China's Baidu Snaps up a Travel Website

It took less than two days from the time Fritz Demopoulos, the co-founder of China’s leading travel search engine, stepped out the door after negotiating a US$306 million deal with the Chinese search giant Baidu, for one of his former colleagues to start slagging him off.

In the transaction, which will make Baidu the major shareholder, Demopoulos stepped down as Qunar’s CEO despite the fact that in just six years he and his partners had built it into China's most heavily-trafficked travel site. And, within 48 hours, Qunar’s CFO Hanhui Sun suggested that Demopoulos would not be of much use to the company because of communication issues with an all-Chinese staff.

The news stories containing Sun’s comments have since disappeared from the web – either the result of pressure from Qunar, or because of a license on the Zhihu question-and-anchor site where they were uploaded, that requires third parties to ask permission before publishing comments from the site.

Sun, however, had struck upon a sensitive point – the perception that foreign businessmen are ill-adapted to succeed in China’s culturally nuanced internet business. Further compounding the issue is Baidu’s history of leveraging nationalism as a business advantage over foreign competitors, such as Google.

Legions have been lured to China wide-eyed at the promise of more than 450 million internet users and a burgeoning middle class with increasing levels of disposable income. While foreign investors have done well in China, many entrepreneurs have failed, just as American companies such as Google, eBay, and GroupOn have struggled to make headway in the challenging business environment. Demopoulos, however, has proven to be a rare success story.

“Fritz is an exceptional guy and an exceptional case,” says Bill Bishop, a China internet analyst. Bishop says Demopoulos looked at his business very strategically and picked a sector – travel – where the macro trends were right and a boom was on the cards. Crucially, it was also a market immune to government regulation. Demopoulos also had a good team of local co-founders who complemented his skills and experience.

“I know several VCs, friends of mine who passed on a deal, who didn’t understand what he was doing,” says Bishop. “He’s a classic entrepreneur. He saw a market that other people didn’t believe and then he just executed the hell out of it.”

In an interview with Asia Sentinel, Demopoulos, who has spent more than a decade in China, declined to comment on Sun’s posts. However, he said he “couldn’t be more thrilled to take a step back and think about the next thing.” He decided to leave Qunar, he said, because the skills he brought to the company – corporate development, leadership, investor relations, and strategy – would be contributed by Baidu from this point forward. Instead, Qunar is to be reorganized to focus more on execution. Demopoulos will stay on as an advisor despite Sun’s comments.

Baidu, which has a domestic market share in search of about 74 percent, invested vertically to bolster its offerings in travel, a sector that represents huge growth potential in China. According to a China Internet Network Information Center report released in January 2011, 81.9 percent of China’s 457 million internet users use search, but only 7.9 percent have used online travel booking services. In the US, by contrast, 66 percent of internet users have booked travel online.

Despite Demopoulos’s success in building the company, which he co-founded in 2005 with Chenchao Zhuang and Douglas Koo, Sun was quick to undercut his worth to the company.

“[After Baidu’s investment], Demopoulos’s value to Qunar is not great,” wrote Sun in comments that were picked up by several China news sites. “You can imagine, an American, due to language and communication problems, would have a difficult time with the daily operations of an all-Chinese company.”

Sun’s comments were quickly repudiated on popular microblogging service Weibo by the new CEO Chenchao Zhuang, who said he didn’t agree with Sun’s perspective and that he will continue to work with Demopoulos, who has bigger dreams to pursue. “I believe the most important part of management is intelligence, not language. Nationality and language are never, and shouldn’t become, a problem,” Zhuang wrote.

“Knowledge comes from observing customers in close proximity, execution comes from fighting shoulder-to-shoulder with your employees. This is what Fritz does very well.”

Demopoulos cut his teeth in China as a business development manager for News Corp., working closely alongside Wendi Deng, who would later go on to become Mrs Rupert Murdoch. He then went on to co-found the sports portal Shawei.com, which he sold to Hong Kong-based Tom Group for US$15 million. He founded Qunar after a stint running corporate development at internet giant NetEase.

Kaiser Kuo, Baidu’s director of international communications, says that, while he wasn’t present in any of the Baidu-Qunar meetings, he doesn’t believe there was any pressure from within Baidu to push Demopoulos out in favor of an all-Chinese management team. “He has a terrific record,” says Kuo. “He is very, very well respected here. He’s either, as he would humbly say, incredibly lucky, or massively talented, and I tend to think the latter.”

Until the Baidu investment, Qunar had been rumored to be looking at an IPO. With the huge cash injection, that might be further away than it once was, but the door isn’t closed on going public.

“The good thing now is we have breathing room,” says Demopoulos, who still owns shares in the company. “We can kick back, execute, dominate the market, and if it makes sense to go public in six months, great. If it makes sense in three years, even better – nobody cares.”

Qunar, China’s leading travel site in terms of traffic, operates as a search engine rather than a booking agent, unlike competitors Ctrip and eLong, and makes its money from advertising. It accounts for about 30 percent of all airline tickets booked in China. (Qunar’s nearest US equivalent is kayak.com.)