Baidu Thinks It Can Play in Japan

Faced with slower growth at home, China's No. 1 search engine looks to its island neighbor for new growth opportunities. Will it translate?

Facing slower growth and increased competition at home, (BIDU), the dominant search engine in China, is making its first foray overseas. On a call with analysts following the company's announcement of earnings for the fourth quarter, Baidu Chairman and Chief Executive Officer Robin Li said the company will spend $15 million trying to replicate its at-home success in Japan this year.

The company started investing in Japan last year and management argues that the same magic that made tops in China will give an edge in Japan. "We are very confident" about Baidu's ability to make an impact in the Japanese market, Li said in a conference call with analysts Feb. 15 from Beijing.

Baidu certainly has had an impressive run in China. The company reported profits for 2006 of $38.7 million, up 533.9% from a year earlier, on sales of $107.4 million, an increase of 162.5% from 2005 revenue. Baidu has more than half of the total search market in China, and it has formed partnerships with some of the top names in the tech world, from IBM (IBM) to Intel (INTC) to Microsoft (MSFT).

More New Rivals

Baidu's accomplishments are all the more impressive given the attempts by both Google (GOOG) and Yahoo! (YHOO) to become more competitive in the Chinese search market. Even Baidu, though, can't keep that kind of torrential growth going in China. In today's call with analysts, Li and Chief Financial Officer Shawn Wang discussed a slowdown in the company's new-customer growth.

In the fourth quarter, Baidu only added 6,000 new customers on a base of more than 100,000 advertisers. Google and Yahoo! aren't the only ones going after Baidu's core business. Local players such as portal (SOHU) and Shenzhen-based instant-messaging provider Tencent (TCEHF) are also boosting their Chinese-language search offerings.

That's one reason Baidu is expanding to Japan. Some people who follow the industry believe that Baidu's strengths—especially its ability to cope with tens of thousands of Chinese characters—will help there. Written Japanese uses many of the same characters as written Chinese, and that plays to Baidu's biggest advantage over Western rivals, says Gerhard Fasol, CEO of Tokyo-based consulting firm Eurotechnology Japan K.K. "They may be able to exploit their knowledge of Chinese characters better," he says.

Facing Giants

Fasol also believes that Baidu has an opportunity to establish itself in Japan's mobile search market, which is in its infancy. "The momentum on development is moving from fixed-line to mobile," he says, pointing out that search via mobile phones is only about six months old in Japan. "You know, it's very early, so it's not mature at all. The dice have not fallen yet."

Still, some people who follow Chinese companies have their doubts about Baidu's ability to do well in Japan. There are several big-name competitors vying for the same market as Baidu. The field is dominated by Yahoo! Japan, controlled by local giant Softbank (SFBTF). Google is stronger in Japan than in China, too. And Japanese cellular operator NTT DoCoMo (DCM) operates a mobile search service of its own.

Talking with analysts, Li said that Baidu has plenty of experience in coming from behind to take over a market. "Baidu wasn't No. 1 in China from Day One," he said. "We started quite late. So we are familiar with how to play the catch-up game."

Funnier at Home

However, the players in Japan are in a very different league, warns Shaun Rein, managing director of Shanghai-based China Market Research Group. "There are a lot more embedded competitors in the Japanese market than in China [when Baidu got started]," he says. Because the Chinese market was in its infancy early this decade, "Baidu wasn't really competing against anyone with a strong position." That's not the situation in Japan, where Baidu "is going against people who really know the local market."

That's especially problematic for Baidu, given the way it has sold itself in China by playing off the nationalist feelings of its Chinese users. One of Baidu's TV commercials, for instance, pokes fun at a stiff-looking Westerner, dressed up in a tux and Abraham Lincoln top hat, struggling to say "I know" in Chinese, an unsubtle jab at U.S.-based Google (the ad is posted on YouTube, at

That might work at home. But as they try to convince Japanese Internet users to give a Chinese-owned search engine a try, Baidu management will have to work fast to make sure that the joke is not on them.

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