Why Is Baidu Expanding to Japan?

In December of last year, Baidu (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 (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 (LNVGY.PK) acquisition of IBM (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

Comments

[Chimin Sang]

You may view Baidu's expansion as a variation of the current Chinese IT outsourcing to Japan. Many companies, such as HP China, do outsourcing projects for Japanese companies already. The relationship is similar to what India means to the US.

If you hold this view, you may see Baidu's expansion into Japan differently. There is labor advantage that Baidu can claim. Of course, the ultimate success factor is the marketing/sales in Japan.

You view does seem more of a guessing at this point. So will be everyone else. Baidu's success/failure in Japan needs time to tell.

2007 Mar 29 01:22 PM

[Steve Tang]

i think baidu's ambition into japanese market is doomed to failure. i couldn't see any reason why they need japan's market to support its growth. one possibility is that baidu is slowing down in china. china's internet population is growing, indeed, but that hasn't yet translated into growth in internet advertisment. baidu's innovations and technological development is far inferior than that of google. it is slowly losing core competence.

2007 Mar 31 06:45 AM

[huangjin]

Spot on. Why would a young company, in a nation soon to have the largest number of internet users and still growing rapidly, not focus all their energy there? It makes no sense. Why wouldn't they first target overseas Chinese in the US and Canada?

2007 Mar 29 04:44 PM

[Chimin Sang]

TCL/Thompson and Lenovo/IBM cases are quite different from Baidu/Japan Market case. The two cases mentioned are in the hardware field. Known for very thin margin and heavy initial investment. Both TCL and Lenovo paid expensive acquisiiton cost to enter the market. TCL has failed. I believe Lenovo will win out in the end.

Baidu/Japan case is organic growth, and the upfront cost is relatively low. Search market is a high margin business. All these make this case a very different one. Time will tell that if this strategic move is good one or not. It is contigent on the quality of marketing/sales in Japan.

2007 Mar 29 06:16 PM

[Chimin Sang]

disclaimer: I hold no position in BIDU. No long or short. The discussion is purely based on my microeconmics view.

2007 Mar 29 06:25 PM

[Drunken Economist]

I agree with Chimin. Aside from the fact that Japan and China have mutual experience with data standards (the whole 2byte / 4byte thing) Baidu's looking for cross pollination and funding.

The PRC vis a vis the internet and the great firewall can be a bit stagnant; but with low upfront costs (operating 'offshore' in relation to Japan), it looks like a no-brainer for them to do this- at least to me.

-Drunken Economist
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Jan 27 08:56 AM