Google's China Odyssey

Google started slow in China, but had made real inroads on local search engines before the current controversy and Google's threat to leave the country. The following excerpt is adapted from "Red Wired: China's Internet Revolution," by Sherman So, formerly lead technology writer for the South China Morning Post, and her colleague, Christopher J. Westland, a professor at the University of Illinois, Chicago. See Ms. So's previous article, Is Google Really Leaving China?

Even before it had an official presence in China, Google's services were being widely used there. "Baidu's popularity only began to surge in 2003–04. Before that, most people in China used Google, as there were few other choices of search engine," said Jacky Huang, China Internet Research Manager of IDC.

Some Chinese advertisers were already bidding for keywords on Google's American site. It was the search engine of choice for some of the country's most sophisticated internet users, those with the most income and education and with foreign experience or regular contact with foreigners. Such people have credit cards, and besides Google they also like Facebook and YouTube. The problem was that there were just not that many of them.

Another hindrance to Google's penetration was the behavior of the Chinese government. From 2002 to 2005, access to Google was routinely blocked any time there was sensitive news about China. Local users would find themselves automatically diverted to Baidu or other Chinese search engines. The problem was most serious during 2003–04.

By mid 2005, partly due to Baidu's effort and partly due to government interference, the tables had been turned. Google's market share was about 23 percent, lower than Baidu's 37 percent, but still it was well ahead of the other local competition, according to the Beijing based market research firm Analysys International.

To reach more users and advertisers, and ensure a stable service in China, Google needed a local presence, with servers and staff inside the country. But it would have to tailor its services to Chinese laws. So it joined its local competitors in filtering out of search results all politically sensitive information—about the anti-communist Falun Gong religious sect, for example, or the June 4, 1989 Beijing massacre.

Such compromises certainly clashed with Google's stated mission—"to organize the world's information and make it universally accessible and useful. But the potential of the Chinese internet market, which was bound to become the largest in the world, was just too great for a company from Mountain View, California, to ignore. (China is not the only market where Google has modified its practices to suit local laws. In Germany, for example, access to neo-Nazi sites is banned.)

Despite a high profile in the media, Google China was on shaky ground in its early days. A year after setting up its office in China its market share had actually dropped, bottoming out at around 16 percent in mid 2006; Baidu, with its post-IPO momentum, had increased its share to 50 percent, according to Analysys International.

"The grassroots Chinese internet users had not heard of Google. The high-end users thought there was no hope for Google," said Lee Kaifu, president of Google China. Adding insult to injury, Baidu was even running a commercial on Chinese TV ridiculing the quality of Google's Chinese search. By the end of 2006, some of the local media were already anticipating the day when Google would exit China, just as eBay, another supposed American world beater, already had.

Teething troubles

There was a good reason for Google China's problems: It had few staff at the start, and soon found itself facing a host of unforeseeable obstacles."I was a general without an army," said Lee. The first employee he hired, a developer, did not start work until January 2006. In fact, a lawsuit brought by Microsoft, his former employer, had prevented Lee himself from taking up his duties before September 2005.

Born in Taiwan, Lee emigrated to America in 1973 while still in high school. He later earned a PhD in computer science from Carnegie Mellon University. While working as an assistant professor there, he developed the world's first speaker-independent, continuous speech recognition system, which BusinessWeek honored as the "Most Important Innovation" of 1988. After leaving the university, Lee spent six years at Apple Computer, where he developed QuickTime, QuickDraw 3D, QuickTime VR, and PlainTalk speech technologies.

In 1998 he joined Microsoft, where he was responsible for advanced natural language and user interface technologies and founded Microsoft Research Asia, now regarded as one of the best research centers in the world.

By 2005, he was ready to embark on a new journey with Google, but Microsoft was not ready to let go. It sued Lee over the one-year non-compete agreement that he had signed in 2000 on becoming Microsoft's corporate vice president of interactive services.

The lawsuit was barely out of the way when it became clear that while getting a license for Google's research and development center would be easy, the same could not be said of its website, "The government tightened the approval process for foreign companies to get ICP licenses," said Lee. An ICP, or internet content provider, license is a must for all websites in China. While obtaining an ICP license is a fairly easy matter for domestic players, Google did not get its own until mid 2007. So it had to use a license "borrowed" from a local player,, a classified advertising site that Google had once considered acquiring, said Lee.

