baidu.gifThere’s a long, tough slog ahead for Silicon Valley companies like eBay and Google in China. They’ll cede ground, if they haven’t already, by not being there.

Exhibit A is Google’s experience:

When we first read this story in China’s People’s Daily Online about Google’s woes in China, we suspected it was a piece of local propaganda. It said Google had been number one in China, but didn’t pay enough attention to the country, and so was overtaken by Baidu. Good grief, we thought, should we laugh, or cry? Google had been suffering heartburn for years over China — hand-wringing over how much it should agree to filter sensitive content to appease China’s authorities, and how much to hang tough. Google’s service has been blocked by China numerous times. And now China’s press is saying Google was a slouch?!

But after making a few calls, we soon realized the People’s Daily had a point. If you read the story carefully, it is about how Google didn’t try to tailor its service in any specific way to treat the Chinese market. Sure, Google translated its site into the local language, and sought free distribution throughout the country. But that’s what it did for other countries — Google flipped the translation switch, and that’s it. We checked with a few people at Google, and they confirmed they’d tried nothing else until now. So, with that, let’s return to the article’s main point:

Google gets nod to set up branch in China

Google, the No.1 search engine company in the world has announced to launch “university search” service in China. Google aims to help users to search for information about the Chinese universities by launching the special service at the time when China’s college entrance exam just ended. This is the first time Google offers service specifically to Chinese users.

Signs have shown that the once arrogant Google has paid more and more attentions to Chinese market. Sources from the company say Google has gained approval from Chinese government to put up branches in China. The office location in Shanghai has been fixed.

Google was once the No.1 Chinese search engine in China thanks to its early entry into Chinese market. But because it hasn’t given sufficient attention to the Chinese market, it has been surpassed by Chinese enterprises like Baidu.

Now, with Baidu on the ground there, and completely focused on serving China, is it…

…any wonder that Baidu has done so well? What’s more, Baidu is about to go public, and will undergo a significant branding campaign. As China become more important, we might have to eventually add Baidu to the list of search leaders Yahoo, Google and MSN. Google’s one smart move: Buying a chunck of Baidu last year.

Second, take eBay:

meg.jpgeBay’s CEO Meg Whitman (picture at left by Dai Sugano) appears to have taken the “got to be there” lesson more seriously — though might have taken some prodding. As we mentioned, we’ve been on the eBay annual conference this week (see Mike’s story here, which includes other links), and the China angle is the most interesting part of that story:

As important as the U.S. and German markets are to eBay, its brass ring is China. Executives are excitedly eyeing a middle class of 250 million people and the world’s second-largest Internet population. The Chinese online auction market is expected to grow annually by more than 40 percent over the next two years, reaching 35 million users in 2007, according to Shanghai iResearch.

EBay was the first major company to aggressively enter the Chinese online auction market, investing in and then acquiring local site EachNet. China is so important to eBay that Whitman has traveled there three times this year, and plans to return later this summer.

“If you can actually have five days with the team, you can get more accomplished and really have a sense of what’s going on in the marketplace,” Whitman said, adding that China could be eBay’s biggest market in five to 10 years.

But China is turning out to be more drama-filled than some anticipated.

Yahoo, which forced eBay to retreat from Japan, is making a play in China. And a brash entrepreneur named Jack Ma has launched Taobao, an eBay clone that Ma says is giving eBay a run for its money.

Taobao’s parent company, Alibaba, runs an established and profitable online business-to-business e-commerce site and counts investment firms Softbank and Fidelity Capital as partners.

Unlike eBay, which charges sellers to list an auction and takes a cut of each final sale, Taobao is entirely free — and may remain that way for at least another year as it tries to build up a base of users.

Battling back

EBay has responded by slashing its Chinese listing fees and unleashing an expensive marketing campaign on television, billboards and the Internet. EBay executives committed to spend up to $100 million in China this year.

Paul Waide, founding editor of Pacific Epoch, a small research firm based in China, said eBay “got a huge head start.” But Taobao “has spent a lot of money, and they’ve spent it wisely.” And its parent company is local, as opposed to eBay EachNet.

“It’s hard to say either is winning,” Waide said.

Ma says he has lured eBay into a battle and is happy to let eBay “shoot all its bullets” at him. “We are helping them to spend more money,” he said.