Baidu’s Adventure in Japan

Perhaps the most discussed topic during my dissertation trip in China was Baidu’s decision to enter the Japanese search engine market in January 2008. It was the first thing that came to mind of just about everyone I spoke with on the topic of my study. Following a nearly year long study of Japanese-language search technology and localization, Baidu’s expansion plans were first announced at the end of 2006. In a reaction on earnings for the fourth quarter in February 2007, Robin Li said the company would spend $15 million, 14 percent of Baidu’s total budget in 2007, trying to replicate its home market success in Internet-savvy Japan.

Getting Started in Japan

Earlier in May 2006 Baidu had announced a hiring plan to search for Japanese and Vietnamese search talents and product managers to be in charge of know-how on the local competitive market as well as local cultures. Rumors at the time were that Baidu had already hired several Korean search engineers. Nearly a year after the first signs of Baidu expanding to other Asian markets on March 20 2007 a test version of Baidu.jp was launched. The site runs on servers located in Japan and straight from the start it turned out that the site was mainly getting visitors from China looking for content they can’t find on Baidu’s Chinese site. According to Alexa, at the time the share of Chinese users visiting Baidu.jp nearly reached 60 percent (of which 76 percent were visitors searching for pictures) compared with less then 30 percent of the visits coming from Japan. In a reaction on the launch of Baidu.jp, that was still in beta at the time, the purpose of the bulk of the Chinese visitors is well illustrated: “It is really very good, but nothing stunning for other countries, especially Japan which has a large, specialized po r nography industry. Still this is huge for China!” Not surprisingly even before its official launch in January 2008 when more Japanese language services including a blog search application were added, Baidu.jp was blocked in China in April 2007, less then a month after the first launch.

Currently Baidu’s Japanese subsidiary has around 30 employees located in Japan. Furthermore nearly 90 percent of Baidu.jp visitors come from Japan while only 8 percent comes from China. When looking at Alexa statistics it looks as if Baidu did not get a foothold in Japan. With only 0.3 percent market share it has not been able to claim a significant market share from market leader Yahoo! and the pursuing International giants Google and Microsoft. Though contradictory with its initial naïve announcement Robin Li now appears to be realistic about the situation and realizes that Baidu will not become a significant player over night. “We will be very patient.” In another reaction, Robin Li said that Baidu has plenty of experience in starting of as the underdog and taking 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.”

Why?

It is interesting to evaluate what the initial goal and reason was for Baidu to give Japan a try with such an extensive budget. The decision must have been based on many more factors and incentives than just short-term profit and it would be too one-dimensional to purely assume that Baidu genuinely suspected to quickly become a big player in the Japanese search market.  For my study I have tried to collect all possible incentives for the decision I could find. During my interviews with Tangos Chan, China Web 2.0 expert, and Zhang Tao, Baidu’s manager of international business, I have asked them to distribute 100 points over the four reasons for Baidu’s Japan adventure that I had previously derived from numerous interviews. The two respondents could also enter a new reason which they both did and attributed 5 points to. The results of the small survey are depicted below.

Following are the six reasons for Baidu to enter Japan worked out separately and in order of influentialness.

1. Maybe the most important reason for Baidu to enter the Japanese search market is Robin Li’s power and personal pride. As depicted in the survey above according to Zhang Tao, sometimes working with Robin Li himself, this could have been one of the primary reasons. Zhang’s remarks on the whole Japan expansion situation made me realize that Robin Li plays an essential role in Baidu and has a very distinctive view on the market. It seems that his personality is determinative for Baidu’s direction and he almost solely formulates its strategy. After having beat Google in its home market he now wants to show the world that a Chinese company can compete with the big Western giants in other markets also. According to Tangos Chan, “Robin Li wanted to prove that it could beat Google not only in China.”

2. The chance to gain valuable market experience in a foreign market has also had its effect on to the choice of Baidu to enter Japan. Paul Denlinger, CEO, China Business Strategy and tech blogger behind China Vortex, thinks this has been one of the major reasons. “The thing is that market share is not the most important part. The important part is to go to another market and put a flag there to learn and understand how the Japanese search market is different from the Chinese search market” he says. Zhang Tao shares the same view and has addressed 40 out of 100 points to the ‘longer term International strategy’ reason. Tangos Chan thinks that the opportunity to learn could not have been extremely influential. I tend to agree since the amount of resources that Baidu has poored in the Japan project does not match with such a longer term strategy. If Baidu wanted to gain valuable insights they might as well have looked for local partners or even acquire local companies which would have been a much cheaper and more efficient approach.

