Where Google Loses

Baidu is the dominant search engine in the world's biggest (and fastest-growing) Internet market -- China. But how did it outsmart Google? 

Besides a cloud of smoke, sticky keyboards, and the incessant sound of noodle-slurping, nearly every Internet cafe in China has one thing in common: All home pages are set to Baidu.com, China's dominant search engine. It's not a coincidence, or even a matter of preference. Back in 2005, when Baidu was just a start-up, company representatives traveled through China persuading Internet cafe owners from Beijing to Kunming to install its toolbar and home page. In addition, it set up alliances with dozens of Internet directory sites, where most first-time Internet users in China start surfing. Now, the vast majority of the online population uses Internet cafes -- and the vast majority of searches go through Baidu. Simply put, Baidu knows China. And Google can't seem to catch up or catch on.

Baidu's overwhelming dominance comes down to Google's woeful ineptness at adjusting to Chinese market realities. Google entered the Chinese market and treated it like any other. But, from the beginning, Baidu operated as a Chinese company, using Chinese strategies and tailoring itself for Chinese needs. Thus, in terms of dealing with the government, popularizing the brand, making sales, and offering the masses what they want, Baidu bests Google.

The Beijing-based search engine (whose name means "hundreds of times," after a line in an 800-year-old poem) maintains an astounding 70 percent market share. California-based Google trails far behind, with only about 25 percent. As China now has the world's largest (and fastest-growing) Internet community, with 338 million users, market dominance means a whole lot of profit, both now and in the future.

The business world has cottoned on. Baidu's price-to-earnings ratio, a good way to gauge investors' expectations for growth, is double Google's. (Baidu has been listed on the NASDAQ stock exchange since August 2005.) This is in part because China's Internet saturation is only about 25 percent, compared with more than 75 percent on average in OECD countries, like the United States. Meanwhile, Baidu's net income is increasing wildly: 40 percent year-on-year, compared with 18 percent for Google. Every indication points to fast growth and lucrative profit.

The secret to Baidu's success -- and Google's failure -- is largely positioning. First, Baidu has managed to win Beijing's favor, a trump card in this command economy. The government controls the Internet and appreciates loyal partners. Baidu understands that it operates under the good graces of the Chinese Communist Party, and continues to show it. As Robin Li, the company's chief executive, said in an interview with the Guardian, "As a locally operated company we need to obey the Chinese law. If the law determines that certain information is illegal, we need to remove it from our index."

Google also allows its content to be censored. But it does so reluctantly and poorly, compared with Baidu and its army of Chinese programmers. From a Chinese Internet cafe, a search for "Tiananmen June 4" written in Chinese characters -- perhaps the most taboo combination one could create -- yields 915,000 results on Google China. It gets just 11,300 results, 99 percent less, on Baidu. Type in "harmonious society," a government catchphrase, and Google gets just over 10 million results. Baidu gets 18 million.

Deference has certainly helped Baidu. Earlier this year, Chinese authorities temporarily blocked Google because it allowed through some pornographic search results. But many of these same results were also available on Baidu -- and in fact an industry insider told me that the large majority of traffic to Baidu's new Japan site comes from mainland users searching for pornography. The implication is that the government has Baidu's back.

"You definitely get a feeling that the government would give Baidu a bit more time to fix a problem than they would give Google," explained Ian McGuinn, director at leading Chinese market research firm JLM Pacific Epoch. "It would be very interesting to see whether the government would try to keep Google from ever getting a majority of the market share. They've messed with Google before when they forbid it from having its servers in China. Searching on Google was incredibly slow, so nobody wanted to use it."

On one of the most contentious issues for search engines -- intellectual property rights and illegal downloading -- the government and Baidu are on the same page as well. Baidu connects users with sites through which they can illegally obtain music. It also allows users to search directly for and illicitly download MP3s.

The Chinese government sometimes gestures toward stopping the practice, but never really does. Recently, for instance, the Ministry of Culture released a circular on illegal downloading. But the document focused on regulations for music itself, requiring posted songs to receive approval and foreign lyrics to be translated into Chinese, for instance. Plus, the Ministry of Culture doesn't even deal with intellectual property protection.

May-seey Leong, Asia regional director for the worldwide music industry trade group International Federation of the Phonographic Industry, explained. "It's not even a regulation," she said. "It's just a lower-level circular and it principally seems to be trying to control content on digital platforms," i.e., so that the government can censor that content.

Simple hometown favoritism seems to have protected Baidu from copyright infringement lawsuits thus far. In 2005, several U.S.-based music companies sued Baidu, but inexplicably lost. In 2006, they sued Yahoo China, an American-based company, and won. (The verdicts were released on the same day.) And the record companies' current lawsuit against Baidu seems to be going nowhere. Leong complained that after nearly two years of legal battles, no verdict has been returned. Even if the lawsuit is somehow successful, the record companies are seeking only $9.7 million in damages, a drop in the bucket for Baidu.

