Growth Engine: China's Search Giant Baidu

Baidu CFO Jennifer Li

In a little over a decade since it came into being, China’s first homegrown search engine, Baidu, has become a formidable internet giant. Today Baidu commands over 85% of the Chinese search market, and in terms of marketshare, it is counted among the top three search engines globally. It has also started to create a global footprint.

While web search is Baidu’s proven business model, it accounts for only about one-third of the overall traffic. The majority of traffic now comes from other ancillary products, like vertical search or community knowledge-based products such as Baidu Knows (Baidu Zhidao, an interactive knowledge-sharing platform), Baidu Encyclopedia (Baike Baidu, a collaborative encyclopedia) and PostBar (Baidu Tieba, an online community to share views and experiences).

Jennifer Li joined Baidu as Chief Financial Officer in early 2008 after successful stints at GMAC and General Motors in various capacities and across geographies. Li, who is often referred to as the ‘Sheryl Sandberg of China’, is counted among the most influential businesswomen in Asia according to Forbes, the Wall Street Journal and Financial Times.

In this interview, Li reflects on Baidu’s strategy so far, opportunities for the future and the allegations of Baidu being a Google clone. Excerpts:

Q. In the last decade or so since Baidu’s inception, how has your strategy evolved?
A. The first change was the shift from an enterprise service to an independent, general search engine. At the time, the majority of Baidu’s income was coming from our business associates, the B2B kind of business. (Baidu CEO) Robin (Li) sensed the explosion of internet usage and what a search engine can offer. So he pulled the plug on the B2B business. [Editor’s note: Baidu already had 85% of the market at that point so there wasn’t much room to scale from there.]

Q. In some senses, that was also a painful decision.
A. Yes, it took a lot of guts to do it, because you are basically trying to reinvent yourself. You make that critical decision and challenge yourself, and only then you re-emerge and become something that you never thought you could be. There were many other things that happened along the way, like PostBar which was launched in 2003. The company is very innovative and creative. (Back then) there was not a lot of information online and to create more activities online and generate content, they came up with these products. So Baidu Knows and Baidu PostBar are about user-generated content. By creating a product like that, users engage more with the internet and they are offering much more quality content that can be used by search engines. People look for something that can actually produce results for them. We’re not only a web search waiting to use our spider to grab everything that is available out there, but we also think about ways to create more activities and content online.

Another point is about competition with Google (in China). We had internet users who were not very active and we wanted to stimulate their activity, but at the same time we had competition—many of them very strong, powerful and resourceful as competitors. Because the internet content was growing fast, one of the things we did was expand our index size like crazy. Google set a pace to enlarge their index size, but they underestimated how fast the Chinese market was exploding. With more content indexed, of course, your search results are better because you have more things that you can choose from. That was one reason why our search results are so much more relevant than Google’s. Users learn fast. If they experiment on different search engines and they get to see what they like and not so much in another search engine, that forms a habit. That was very critical in the way Baidu grew. Many things that the company did was about the right decision executed well at the right time.

Q. The dominant perception outside of China is that Baidu is just a clone of Google. How do you deal with such perceptions?
A. If you look around today there are only a number of search engines available. Google is obviously the most powerful one. Then you have Yandex in Russia and NHN Naver in Korea. The funny thing is that while everybody knows Google, when Yandex went public in 2011, in their IPO brochure they said, ‘We are the Baidu of Russia’. So there’s difference in the search service that Baidu does versus Google’s. Yandex knows that because they face similar issues. Still a lot of people think that Baidu is the Google of China.

I would also go back to the very beginning. I would always challenge (the notion) that we were purely derivative by pointing out that Robin was one of the leading luminaries in search. The core idea at the heart of all market search engines, Hyperlink Analysis, is something he both applied and received a patent for prior to (Google co-founder) Larry Page for Page Rank. In fact, Robin’s work is cited in Larry Page’s. We started doing what Google was doing at around the same time. And really if there is anyone to be credited, I think we were both looking to the same company for business model inspiration—GoTo, which later became Overture.

Google is now taking a page from our playbook, and looking at delivering information structure data, content—by which I mean digitally consumable content—and applications directly to the search engine results page.

Q. China’s internet market is exploding. How is Baidu gearing up for the opportunity ahead?
A. (Internet) users in China are a little over 500 million—that’s less than 40% of the population. Search is a great function that provides very convenient access for people to find information. If there are more people coming online, search is inevitably the gateway that directs whatever the right information is that people should be looking at. Going forward, there will continue to be a lot of momentum on the user side. That offers much more opportunity in the use of search that gives us the market base for us to operate on. What comes with a search service is a beautiful business model. The beautiful thing is at the time we are servicing users, there’s a tremendous commercial opportunity for us and for our customers.


