China Market Entry Considerations For Foreign Tech Startups (Part II)
Examples of Success and Failure
Introduction
In this post, we’ll examine past attempts by foreign technology companies to enter the China market. I’ve found that analyzing case studies can often reinforce understanding after learning the initial framework. These examples should be useful to reference in both passing conversation and formal debate. As there exists limited literature on this topic (at least on English language websites), I’ve also incorporated learnings from conversations with my counterparts in China (big shout out friends at Xiaomi, Qihoo, IDG Ventures, Qiming Ventures and more). I’ve focused on some of the more common examples and kept them concise — hope they are helpful.
Starting With the Failures
Facebook: this one is straightforward. FB got blocked by the Great Firewall barely a year after its China launch in 2008. This shouldn’t come as a surprise, since direct censorship is just one of many levers utilized by the Chinese government to better manage social expression and movements. FB is reportedly still interested in entry however, backed by Mark Zuckerberg’s strong personal interest in China (recall Zuck running sans mask in Tiananmen Square) It should also go without saying that most prominent, foreign social media platforms are banned in China. This holds for Twitter, Instagram, Snapchat, and the like.
Google: Google first entered China in 2006 with some success, but was blocked by the government after 4 years of operation. Google China initially (but tentatively) conformed with the Chinese government’s censorship polices. However, in 2010, a Chinese cyberattack that hacked into the Gmail accounts of Chinese human-rights activists proved the final straw for a company whose corporate motto reads “Don’t Be Evil”. Google acted promptly and directed all of its Chinese traffic to its uncensored Hong Kong search engine, a move that left the company vulnerable to being shut down in China. Unsurprisingly, Google services got blocked in China shortly thereafter.
eBay: perhaps the poster child for high profile failure in the China market. As described in the first post, Meg Whitman’s eBay benefited from a significant capital advantage ($100 million earmarked for China entry) yet struggled and eventually capitulated to domestic upstart Alibaba. At the end of the day, eBay failed because it tried to transplant its existing business model in China and threw a lot of money at the wrong problems. It did not understand the needs of local buyers and failed to leverage the expertise of local Chinese employees. Furthermore, as decision making was centralized in San Jose, eBay could not and did not enable Chinese managers to make critical decisions fast enough. eBay even put its Chinese auctions on web servers outside the country, resulting in a sluggish service that was difficult for some Chinese citizens to access. I’d recommend reading ‘Alibaba’s World’ for a first-hand account of this titanic clash that helped shape the Chinese tech landscape.
Groupon: people forget that back in 2011, Groupon was a media darling and early unicorn valued at over $13 billion, with typical ambition to win the China market. Julie Zhu offers good analysis (link to her article) so I’ll paraphrase her thinking here. Groupon initially made a smart decision by partnering with Tencent. However, rather than leveraging Tencent’s market expertise and hiring local managers, Groupon instead brought on expats to run its operations across the country. In fact, of Groupon’s senior management team in China, only two members were Chinese. Company culture deteriorated quickly in a situation where foreign managers were managing Chinese employees and in some cases seeing very low efficiency, because employees did not necessarily respect or feel loyal to their managers. As a result, Groupon experienced tremendous employee turnover and high cash burn, and it ultimately failed against aggressive domestic competitors.
The Maybes
A good example here is LinkedIn, which entered in 2014 and has experienced a modicum of success, but whose future is still far from certain. Like Uber, LinkedIn entered by creating a separate China entity jointly invested in by the parent company and Chinese venture firms (in this case Sequoia China and CBC). President Derek Shen was given a high degree of autonomy to run LinkedIn China so as to better navigate competitive dynamics and government relations. For the past 2 years LinkedIn has been trying all the right things, playing by content censorship rules, running popular marketing initiatives via Wechat and Didi, and recently even launching in parallel a mobile professional networking app ‘Red Rabbit’. Yet the company is still struggling to win over local users beyond those with overseas background or those who work at large multinational corporations. Throw in Microsoft’s recent acquisition of LinkedIn and you have an added layer of uncertainty, so it gets even tougher to read the crystal ball.
The Winners
Riot: in 2008, Tencent successfully brought League Of Legends to China, which gave it confidence to acquire a majority stake in LoL’s maker Riot Games in 2011 and eventually complete the full acquisition in 2015. Over the years, Tencent has helped turn LoL into the world’s number one MMOG in China. So why did Riot succeed in China? Simply put, Riot it retained competitive advantages that could not be easily surpassed. Typically, your basic technology leadership buys time value, but in most cases Chinese competitors are able to eventually reverse engineer and replicate. However, LoL at the time was already the world’s most popular MMOG, with a brand and fanatic user base so strong that Tencent could not possibly replicate it. Riot understood this well, and as such was able to leverage Tencent’s capabilities to distribute and localize its product, and eventually secured an exit on favorable terms.
As another gaming example, Russia’s ZeptoLab successfully executed an exclusive distribution partnership with local companies by leveraging its brand and user base advantage.
Apple: by most measures, Apple has won in China, owning a lucrative cut of the China market and booking upwards of $50 billion in annual revenue. Apple offers an amazing product, with terrific luxury brand recognition (particularly big deal in China), and a platform that allows Chinese developers to create applications that address local needs. As such, Apple’s China strategy is relatively straightforward — continue to design and produce the best phones in the world, then sell in China via its own retail stores or resellers. Even so, domestic competition has heated up in recent years, with Xiaomi at first, and then Huawei, Oppo, and Vivo producing increasingly better phones and selling them at incredibly cheap prices. Apple is clearly feeling the pain, and its recent $1 billion investment in Didi was reportedly executed to improve its relationship with the Chinese government.
Uber: we’ve already covered Uber in the previous post. While Uber was unable to dominate the market as it had first planned, few can argue against a $7 billion exit and continued exposure to the China market via Didi.
Other Considerations
There are numerous access points into China market exposure, but not all of these involve direct entry and on the ground operations. For example, passive investment in a Chinese company can also yield significant payoff. The most prominent examples include Yahoo’s investment in Alibaba (15% stake now worth ~$37 billion), as well as Naspers investment in Tencent (34% stake worth ~$88 billion). In our next post we will describe each of these market entry options, compare pros and cons, and highlight implications based on company type.
