China's Web giants who pick home over foreign markets

Logic and incentives responsible for why some of the biggest players in China's Web bazaar stay rooted in home soil instead of overseas expansion.
Written by Jamie Yap, Contributor

That any Internet giant will eventually diversify and spread its wings beyond home to serve a global market comes almost as a given. Yet, a number of China's major homegrown Web companies have chosen to play all their cards in feeding the domestic online populace.

A strikingly obvious reason is that the most populous country in the world also has the world's "biggest online population", said Li Mei, manager of investor relations at Web portal Sohu.com, told ZDNet Asia over e-mail. The size and growth are by no means trivial going by the statistics she cited from the state's Internet Network Information Center, which reported 420 million Web users in China to date. In 2009, the number was 384 million.

Rapid growth, plenty of upside
Already the world's largest Internet space, the accelerating growth signals a fertile bed capable of producing "profitable areas", said Jean Shao, senior manager of International Public Relations for video hosting service Youku.com.

An additional and related incentive is that even with impressive figures, China's broadband penetration rate of 7.7 percent is still "far below that of mature markets", Sohu.com's Li said. These include South Korea (33.8 percent) and Hong Kong (29.34 percent).

It is this combination of a rapid growth rate and an online market that is "far from saturation", which explains why companies naturally want to "grasp and concentrate on the current available market" in China, said Karen Chen, Youku.com's vice president of Marketing.

Homegrown advantage
Whether within or outside the perimeters of China's online market, there is constantly "intense competition in several sectors in the Internet space because no one player dominates", said Jessica Lo, managing director at China Market Research Group (CMR).

Similarly, Youku.com's Chen said that since "competition is fierce anywhere" in the Internet space, it boils down to working with "what one is most comfortable with".

To grow their business, Chinese Web companies are making every possible effort to utilize their in-depth knowledge of how their own online market operates. It is very much a no-brainer for firms to focus on their home market, even in the mid to long run, said CMR's Lo.

"It's the low-hanging fruit for them. It's more vibrant than anywhere else, it's where the biggest growth is, and it's what they understand [best]," she pointed out.

The added bonus is that the home arena is both large and booming, making companies more inclined to deepen their foothold rather than widen their outreach overseas. Anita Huang, VP of Marketing & Business Development for video Web site Tudou.com, said her company's plan in the foreseeable future is "to stay focused on online video within the China market where Tudou.com excels in, and build up a strong presence in China first before diverting ourselves in too many directions".

Huang also said that though the Internet typically connotes a single, globalized entity, it also "operates and iterates in local ways in terms of consumer behavior and cultural and language aspects".

And therein lies a potentially problematic situation for Chinese Web companies keen to stretch their business into foreign markets.

Risk of obstacles when overseas
Enjoying success in their own backyard is no firm guarantee that foreign conquests will turn out the same way even for the most established names in China's Internet stratosphere. They could just as easily fail due to a "lack of overseas operational experience or if their home products aren't well received in foreign markets", noted Sandy Shen, research director, Mobile Devices and Consumer Services group, at Gartner.

In blunt terms, China's Web performers could well encounter the same misfortunes suffered by their Western counterparts such as Google and Yahoo, whose attempts to enter the lucrative Chinese online marketplace have largely flopped. If Chinese tech companies venture overseas, they might run into the "challenge of understanding what foreign consumers want", CMR's Lo said.

In general, "firms need to localize". What works in one country may not work someplace else, she said, giving the example of Google-run social networking site Orkut, which is popular in Brazil but falls behind rivals MySpace and Facebook in the U.S.

Underestimating the impact of localization could also lead to the risk of overseas expansion plans going awry, such as in the case of Baidu, Chinese's largest search engine, when it tried entering the Japanese market in 2007, she added. Baidu was targeted by the government when mainland users were able to circumvent the Great Firewall and access porn sites because the server was based in Japan.

The nature of the business
Nonetheless, not all attempts to penetrate foreign markets have been unpleasant for Chinese Web firms. While founded in China, Alibaba Group has been a "global company since day one", said John Spelich, its vice president of International Corporate Affairs.

Taobao, one of its companies, is a successful online retail platform with 200 million users. Another, Alibaba.com, an online business-to-business (B2B) trading platform for small businesses, has 50 million users worldwide and operates in 240 countries. Continuing their expansion plans, the Group recently acquired two Californian-based tech companies, Auctiva and Vendio.

Regarding Alibaba.com's success overseas, Spelich admitted that because its nature is predominantly B2B e-commerce, there are "probably more commonalities than there are differences" when users from different markets interact. "Commercial transactions are commercial transactions," which make them less sensitive to local subtleties.

Still, there are obvious challenges that any Chinese IT company could likely face in their overseas expansion, he said. So, instead of simply anticipating the potential obstacles, what is more important for his company is "focusing on the customer, the employer, and embracing change".

Despite the different paths chosen for their business, with some Chinese Web giants increasing their presence overseas and others strengthening their stand back home, Spelich noted that regardless of strategies taken, the overall online business in the Internet marketplace is gradually evolving.

Editorial standards