Q. Online advertising is also growing in China, as are internet players. How are you developing that space?
A. Our business model is based on bidding for advertising-based service to our customers. Already online advertising is becoming a bigger piece of the overall ad market. Within online advertising, search is growing faster and taking more share: in the 30-something percent range. Search engine (advertising) is very unique as it’s very targeted and performance-based. So if you don’t click, you don’t have to pay. That’s very affordable for many small companies. Not only can we serve the large advertisers, but we also opened up a new market potential: these small- and medium-sized enterprises (SMEs) never had that kind of channel to promote their products and services. Because of search engine advertising, they can have very little budget and start from wherever they are and advertise. In China there are 40-50 million SMEs. (Currently) we service only around a couple of hundred thousand—484,000 was the number in 2011. We can continue to service these customers and grow the customer base.

Q. What about the local developers’ ecosystem?
A. In 2009 we launched the open data platform; in 2010 we launched the open application platform and in 2011 we launched the personalised homepage. So step-by-step our platform has become very open, it gives access to many developers and innovators. Because we are the gateway, we connect these innovations with a vast user base, and give opportunities for young entrepreneurs to showcase their products and help the whole ecosystem to build up.

We have made terrific progress. We have the largest developer community in the country as an open platform. That’s been our focus over the past few years: to develop an ecosystem, to nurture a platform which encourages innovation and accumulates many excellent developers and uses their skills and manpower to together serve the users. All this is influencing the search results very positively.

Q. A recent report by China Internet Network Information Centre said that the use of mobile internet has surpassed desktops. How is Baidu looking at this opportunity?
A. More people accessing the internet through mobile adds another dimension of users that access information online, and (for us) the opportunity to service them as well.

Everybody sees mobile as this technology that we build on a solid foundation for us to move forward. Having a very powerful cloud service or back-end technology that houses many other developers’ data points, information, apps that drives the information or service to your end device (is very important). That’s one thing that’s hard to replicate. We have been building on it over these past years. Whatever the end device is, the cloud can drive the service.

The Chinese marketplace is very exciting. (There is) much ahead of us in technology innovation, mobile opportunities, user behavior and how that will migrate and evolve, and how the business model will emerge in the mobile space. A lot of those are unknown issues, but we will work it out along the way.

Q. In recent years, Baidu has started expanding globally. Given that a lot of what Baidu does is very unique to China, what is the thinking behind the global strategy?
A. Obviously (China) is a massive market and we serve many people. But those kinds of services can also be offered elsewhere, where the country environment is in a similar state. Unlike those very developed markets, the users’ behavior, the environment can be very different. We can leverage what we have operated and experienced here and expand that beyond the border. Longer-term if you look at all the successful businesses in the world in business history, no successful companies are only domiciled in one place. They are global companies. On one hand, we are proud of our products and services and on the other hand, this is a young and ambitious company. So we want to be here for the Chinese users, but we want to serve the global users as well.

We have to offer a differentiated value proposition. Because we have gained tremendous experience in this market of all the different kinds of products that we offer here are very unique. Along the stage of how the country has evolved from an internet development stage perspective, we have much experience there. So it makes sense for us to establish presence in some of the developing countries. (It is) still early stages for the global efforts, and (there are) a lot of challenges for Chinese companies to go beyond their borders—cultural, managerial, familiarity with the local market—but it’s worth experimenting. (See ‘Baidu’s Globalisation’)

Q. The most interesting thing I find in the whole plan to go global is the kind of countries you have chosen. For example, who in the world would think of going to Egypt at this point, with so much political turmoil there? The last thing on anyone’s mind is the potential of the internet over there. So what is the thinking that goes on over here when you look at countries and identify areas to grow in?
A. Before we make a decision, obviously we do market research to understand the country’s general demographic situation, the internet situation, the line connections and the user growth profile, whether there are some main players in there and what are the opportunities. So for things like that I think any business opportunity these are the long-term focus. These are obviously near-term issues with some specific countries, but a lot of the work as I said can be centrally managed here. At the end of the day it is an internet service and the internet is borderless. If we feel the market has a need that is not filled and the market has great potential that can become a very meaningful place, the population is there, it’s those kind of factors that make us think we can try these markets.

Q. Japan was really your first big international foray and it hasn’t worked out as you expected. What are some of the lessons that you have learned from that experiment?
A. Baidu made that decision to go to Japan in 2006-2007 timeframe. We thought we could leverage the language similarities, the geographic co-proximity and maybe the communications cost won’t be too high. Yahoo! was the main player in Japan and there was Google and some others. We went in there to do search, in a very mature market. If you compete head-on with the same service, it is very difficult. Search by nature has an element of a virtuous circle that leads to a winner-takes-all phenomenon. We have good people, good technology, but in a very mature market there is very little (room) you can get in to establish yourself. Over time with Google actually doing the search service for Yahoo!, they eventually got 90% of the market. So the market situation shifted. There is something to be learned about the approach you take to get into a market.