As Lee recalls, much of 2005, the first year of Google China, was spent on preparation: getting licenses, signing deals with partners, recruitment, and market research. To better understand local requirements, Google interviewed the Chinese advertisers who were bidding for keywords via the AdWords service on its American site. But it understood that the majority of Chinese small businesses were not so tech savvy. Rather than rely completely on its online channel, Google followed Baidu's lead and used third-party sales agents to target small businesses.

Traveling executives from the American headquarters carried out most of Google China's work in 2005. They signed up 25 local agents to be Google's resellers in China.

Much of Lee's work in his early days was hiring staff. He trolled for young talent in China's top universities. Luckily, backing from headquarters was strong. "As long as I can find qualified talent, there is no limit on how many I can hire," said Lee in an interview in October 2006. By the end of 2006, Lee had recruited over 300 staff, and the hiring continued.

Growing up in China

Real work at Google China started in 2006. "The first thing we did was to improve Chinese search. And that occupied most of our time in 2006," said Lee. Google's search engine was designed to support multiple languages. At the time of its IPO in 2004, it supported at least 97 of them, including Chinese.

The Chinese language presents its own peculiar difficulties, however. Chinese consist of phrases, equivalent to words in English, which are formed by multiple characters. A search engine must index and segment the Chinese text phrases before conducting keyword/phrase searches. Moreover, a Chinese language phrase generally has more synonyms and closely associated phrases than an English word. As a result, a Chinese language search engine must have a comprehensive database of these synonyms and phrases in order to function effectively. "For example, one of the top universities in China is Tsinghua University. It is commonly known as just Tsinghua (清華) in China. So if users search for the keyword university (大學), should pages that contain only Tsinghua be included in the search results?" said Lee.

Because Baidu was built to optimize Chinese search from the start, the developers bore all of these factors in mind when the system was built. Initially it was better at Chinese-language search than Google was. But by 2006–07, most analysts agreed that Google's Chinese search results were at least as good as Baidu's.

"In 2007, while we continued to improve our Chinese search, we started two major non-search development programs: mobile search and map," said Lee. Google China signed a deal with China Mobile, which serves more than 70 percent of the country's cellphone users, to be its mobile search provider in 2007. Developing mobile search features became a major task for Google China in the next few years. Its developments in map not only allowed users to find local businesses, view maps and get driving directions, it also resulted in some applications with high social impact. For example, a real-time map could be viewed showing rail traffic around the Chinese New Year holidays, when people traditionally return to their families and train stations are packed.

In May 2008, an earthquake in Sichuan province killed at least 80,000 people. Google China launched a special real-time map that showed people who wanted to make donations or offer direct help what resources were needed in each of the affected districts. Such initiatives have helped Google to improve its relationship with the Chinese government, said Lee. "We now have regular meetings with the government to understand their policy about the internet," he added. (Improving the relationship with the Chinese government was important. A former Google staffer considered government relationships to be an obstacle that held back Google's development in China.)

After Google's CEO Eric Schmidt visited China in April 2007 to show his support for the China team, things started to improve. By mid 2007, Google's market share had rebounded to 22 percent, according to Analysys International. "Our efforts paid off. By 2008, our traffic in mobile search and map increased by four times," said Lee. Market share had reached 26 percent by the middle of the year. "Comparing the fourth quarter of 2008 to that of 2007, our sales in China increased 109 percent," he continued.

In 2009, Google China began a new project to develop its advertising products, AdSense and AdWords. In late 2009 [Before the current controversy – editors] it had planned to start a music service that would resemble Baidu's controversial MP3 search feature, but run on legal music files.

"We have formed a joint venture with Top100 to offer ad-sponsored streaming music or music download services," said Lee. is a legitimate music site in China founded by NBA superstar Yao Ming, Gary Chen, and Erik Zhang in 2006. Google purchased a minority stake in 2007. The new service will offer free music; music companies, Google, and Top100 will share the revenue generated from selling ads on the site. Lee said the service may offer little profit in the near term, but in the long term it could change the way the music industry worldwide does business.

"The music industry is seeking new direction," said Lee. "China represents a good opportunity for testing. If our model works, it may become a global trend."


Figure 4.2: Google China's market share in search engines (mid 2005–end 2008)

Data source: Analysys International


In adapting its business to China, Google seems to be a faster learner than some of the American internet firms that entered China before it. "We are latecomers. But being a latecomer has its advantages," said Lee. "By the time we entered China, its importance had been proven. It was the largest internet market in the world. Our headquarters fully supports our operation and has delegated a lot of power to the local team."

Lack of local autonomy and lack of support from headquarters are factors that tripped up other American internet firms making forays into China. The importance and the complexity of the Chinese internet market were both underestimated. But Google seems to have learned from their mistakes. There is only one layer of management between Schmidt, the CEO, and Lee, the China head. And Lee said he meets Schmidt regularly, almost every month, to brief him on the situation in China.