Not that a shutdown of Baidu's MP3 search engine would make a big difference anyway -- it's not driving the company's revenue. Baidu puts banner ads only on its MP3 search, whereas according to its U.S. Securities and Exchange Commission filings, 99.8 percent of its advertising revenue comes from pay-for-placement ads, where advertisers bid for the right to present an advertisement next to specifically searched keywords.

The government allowed Baidu to operate its illegal music search just long enough to attract a huge user base. Now even if the MP3 search disappears, the users are likely to stay, along with the advertisers.

"Very early on, when Baidu was just starting as a search engine, they used music as a tool to gain market share," said T.R. Harrington, a partner at Darwin Marketing, a China-based firm that helps companies optimize their search engine marketing. "Now, they are making next to nothing on their music searches because advertisers realize that users are going only to download music, so not many people want to advertise on that part of the site. They are making almost all their money on keyword advertising, which is also the case for Google."

Also, Baidu is continually rolling out products that focus on creating a social community. Its new Baidu Zhidao ("Baidu Knows") service allows users to answer each other's questions about everything from restaurants to when track superstar Liu Xiang will finally recover from his injury. And Baidu Tieba, a kind of chat room, now accounts for 14 percent of the site's traffic.

Creating a social community is a way of ensuring Baidu's long-term dominance. Unlike in the United States, where people primarily use the Internet for gathering information, in China people first and foremost use the Internet as a social device.

"Two years ago, [music search] was where the business was, a lot more than where it is today," explained McGuinn at JLM Pacific Epoch. "In the past two years, Baidu has added a lot of products. People go to Baidu for a lot of other reasons than just music, and I doubt that is going to change anytime soon."

Indeed, Baidu's entire business strategy is tailored to Chinese governmental, legal, business, and social culture -- and that is what has set it apart from Google.

Take, for instance, advertising. "Once Baidu went public, they invested in brand advertising, something that Google has just been arrogant in their reluctance in a growing market to invest in any kind of advertising to increase their brand awareness," explained Harrington. "Baidu went into all the smaller cities and put up billboards, bus ads, and even commercials on [state television]."

In fact, analysts think that in smaller cities, Baidu's market share could be more than 90 percent. Although Google might be one of the most well-known brand names in the world, most people outside big cities like Beijing and Shanghai have never heard of it, let alone know how to spell it. (Google is apparently catching on -- it recently purchased www.g.cn and starting placing advertisements.)

The same goes for Baidu's sales force. The company has employed thousands of people throughout China to entice small and medium-sized companies to buy keywords. Google has only about 500 people doing the same in the entire billion-person country, and the Chinese sales force has little autonomy, despite many proclamations to the contrary. "The Google model has historically relied more on technology for sales. Having a large sales force has definitely helped Baidu a lot. They are getting people online for the first time," McGuinn said.

The combination of a great market strategy and government favoritism means that Baidu will likely not fall from the top, despite the potential loss of its music search site. This is especially true if Google keeps on quarterbacking from California, which is now even more likely since the surprise resignation of its powerful China president, Lee Kai-Fu.

Google might dominate almost everywhere else, but in China, Baidu is set to stay king.



E-Waste: There’s an App for That

The iPhone is coming to China -- and so is a lot of technological trash.

Before year's end, Apple and China Unicom will finally launch the iPhone in China, leaving hundreds of thousands of affluent Chinese cell-phone users with an increasingly pressing question: What should they do with their old handsets? Sure, some will pass them on to friends and relatives, and others will stash them in drawers. But for those precious few who decide that they'd like to recycle their old cell phones in an environmentally sound manner, they'll be mostly out of luck. Unlike in the United States, Apple doesn't offer to collect and recycle old cell phones for its customers in China. And the Chinese government, which has long decried the developed world's exports of e-waste to its shores, has done almost nothing to handle the growing tide of its own, homegrown e-waste, generated by its expanding middle class. In short, as China grows, consumes, and gets hooked on the iPhone, the environmental disaster that is South China's e-waste processing industry is about to become much worse.

The environmental costs of China's e-waste processing industry were first documented by activists and journalists in the early part of this decade. Then, as now, coverage generally focused on the e-waste "dumped" by the developed world. Those countries often prefer not to take the trouble and expense of processing their high-tech throwaways in an environmentally sound manner, so for decades they have simply shipped the stuff overseas. In documentaries and news stories, South China has been dubbed the West's "digital dump," where toxic chemicals are used to extract metals from old circuit boards with the leftovers tossed into streams.

Yet even as those first stories ran, the business of processing e-waste in South China was changing from one focused on imported waste to one attuned to the burgeoning Chinese middle class and its throwaways. Televisions, refrigerators, and other appliances purchased in the mid-1980s were reaching the end of their life cycles, and China -- which still lacks any environmentally sound e-waste recycling -- allowed them to flow southward into the now largely domestic digital dump.