3. The most obvious reason for Baidu to give it a try in Japan is, as mentioned, the presumption that they really stand a chance and can compete in another market. Success in the Chinese market made Baidu feel confident enough to start tapping in on the $700 million paid search market rather than focusing on growth in the relatively undeveloped and small local market. In a reaction on the launch of Baidu.jp Robin Li has said: “We believe that our proven strength in non-English-language search, the high Internet penetration in Japan, as well as similarities between the Chinese and Japanese languages make this market an ideal next step for Baidu.” Gang Lu, owner of MObinoDE and China Internet expert, adds to this and explains that Baidu might have thought “that the Japanese and the Chinese are quite similar and also historically Japan was a part of China, so the technique could be similar.” Some people I have met think this has been the primary reason for the rather drastic International initiative. They believe that Baidu genuinely thought that its strengths, especially its ability to cope with tens of thousands different Chinese characters, combined with good technology would help them to do well. Also because Japan is an important trading partner of China, Baidu might have aimed for linking small Chinese companies to Japanese consumers and businesses through their search engine. It could have been assumed that Baidu.jp would become particularly popular among these groups because these have a strong interest in inexpensive goods produced in China.

4. When I asked Tangos Chan to distribute his 100 credits he argued that besides the major weight of Robin Li also the overall attitude or sentiment of everybody in the company could have been of influence. He came up with a reason I had not previously encountered. He argued: “it was the whole company that wanted to prove that they stand a chance abroad.” Paul Denlinger also thinks this could have been a factor that contributed to Baidu’s move. “The Chinese are proud of Baidu.” he says. Gang Lu’s reaction on Chinese companies going International is illustrative for the sentiment of many proud Chinese: “I was very exited when I first heard that some Chinese companies were going abroad.”

5. An additional reason that Zhang Tao thinks might have been of influence, is closely related to the influence of Robin Li. According to Zhang Tao the Internet does not have a geographical border it only has cultural and language borders. He points out that Robin Li believes in the concept that if you want to be a global search engine, the best way is to localize as much as you can so language and culture are the main factor for success. This is something Baidu has learned from the Chinese search engine market where Google failed because it “just tried to copy its concept which made them so successful in the rest of the world.” “We want the users in Japan to be a benchmark. If we succeed in Japan our concept is approved.” Zhang Tao explains.

6. A different reason for Baidu to go over the border has to do with the fact that it is listed on Nasdaq. As a public company Baidu has to deal with shareholders and investors that are looking for short term profit. “These guys will look at your quarterly earnings and will try to make sure that you are making money.” says Paul Denlinger. Shareholders could have pushed Baidu to make the hasty decision to enter Japan. Benjamin Joffe, Managing Director of +8* (plus8star), adds to this and says the decision “sends an interesting signal to Nasdaq”. He argues that maybe Baidu might have deliberately avoided expanding to developing countries such as the Philippines or Vietnam with a small online advertising market. Instead they wanted to make “a big headline” and expand to a more mature market: Japan, with the world’s second biggest online advertising market.

Conclusion

It is uncertain what has been the primary reason for Baidu to expand its services to Japan, but based on the different stand-points that I have come across there are probably three key factors that have been decisive. When looking at the model the foremost important one is Robin Li’s strategic views combined with the key decisional role he plays. As a founder and CEO he still plays an essential role in determining the longer and short term strategy which has a profound impact on the company. Furthermore despite spending 14 percent of the total 2007 budget and skipping the whole partnership and joint-venture part, Baidu entered Japan to learn. Also considering rumors about expansion to other Asian regions and even Europe, expanding to and learning from the Japan market seems to be part of a longer term International strategy. Lastly because of the domestic success and distinct strategy used in the Chinese market I assume that Baidu genuinely believed that it could quickly acquire a strong position in Japan.

The Uncertain Future

Baidu will certainly have a hard time growing its share in Japan considering the trong competitors Yahoo! and Google. But the strategy has to change drastically in order to even stand the slightest chance of gaining a significant market share and eventually make money. According to a Baidu insider the operations in Japan will be further intensified, but this was all before they got into trouble with their dodgy practices concerning paid for ads of unlicensed suppliers of medical products. Before the while crisis Baidu expected to spend between $20 million and $25 million on the development of its search service in the Japanese market in 2008. Furthermore in July 2008 Robin Li has said that a new president of Baidu Japan will be hired and that despite any specific plans Baidu is also looking into the Taiwanese market. Regarding these considerable efforts to intensify Baidu’s overseas operations and despite Baidu’s current reputation crisis I think it is unlikely that they will pull the plug in Japan any time soon. It is more likely that Baidu will cut back on its International expansion budget.