How different from the experience of eBay. "When eBay China moved its computer platform from China to America in October 2004 traffic dropped by half on the very same day. But Meg Whitman, then CEO of eBay, didn't find out about it until a month later," said Bo Shao, founder of EachNet, which was sold to eBay in 2003 and became eBay China.

After the platform was moved to headquarters and consolidated, eBay China lost control over its website. "It took nine months to make any major changes and nine weeks to alter a word on screen," said Shao. "This is unthinkable for an internet business, which needs to be able to react rapidly to the market."

"Such things could not happen to us," said Lee. Google China has relatively good control over its technology platform. The search service and ad platform (i.e., AdWords and AdSense) are core to Google's technology. As mentioned before, Google China started optimizing its Chinese search functions in 2006. In 2009, it started to develop its advertising product for China.

It also seems to have studied Baidu's moves closely. And it is not ashamed to imitate the local market leader when it makes sense. "We are humble and we listen to what the local market wants," said Lee.

The first instance of this was Google China's decision to employ agents to sell keywords. It also followed Baidu's lead in targeting the customers of internet cafés. After Baidu bought, the directory website most popular with internet café patrons, Google bought the second most popular,

Taking another leaf out of Baidu's book, it lobbied with internet café owners to make its website ( the default search engine on their computer browsers. Lee arranged for Google headquarters staff to visit internet cafés, so they would appreciate how important internet cafés were as the point of first contact with search engines for many young internet users in China.

In response to complaints that the "Google" name was too difficult for Chinese users to remember, it registered "," which is the Pinyin of its Chinese name , and a simpler version, "," at the risk of being accused of diluting its brand image.

Moreover, Google China has developed a lot of new applications for the local market. These include the Pinyin inputting method and Shenghuo, a website devoted to daily essentials, such as train time tables, apartment rentals, and job hunting. And there were many other small developments or adjustments that Google made as it acclimatized to the Chinese market.

By early 2009, Google had around 800 people in its China office. Most analysts believe its sales and profits have been growing at a healthy rate. Nevertheless, it still lagged behind Baidu by a wide margin. At of the end of 2008, the local rival controlled an estimated 60 percent of the search market, compared to 30 percent for Google, according to Analysys International.

Baidu was just more resourceful and aggressive. It operates on a much larger scale than Google in China, and has tried that much harder to win traffic and customers, sometimes crossing ethical and legal boundaries in the process. The Chinese government's interference also helped to divert traffic from Google to Baidu—a point we discussed in the last chapter.

Moreover, a common criticism of Google China is that it is still not localized enough. "If more of its decisions were made locally, Google would be more successful in China," said T. R. Harrington, director of Darwin Marketing, a search engine marketing firm based in Shanghai. Darwin deals with both Baidu and Google on behalf of its clients.

Google's edge

Nevertheless, Google has competitive advantages of its own, because of its technology and global presence. Three in particular stand out: 1) Google's advertising platform; 2) the size of its partner network; and 3) its global reach.

1 Google's advertising platform

Because of its more advanced technology, Google can match ads with keywords better than Baidu, giving it a higher traffic-to-sales ratio.

Advertisers can also target their ads more precisely on Google, leading to a better response from users. "Third-party research has shown that while we have around 24 percent of total search engine traffic we have around 30 percent of total revenue," said Lee.

Of course, advertisers in China may not yet be technologically savvy enough to appreciate these differences. The average spending of Baidu's clients was only US$674 per quarter in late 2008. But as they gain in sophistication, the advantages of using Google's ad platform may become more apparent.

2 Its larger network of partner sites

"The virtuous cycle kicked in quickly for our partner program. As our technology is better, which results in a higher click-through rate of ads on our partner sites and more revenue for them, more websites became our partners," said Lee. Moreover, it gives its partners a bigger share of ad revenue: 60–70 percent, compared to Baidu's 30–40 percent, according to one industry insider.

"Google AdSense quickly became China's number one alliance program," said Lee. Over 200,000 sites have become Google partners, including some of the biggest names, such as Sina, the leading portal. The partner sites help Google to build its brand in China, as well as increase its traffic and revenues.

3 Global reach

Another advantage Google China has is its global reach. Many small businesses in China are using it to market their products and services overseas. Baidu cannot help them because it lacks an audience outside of China. (Baidu has launched a Japanese search site that has not proven very successful so far.) With time, some experts say, Google can become a more serious threat to Baidu.

