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Why American Internet companies fail in China

Editor’s Note: The piece originally appears on LinkedIn, we reproduced it here under Kaifu Lee’s authorization. Kaifu is the founder of Chinese incubator Innovation Works , he also served as Google and Microsoft VP.

Almost without exception, American Internet companies failed in China. The chart below shows the failure of American companies in China, and the three big winners: Alibaba, Baidu, and Tencent, that emerged as a result (the collective market capitalization of these three companies is about $150 billion). Many attribute the American company failures to government regulations or favoritism. While these played a part in their failure, there were other more relevant reasons related to the companies themselves:

1. Too short-term focused – China is a large market requiring much patience. American companies often prioritize globally based on profitability, or cut-back across all regions during economic downturns. But these moves often prove to be penny-wise, pound-foolish. They save some money in the short-term, but hand over market share to the competitors. Examples: AOL entered and exited China twice — each exit caused by its own financial woes, while the China market was booming. 2. Local team not empowered – China is a tough, large market with fierce competitors. To have a chance in China, the American company must empower the local team to be responsive, autonomous, localized, and ready for combat. However, because of some horror stories or stereotyped concerns, American company headquarters would not only refuse to give autonomy, but also apply additional scrutiny. Example: Google’s processes required headquarter approval for policy, product, data center allocation, UI, and even doodle, not to mention hiring of each personnel. 3. Slow global processes – Chinese market can be sufficiently different to require exceptions, but American companies care greatly about maintaining a single global platform. These decisions will maintain integrity of the global platform, but may give up the local market share. Example: eBay bought the market leader Eachnet, and then killed its platform in favor of the eBay platform hosted in the US, which was a disaster. Another example was eBay relied on seller reputation, but in China that was not enough, and Alipay came up with an escrow payment which won the battle and the war. 4. Cultural mismatch – American companies prefer to hire Ivy League MBAs or Stanford PhDs with years of experience, speaking perfect English and American body language. But these “sea turtles” may not be the most effective in day-to-day battle in the Chinese Internet gladiatorial fight. Example: Yahoo China had a GM who was considered a misfit inside Yahoo, but left to build a company valued over $3 billion in just six years. So will an American company have a chance? It won’t be easy, but possibly. First, all of the above make a great textbook that must be studied to have a chance. Second, while Chinese companies are doing well in the consumer/mobile software space, I believe with big data, cloud computing, and enterprise software, American companies still have an edge… for now.