese internet market. the new entrant could actually outperform Baidu in the long term. The online advertising market has been growing at between 20 and 30% per year and has currently a market size of about US$ 3 billion 12. it is to be expected that the total Chinese internet market will grow far beyond the current level once they reach more maturity over the coming years. this might be another big and challenging constraint for the new entrant. This is still relatively small compared to for example the total annual turn-over of Google which is more than US$23 billion in 2009. These specific regulations have to be properly understood and evaluated before deciding to enter the market in order to avoid unpleasant surprises once operational and confronted with the actual implications of obeying to the imposed regulations. As shown by Baidu. therefore the opportunities are almost unlimited as usage patterns are already more developed and advanced. furthermore the level of education and urbanization is relatively high compared to some other developing nations like India or Brazil.• Regulations: the regulatory environment in which the new company would have to operate is the biggest constraint to success. and the . the existing well established competition from mainly Baidu. inspired by the good and bad experiences of existing market players. in particular a new entrant. Final Recommendation When a big established multinational global player like Google – furthermore the world class expert and dominant market leader in its field op operation . Chinese market could also open up opportunities to enter other Asian markets and advanced search techniques developed for the Chinese language might be easily adaptable to other languages commonly spoken in the Far East and replicated in those markets. then anybody else. and even though the potential and the opportunities could be big. as long as the timing of implementation would be reasonably short and the regulatory environment favorable to change. the market could dramatically change in such a relatively long period making all the initial business assumptions on which the investment decision was initially based void and non valid. which is entering other markets within Asia like Japan or potentially South Korea.has failed to turn its venture in the Chinese market into a success. • Opportunities Because of its size (a population of more than 1 billion people – these are all potential customers of consumer products like internet access or mobile telephony) the Chinese market inspires and attracts a lot of businessmen in general and technology companies or service providers in particular. in a very fast moving and competitive environment. By combining the positive learning and key strengths from both Google and Baidu. Even if in future annual growth rates might slow down. Timeline: Based on the 18 months delay Google took to obtain its operating license. from the beginning it is clear that the regulations imposed by the Chinese authorities are not in-line with the commonly accepted operating standards of the industry in most other parts of the world.

They make excuses not to concern themselves with violations of human rights. 2011 when attempting to travel to Hong Kong -: “Most discouraging to those of us who are fighting for increased freedom is the tendency for developed nations to lower the bar to please China.difficult regulatory environment in which one will have to operate could turn it into a very risky investment. with their human rights” unfriendly policies”. In a recent newspaper article 13 Mr Ai Weiwei.before he was arrested at Bejing’s airport on Sunday April 2. a popular Chinese web communicator and an advocate for the rule of law and individual freedoms was quoted saying . an investment in a new popular internet search engine in China could turn out to be “mission impossible” for any corporate which proclaims high ethical standards of doing business as is now the common norm for all NASDAQ or other reputable stock exchange listed companies. To espouse universal values and then blind oneself to China’s active hostility to those values is irresponsible and naïve”. Taking in particular into account that the biggest risk actually comes from the authorities and regulatory bodies themselves. .

Search Engine Rankings ». February 24. March 22. the Conversation – Harvard Business Review Blog. 2009 12 Max Magni and Yuval Atsmon. 2010 8 lbid 9 David Drumond. but not necessarily for the right reason ». 2011 2 1 .S. February 24. « Google does the right thing in China.References David Drummond.S.2010 Richard Ivey School of Business Foundation.usatoday.htm 11 « Comscore releases November 2009 U.Consumer Watchdog. « a new approach to China ». the official Google Blog. Exhibit 3 ». 2010 10 2010 13 « The message of Ai Weiwei ». ComScore. December 16. « Google in China. « A new approach to China ». 2010 7 Max Magni and Yuval Atsmon. 2010 3 « Comscore releases November 2009 U. The Official Google Blog. April 7. « China’s Internet Obsession ». June 18. 2010 6 Patricio Robles. January 12. January 12. « Google in China. December 16. Exhibit 2&3 ». the Wall Street Journal. the Conversation – Harvard Business Review Blog. June 18. 2009 4 Google annual report 2009 5 Richard Ivey School of Business Foundation. Search Engine Rankings ». « China’s Internet Obsession ». ComScore.