"Among all the internet businesses, search engines are among the few that require core technology. That gives Google an edge. I believe it can narrow its gap with Baidu in the longer run," said Joe Chen, CEO of Oak Pacific.

Bo Shao, founder of EachNet, which was sold to eBay to become eBay China, said: "I believe search is still in its infancy, so if Google manages to come up with a technology breakthrough that dramatically improves its user experience, and if Baidu fails to catch up quickly, Google might have a chance in China. Barring that, I believe Baidu will remain the search leader in China."

Future tech

As computers and broadband services get cheaper, more people in China are going online. The internet is reaching beyond the big cities into remote areas. Users are no longer just university graduates, but also kids, teenagers, factory workers, and the elderly.

"Given that new internet users in China are currently concentrated in second- or third-tier cities and among low-end users, Baidu will continue to lead over the next five years," said a hedge fund manager who invested in Baidu.

Google, on the other hand, appeals to high-end and more experienced users. As the country's internet population matures, more users will prefer Google to Baidu. However, this could take a long time, as Chinese internet penetration was only at 25 percent in June 2009.

Around 2007–08, satisfied with its Chinese search engine performance, Baidu began casting about for new opportunities. It launched a Japanese search engine, and developed an online chat platform, Baidu "Hi," to challenge the dominant QQ, which belongs to local player Tencent. It also developed an online auction market, Baidu Youa, challenging e-commerce king Alibaba's Taobao. These initiatives could become profitable business lines, but they could cause Baidu to lose its focus, giving Google a chance to catch up in search. Or, to Baidu's peril, they could alienate Alibaba and Tencent, two of the strongest internet companies in China. The next battlefield for Baidu and Google will almost certainly be mobile internet services.

Google has been the mobile internet search partner of China Mobile, the country's dominant cellphone operator, since 2007. In May 2009, Baidu became the internet search partner for a new mobile operator, China Telecom. As well as the search function, popular Baidu applications such as Baidu Knows, Baidu Post-bar, image search, news search, MP3 search, and so on, will be available on China Telecom's 3G platform.

The country's second largest mobile player, China Unicom, has yet to pick an internet search partner. But Baidu also has an agreement with China Netcom, the country's second largest fixed line operator and internet services provider, to provide an internet search page for its users.

Under the telecoms restructuring plan implemented by the government in 2008, China Unicom merged with China Netcom. If Baidu can expand its contract with China Netcom to include mobile search, it will have the country's second largest cellphone operator on its side, too.

And following industry restructuring, cellphone services market shares look likely to fluctuate more than they ever have. The dominant fixed line operator, China Telecom, acquired the CDMA (Code Division Multiple Access) cellphone network of China Unicom and is developing its 3G network using the CDMA-2000 standard. China Unicom keeps its GSM network and offers 3G via WCDMA, a mature technology already in wide use internationally.

China Mobile, which owns over 70 percent of the cellphone market, will be using the unproven domestic technology TD-SCDMA to offer 3G services. If TD-SCDMA gets off to a rocky start, China Telecom and China Unicom could gain ground on its rival.

As mentioned, Google China has worked on mobile internet since 2007. Its headquarters launched the Android program to make internet-ready phones easier to produce. "Many applications will be even more useful over the cellphone. For example, Beijing is often choked with traffic. For people who are driving, a real-time traffic map of the city available on cellphone will be very useful," said Lee. "Google has an application called Latitude. It shows the location of a user's friends so that the user can message them to arrange a get-together, say. This kind of application will be more useful in a cellphone whose location is changing as a person travels than in a PC whose location is always fixed," he added.

Applications that use GPS and cell triangulation information to determine the person's location and show restaurants, cinemas, and other nearby points of interest are increasingly popular and numerous in America and Europe. But some industry insiders feel such Google applications may be too sophisticated for the broad Chinese public.

"In our experience, cellphone users are generally more low-end than people who use a PC to access the internet. They prefer entertainment and simple applications," said Jay Chang, CFO of Kongzhong, a leading mobile data service provider in China. In Chang's view, the ideal mobile internet applications are multiple-player games and novel downloads.

Baidu has yet to launch special cellphone applications, but some analysts believe its share of mobile traffic is larger than Google's merely on the strength of its local name recognition. Baidu has also teamed up with handset makers such as Samsung, Lenovo, Nokia and Motorola—one development is the pre-installation of a search box on the handset, making it easy for users to access Baidu's service. However, the site that attracts the most cellphone traffic belongs to neither Baidu nor Google. It is Tencent's, the dominant online chat platform.