Despite an off-key name, censorship issues, and strong local rivals, the U.S. search giant remains confident it can be No. 1 on the mainland
Kai-Fu Lee was last in the spotlight a year ago, rejoicing outside a courthouse in Seattle after winning his freedom from Bill Gates and Steve Ballmer. Lee was a longtime Microsoft (MSFT) vice-president and expert on speech-recognition technology, who abruptly resigned in mid-2005 and joined the company's most powerful rival, Google (GOOG). Although Microsoft argued that a non-compete agreement meant that Lee couldn't go to Beijing for Google, a judge in September, 2005, disagreed.
As my colleague Jay Greene wrote in a BusinessWeek cover story a few weeks later, "When court adjourned, Lee smiled broadly and threw both arms in the air. 'I feel great,' he said. 'I can't wait to start work tomorrow morning.'"
Today Lee is in Beijing, busy recruiting Chinese engineers and building a Chinese operation for Google that could rival that of his former employer. Yet in China, Google is in the unfamiliar position of being the also-ran, lagging far behind local champion Baidu.com (BIDU).
A Step Backward
Lee insists that he's not too concerned—and he confidently declares that it's only a matter of time before Google grabs the top spot. "We don't really obsess ourselves with the competition, but we certainly think a lot about our core strengths," he said. And what makes Google so strong? "We just have better search," Lee says.
Up to now, though, not many Chinese have agreed. Baidu has over half of the Chinese search market. A recent survey by the China Internet Marketing Information Center put the Chinese company's market share at 62%, compared to just 25% for Google China. Worse, Google has actually gone backward this year, losing 8% of its market share.
And the market is only getting more crowded, with local companies such as Alibaba, Tencent, Netease (NTSE), and Sohu (SOHU) all planning to launch new search initiatives to compete with Baidu and Google. "I believe that 2007 will be a watershed year," says Richard Ji, an analyst with Morgan Stanley in Hong Kong. "There will be a search war on a scale that we have never seen before."
Still, Lee says that whatever problems Google China has are nothing that the cash-rich company's money and engineers can't solve. Google has struggled, he argues, because the Chinese-language search was developed by just five Google programmers, working back in Mountain View. Now the company has over 100 engineers in Beijing working on developing something that better suits the needs of local users. "Any imperfections that we may have had because of lack of resources are going to get fixed," Lee vows.
Baidu isn't home free either. It is facing a legal challenge in China over allegations of click fraud (see BusinessWeek.com, 9/22/06, "Click Trickery Claims Land Baidu in Court").
And the Chinese search company's shares took a thrashing after it announced stellar third quarter results, but offered lower-than-expected guidance for the last three months of 2006 (see BusinessWeek.com, 10/31/06, "Baidu.com 3Q Profit Up Ten-Fold").
Baidu said that it earned $10.8 million, an increase of over 900%, on sales of $30.3 million, up 169%. However, Baidu also said that it expects fourth quarter revenues of $33 million to $34 million, compared to the $35 million that most analysts expected.
Even so, there's no denying that Google China has had a rough year. It launched its Chinese site in early 2006, just around the time that free-speech advocates in the West were successfully putting the heat on companies providing assistance to Beijing's censors (see BusinessWeek.com, 8/10/06, "Search Engines Censured for Censorship").
Despite the criticism from members of Congress, Google execs like Lee argued that they had no choice but to censor search results for controversial topics such as Tibet's Dalai Lama and the banned Falun Gong spiritual movement.
Google then tried to make amends by posting alerts on its Chinese site notifying users that the search results were incomplete because of censorship rules. That did little to satisfy the company's critics in the U.S. Moreover, it may have angered Google's regulators in Beijing. Soon the Chinese press carried reports that the government might start investigating the company's mainland operation to see if it was violating any Chinese rules regarding foreign ownership.
Johnny Chou, Lee's colleague and Google's president of Greater China sales and business development, denies that the decisions regarding censorship have hurt business. "Local users very, very much understand," he says. While there is a tendency in China to support a local player, "I don't feel it's that strong a sentiment," says Chou. "People are much more practical."
However, even something as simple as choosing a Chinese name hasn't gone smoothly for Google. The Chinese language doesn't have an alphabet, so multinationals searching for a Chinese name often try to find some characters that have a sound or translation similar to the English name. Apple, for instance, has the name Pingguo, which means Apple in Chinese.
A Rose is a Rose
Cisco has the name Sike, which is pronounced "sih kuh" and means "thinking science." Google chose Guge (pronounced "goo" and "ge"). That sounds somewhat like Google, but has the decidedly unhip literal meaning of "valley song."
The new name prompted a backlash, with 19,647 people signing an online protest at a site called noguge.com. That compares to 1,665 votes in favor of the name. "The name Guge makes us sick!" the site announces on its homepage. "Moreover it makes us feel hopeless!" Lee defends the choice of name. "The reality is more than half of Chinese Internet users cannot spell g-o-o-g-l-e. So for them, typing g-u-g-e is much more intuitive. We just want them to find our Web site."
For all of the high-profile difficulties, Lee says that Google's situation in China is not unlike the one the company faced five years ago in the U.S. Back then, Yahoo was the leader in search, and Google focused on creating something better. Once it did, users and dollars naturally followed. The same thing will happen in China, he promises.
"Our No. 1 strategy for winning in China is building a tremendous, amazing engineering team and letting them loose and empowering them," he says. "That is the No 1 thing, to hire great engineers and empower them. That is our traditional formula." Most of Lee's engineers are in Beijing, with a small group in Taipei, and he plans to open a center in Shanghai too.
Because the average age of Google's Chinese engineers is 25, he argues, they have a sense of what China's young base of Internet users want. Just give them some time, Lee says, and they'll do for Google in China what their counterparts did for the company in the U.S. One big difference, of course, is that when Google was getting started in the U.S., few people thought you could make money on search.
That gave Google time to build up a search engine second to none. Today Google doesn't have that advantage—and especially not in China, where many rivals sense a rare opportunity to beat the world's search giant. For Kai-Fu Lee, the legal battle against Microsoft just to win permission to start working for Google in China may turn out to have been the easiest part of the job.