Nobody really knows just how many computers, cell phones, and monitors the Chinese throw away every year, though estimates abound. Analysts can safely claim that China is second only to the United States in PC units sold (40 million in 2008). As for cell phones, estimates are a bit easier due to the need to purchase actual airtime: This year, China is expected to have more than 650 million cell-phone users, who will purchase in excess of 190 million handsets. China's highly fragmented retail sector, dominated by small vendors with gray-market relationships, also makes it impossible to know how many appliances are in use. In a 2007 speech, Liu Fuzhong, an official with the China Household Electrical Appliances Association, noted that Chinese consumers own 1.5 billion televisions, refrigerators, washing machines, and air-conditioning units (all of which are hazardous, to some degree, to recycle), with 120 million such appliances entering the waste stream each year. I saw what the result looks like in December during my last visit to Guiyu, the most notorious of South China's e-waste villages. Giant piles of cell phones were strewn across the yards of home-based dismantling workshops, from which the smell of acid, used to extract gold, wafted.

This outmoded processing system probably sounds a bit mad if you're among those who have read the increasing tide of studies suggesting that e-waste is a potential profit-making "gold mine." It is a bonanza -- but only if it's done in exactly this primitive, environmentally ruinous way. China's e-waste villages provide South China's burgeoning manufacturers with cheap and plentiful sources of raw materials. So profitable is the trade that, for two decades, local governments and port authorities in Guangdong province have openly flouted Beijing's customs and environmental laws, charging lower-than- mandated duties on other recyclable materials while turning their eyes away as prohibited materials -- such as old computer monitors -- moved through the borders.

Environmentally friendly processing, by contrast, is expensive, highly technical, and time-consuming. The most common method used is shredding, after which the resulting waste is subjected to a gauntlet of magnets, and other, more technologically advanced means of separating plastics and various kinds of metals. In Japan, which enforces some of the world's strictest environmental laws, these technologies are widely utilized, but only because they are heavily subsidized by the Japanese government, which in turn collects fees from consumers and manufacturers. Even in strict Japan, more than one-third of the resulting waste stream is incinerated or landfilled. And Japanese regulators concede that a large volume of the country's e-waste still flows to developing countries like China, Pakistan, and India.

China, of course, is the "beneficiary" of this profitable environmental nightmare, garnering junk from eager dumpers abroad. One notable result is that South China has some of the lowest raw-material costs in China and, hence, the country's e-waste processing industry offers some of the world's highest prices for old computers and cell phones (India is rapidly catching up, though). A few weeks ago when my Dell-manufactured laptop failed, I walked it down to my Shanghai street corner, where an independent scrap vendor offered me the equivalent of $25 for it. The reusable parts would be salvaged, she told me, and the remainder would be shipped south where metals would be extracted, refined, and sold to manufacturers. Dell's Chinese "take back" program, by contrast, offers no dividend to consumers who let the company pick up an old laptop and recycle it in a sound manner. (Dell declined my request for detailed information on who their recycling partner is, saying only that it is subject to a stringent recycling audit). In 2008, Dell's take-back program took back a mere 2,800 PCs; I saw that many Chinese PC cases just driving through the outskirts of Guiyu.

Despite the domestic consumption twist, a recurrent subtext in documentaries about South China's digital dumping grounds still concerns foreign consumers and their responsibility for the pollution their throwaways are yielding. If only Apple's consumers in California would take their old laptops to authorized recycling centers, Guiyu would cease to exist, the argument goes. But if this were a possibility in 1999, it's certainly not one now. Over the last five years, China has launched several environmentally responsible e-waste pilot projects that have failed for -- among other reasons -- their inability to compete for e-waste in China's vast, informal network of processors. Two years ago, in fact, one of these pilot projects became so desperate for e-waste that it actually asked for formal permission to import the junk from abroad (the request was denied). As it happens, due to the global economic crisis and a crackdown on scrap-metal smuggling in South China, the actual volume of imported e-waste in South China has been in decline for nearly a year. And yet, despite that optimistic development, Guiyu is just as busy as ever.

It's a sign of the times: China is simply consuming more and making more of its own trash. The items being processed down south have certainly included some of the handsets replaced by the reported 1.5 million iPhones brought (unofficially) into China over the last two years. Unlike in the United States, where Apple accepts phones for recycling from any manufacturer, in China it only accepts Apple-branded products (and requires its consumers to ship them to, of all places, Hong Kong). They have all but guaranteed that, at some point, millions of Chinese cell phones will contribute to the government-supported disaster in Guiyu as shiny new iPhones fill China's up-and-coming pockets.

Apple did not respond to repeated requests for comment in regard to its e-waste recycling operations in South China. Regardless, Apple, just like Dell, is surely aware that it won't forever be able to continue running an e-waste program that is worth more in PR value than environmental value. Last August, the Chinese government approved guidelines requiring manufacturers to take responsibility for recycling the products they manufacture and sell in China. The details are still being worked out and it will likely be several more years before implementation, but the rules will probably include subsidies to help recyclers compete with the workshop processors and requirements for producers to take additional responsibility for the proper disposal of the products that they manufacture.

In other words, in a few years Apple might just have to clean up the post-party mess from all those iPhones it's about to make a killing on. The hangover might not be so fun.