Google Faces Search Engine China Quandary

Google has long wanted to expand in China. And the question of its Chinese strategy is now becoming more urgent, as one of China’s leading search engines, Baidu, gets ready to go public.

China’s search advertising market is growing rapidly. And homegrown Baidu reportedly has a leading position among search users, even if it faces competition from at least seven other players.

Google has a more uncertain position in China, and it has long grappled with the fickle ways of the Chinese market. Google’s site was shut down several times a few years ago by censor-prone Chinese authorities. Google’s popularity apparently forced the Chinese to back off — although the Mountain View company has agreed to censor some of its news offerings that might offend Beijing.

Some observers believe Google would like to buy more than its existing 4 percent stake in Baidu, which it picked up through an investment in the company last year. Speculation that Google is eager to increase its stake in Baidu was fueled by CEO Eric Schmidt’s visit to China last week, his first since he joined Google in early 2001. In addition to Baidu Chief Executive Robin Li, Schmidt reportedly visited several other Google partners, including Internet wireless and games company, Netease. He returned Wednesday.

But others note that Li has long prided himself on keeping Baidu a stand-alone company, at least until it goes public. Investment bankers say Baidu’s preparation for the IPO is under way, and that it may have entered its so-called quiet period.

If Google does make an offer, Li might be asking a price that Google would pale at, despite its bucketloads of cash.

"I know Robin very well," said David Chao, an investor with Silicon Valley’s Doll Capital Management, which considered investing in Baidu last year in the same deal in which Google bought its stake. "I think Robin wants to go all the way."

Google spokeswoman Debbie Frost would not comment on Google’s strategy in China, nor about the rumors of a Baidu acquisition. "Google is interested in China and is working to learn more about the Chinese market," she said. Baidu did not respond to a request for comment.

Danny Sullivan, managing editor of Search Engine Watch, which keeps close tabs on the industry, said China’s complex political setting could have Google considering a number of options.

Since Beijing could scrutinize and censor Google closely if it decided to market aggressively in China, Google’s executives might assume it’s easier to buy a large stake in Baidu instead, Sullivan said. That way, Google’s huge number of advertising clients who want to advertise next to search results in China could do business with Baidu — and Google could profit through its ownership position. Under this logic, Baidu would take the brunt of China’s censorship rules.

In any case, analysts agreed that Google would have to beef up its local presence in China, either through an alliance with Baidu, or by going it alone.

Safa Rashtchy, an analyst with US Bancorp Piper Jaffray, said an office in China is necessary partly because of complex business regulations. Most businesses still prefer to use phone and post mail, making Google’s online registration process for advertisers a bad match for the local market, he added.

"China’s paid search customers don’t sign up online like they do here," he said. "You need an office. Most leads come from a call by phone."

That’s why acquisitions are the easiest strategy for China, he said. "I would expect that Google and other companies would look to acquisitions to expand there."

Also, there have long been rumors that Beijing wouldn’t let Google collect a portion of its advertising revenue unless Google had a local office. Google announced May 11 that it had obtained a license to operate in China, and established a representative office in Shanghai. But Google officials acknowledge that they did little to tailor service specifically for the Chinese market until recently.

Most data on market share for search engines is highly unreliable. According to a poll done by iResearch, Baidu has 33.1 percent of market share in the Chinese search engine market. Google ranks third, with a 22.4 percent market share.

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