We still think there is something special about the Japanese market, it is not totally like the Western developed markets. It is developed but it has Eastern features and there is something that Baidu can probably still leverage, but not directly through search.

Q. Let’s focus for a bit on the areas you choose to get into. How do you evaluate which one is really worth your while and which one might make sense but doesn’t tie in with who you are?
A. This is always a (tough) decision and I think along the way, we got very good at it. I think the first is to really know yourself. You know you are, your strength, what you are here to do, what you are really good at doing and the probability of being successful is higher. In the internet there are many, many things that bubble up. Like a long time ago many people got into the caller ringtone business and we chose not to because this is not the core, just a way to make money. There are many ways to make money. When one way to make money doesn’t tie with your core competency, it’s a business on the side and it can be distracting, so we didn’t do it. A lot of businesses depended on it along the way and when the telecom company pulled the plug, their business was very much affected. When games became really hot, many people jumped into games and made a lot of money. And we never thought it was our core competency to deserve allocating a team and design for the game business.

But we see the phenomenon and we want to create a game channel to accumulate all the game traffic and direct it to the right game players. So we observe what’s happening in the internet environment, we know what we are good at and we don’t necessarily jump into other people’s game. But then we see there are opportunities to leverage what we have and take advantage of our strengths to do it. And in that way the chances for success are much higher.

Q. So is it safe to say you are really a search player and you add value to search and that’s where you will stay?
A. Yes, search is our core business and anything that’s helping search.

Q. Is e-commerce an area that would interest you at all?
A. No. E-commerce is really a very different thing. E-commerce is a retail business. It’s about inventory, logistics, brand, and it’s not about technology. But we love to see e-commerce thrive in the internet. What that means is more content, more activities, more users and search obviously benefits in that ecosystem. So we want to encourage e-commerce development, but we don’t do e-commerce ourselves.

Q. We’ve talked a fair bit about the mobile opportunity and that you are looking at it in a big way. Currently where do you rank in the Chinese market as far as mobile is concerned?
A. I think it’s still early. When the pie is still small, everybody is focusing on building a bigger pie. We only started focusing on mobile about a year ago. But way before the market was penetrated by feature phones and there were many other web search offerings that service the feature phones. We don’t even consider feature phones as the future so today (when) we talk about the market share, it’s going to be different. Today a lot of the traffic comes from the feature phone but that’s going to be obsolete. So our focus is really to offer the kind of services that are superb in meeting user needs. We have a strong brand that carries from the PC and when people search on their mobile device, they use Baidu as well.
 

BAIDU’S GLOBALIZATION
Some time back, Baidu CEO Robin Li declared that he wanted Baidu to be a household name in 50% of the world’s markets. The company has already started taking baby steps to realize this goal. According to Kaiser Kuo, Director of International Communications at Baidu, “Today we are the number two search engine in the world. The core technology for searches in a way can be applied (elsewhere), so there’s some scale that you can leverage from existing platforms.” To go global, Baidu is looking at emerging markets which are underserved by the dominant players. These markets are still evolving from an internet user perspective.

Baidu believes that having roots in China will help as it globalizes. “In China we really are in two markets at the same time,” says Kuo. “We have the developed world market in these first-tier cities and we are very much in the mainstream of technological developments globally. We also serve very much a developing world market already with a relatively unsophisticated user base with relatively unsophisticated consumers. So we’ve gotten really good at developing technologies and products that are appropriate for those sorts of markets.”

So far Baidu has chosen to dip its toes in Japan, Egypt, Vietnam, Thailand and Brazil (and has plans for other markets as well). So Baidu went in with Japanese language search in Japan, it took a Portugese language version of Hao123 (a directory of weblinks) to Brazil (and a similar local-language version of the same site in Thailand), and an Arabic version of Baidu Knows in Egypt. “These products were chosen in part because of their ability to help us understand the terrain and to connect us with other players,” says Kuo.

The choice of countries is somewhat surprising. Take Egypt for instance, which doesn’t rate very high on many companies’ globalization plans. But Baidu has thought this through. “Egyptian Arabic has now become sort of standard from the Maghreb all the way through to Iraq, and Egypt is the culturally dominant country in the Middle East. It has the highest output of literature, film and so forth. There’s a huge group of very well trained engineers in Egypt,” says Kuo. “It makes the most sense from a lot of perspectives.”

Baidu’s strategy is simple: go where English is not the dominant language, build capabilities in that market—and then expand.

[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]