Why Is Baidu Expanding to Japan?

Mar.29.07 | About: Baidu, Inc. (BIDU)

In December of last year, Baidu (NASDAQ:BIDU) announced its plan to expand into Japanese market.

In February’s conference call, Baidu Chairman Robin Li said :

...Another exciting initiative for Baidu is our upcoming interest into the Japanese search market. We believe that with our proven strength in Chinese language search and our focus on delivering the best user experience, we will be able to provide Japanese users with a quality alternative to existing search engines..

Now the Baidu Japanese site has officially launched, I have trouble understanding what exactly his so-called "advantage" is. At most I would agree that Japanese characters and Chinese characters look similar. So what? Is that the critical success factor to run an online search business? To win a market in today's online world is all about marketing muscle and the capability to understand local culture. What advantages does Baidu possess in Japan? Chinese and Japanese culture are totally different, and so is the way each country does business. The Japanese market is not an easy market to crack; just look at eBay's (NASDAQ:EBAY) failure there.

In general, I am not too impressed to see a young company like Baidu expand overseas too quickly. The first question I would ask is “Have you fully explored your local Chinese market?” The Chinese internet population is still growing at over 34% a year (based on the China Telecom 2006 annual report on broadband subscriber growth); how much is it growing in Japan? Why is Japan a more attractive investment to BIDU from an ROIC (return on invested capital) perspective?

There are so many examples in which local Chinese companies failed miserably in overseas expansion. Lenovo’s (OTCPK:LNVGY) acquisition of IBM (NYSE:IBM) PC unit (yes, this is not a proven failure yet) and TCL’s acquisition of Thomson Electronics Corporation, just to name a few. Baidu has not announced any acquisition in Japan or in any overseas companies yet. If that happens, it may be good chance to short.

Disclosure: I have no position in BIDU