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China's Internet titans leave West behind

By Kevin Voigt, CNN
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Will China miss Google?
STORY HIGHLIGHTS
  • Western Internet companies have little presence in China
  • China has more Internet users than the entire population of the United States
  • Consultant: 'Foreign companies have not been agile enough in customizing to the China market'
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Hong Kong, China (CNN) -- They are the biggest names in the Internet world you may have never heard of: Baidu, Alibaba, Youku and Sinu.

They may not be household names in the West like Google, eBay and Facebook, but in China -- which has more Internet users than the entire population of the United States -- they are the champions of the world's largest Internet market.

"China is one of the few Internet markets in the world where U.S. companies are not dominant, or not even important," said Haim Mendelson, a professor of electronic business at Stanford Graduate School of Business. "Even Google in China, they are number two -- by a big distance."

The number one search engine for Chinese users is Baidu, which has a market share of nearly 60 percent of Chinese users, compared to about 36 percent for Google, according to statistics from Analysys International, a Beijing-based technology market research company.

When Chinese consumers want to buy good s online, they don't go to eBay, they go to Taobao.com. In fact, if Google pulls out of China it will be following in the footsteps of eBay, which pulled out of the country in 2006. Yahoo ceded China when it purchased a 40 percent share in Alibaba.com, which also operates Taobao. The biggest video sharing company in China is Youku.com, not YouTube.

The number of Internet users in China has nearly tripled in the last three years -- to 384 million users in December 2009 compared to 137 million in December 2006, according to the China Internet Network Information Center.

Social Internet service providers like Tencent trounce foreign latecomers like MySpace and Facebook.

While the Google-China spat has raised questions regarding the viability of foreign Internet players in the heavily censored environment of China, analysts say in most cases foreign companies were flatfooted in their entry in the China market.

Video: China-Google battle heats up

"There is a certain amount of government relationships, of course, which is a sensitive issue that has to be hurdled," said Yuval Atsmon, an associate principal at McKinsey & Co. Shanghai. "But foreign companies have not been agile enough in customizing to the China market.

"You can argue they tried -- there was an equivalent to YouTube, eBay and Facebook -- but once someone generates scale, that's difficult to overcome," Atsmon said. "You don't buy a car because you need to use (the same model) as other people, but you use a Facebook because there are other people who are using it ... it's a winner-take-all market."

EBay's departure from China was a textbook example of what Western Internet companies often do wrong when they enter the Chinese market, said Edward Yu, chief executive of Analysys.

"When eBay first entered the market, they were definitely a dominate player, but they just migrated their business model to China," Yu said. That strategy ignored a key difference in the Chinese consumer -- they don't like buying used goods.

"Taobao was quick to recognize that people wanted to buy new products online rather than second hand goods," Yu said.