I’ve been following this story because I’ve been focusing my time and effort recently on the China travel industry.  I know that the CNReviews readership would rather have me write a controversial post on Google China.  I’ve even got some thoughts I want to share.  But ever since leaving UpTake, I’ve been feeling pressure to “figure out what I’m going to do when I grow up” and my wife has clearly indicated to me that whatever that is, it involves some current-period income sometime in the next future!  The net result of this is that I’m pretty focused on China travel right now, so bear with me…

The China Lodging Group (HTHT, parent company of Hanting Express) story first got my attention when I learned of Ctrip’s intent to invest in the company.  I wrote a long post on China Lodging Group over at Tnooz, a travel industry blog I’m starting to blog at (here’s my feed).  Here’s an excerpt:

Leveraging its market share, cash war chest, and insider relationships, Ctrip is making strategic investments in hotel chains to secure access to inventory and potentially even integrate IT and some operations with their partners.

On March 12, Ctrip announced that it will purchase shares equivalent to 8% of the company at the IPO price (see Tnooz, JLM Pacific Epoch) and also 15% of another hotel chain, BTG-Jianguo Hotels & Resorts. At the expected IPO price, Ctrip’s investment will cost them $48-58 million.  China Lodging Group will appoint Ctrip co-founder and CEO Min Fan as a Board Director.

For China Lodging Group, 8% to Ctrip represents a significant stake—all other public investors are expected to account for only another 15% of the company.

Think Different.  Think Offline.  Play an Offline game to win Online.

The first lesson I think this case holds is that a successful “online business” in China must always be thinking about the “offline” components that will confer them advantage.  The conventional wisdom is that Ctrip was smart to focus on call center and on offline media, while eLong was stuck focusing on a more pure online model, in part because of their foreign investors and meddlers from Expedia.  Whether that is true or not, now we see Ctrip making large $50 mm investments in economy hotel chains.

One hypothesis I have:  The hotel industry is massively fragmented and dominated by local interests.  Because hospitality is basically like a real estate business, local hotels all have local “uncles” and connections to protect their real estate interests, so its difficult to consolidate.  While travelers want a nationwide brand, hotel operators have a hard time acquiring the properties in different cities, dominated by local interests, to get the coverage needed to support a brand.  What Hanting, Home Inns, Motel 168, and others have done is much more remarkable than a Western viewer might initially think.

This fragmentation slows the adoption of technology and service management practices.  As a result, the level of service, technology is very low level and primitive.  That’s why it will take a while before Ctrip, or anyone else for that matter, can move beyond faxes, calls, and SMS messages (and hongbao) to local hotel salespeople.  In turn, this limits the ability for Ctrip (or any online travel agency, for that matter) to improve their service.  Any time a customer makes an online reservation, they need to get a call center rep to contact the hotel to confirm that the room that the customer booked is actually available.  Only after some period of time (e.g. 24 hours) can Ctrip contact the customer to tell them that the room is actually confirmed.

The discount economy hotel chains, on the other hand, can provide instant confirmation.  If Ctrip can get access to their inventory, and connect directly to their Central Reservation Systems (CRS), then Ctrip’s hotel booking service becomes that much better.  And if Ctrip could, say, sit on the Board of these companies, and block competitors from having the same access, then all the better.

Did Google play offline to win online?

Make sure you got juice.  In other words, combine centers of power to gain unfair advantage.

Another general theme I see is combining various sources of power together to gain an unfair advantage.  There is a tight set of interlocking Board directorships and investments going on with Ctrip, Home Inns, Beijing Tourism Group (state-owned enterprise and parent company of BTG-Jianguo Hotels), and China Lodging Group.  From my Tnooz post:

In the case of Home Inns and China Lodging Group, Ctrip enjoys an especially cozy relationship with the two companies.

Home Inn was co-founded by Neil Nanpeng Shen, who also co-founded Ctrip and sits on the Board of both companies.

China Lodging Group was founded by Qi Ji, who co-founded Home Inns and also Ctrip, and sits on the Board of both China Lodging Group and Ctrip.

Home Inn co-chairman Yunxin Mei serves on the board of Home Inn and is also vice-chairman and president of BTG (Beijing Tourism Group), a state-owned enterprise focused on tourism.  BTG’s hotel subsidiary BTG-Jianguo Hotel & Resorts also received an investment from Ctrip.

The real test of Ctrip’s strategy will come when they try to secure similar deals with other hotel operators without as close a relationship as Home Inns, BTG-Jianguo, and China Lodging Group.

So who is BTG exactly?  They’re big and state owned:

Beijing Tourism Group (“BTG”), established in February of 1998, is China’s first provincial-level, wholly state-owned tourism enterprise. Through over ten years of hard work, BTG has realized leap-frog development. According to the “2007 China Big Enterprise Groups” published by the National Bureau of Statistics of China, BTG ranked 188, which showed its leadership among China’s tourism enterprise. By 31st December, 2008p, BTG has a total of 40,367 employees, with total assets of RMB28.55 billion. For the year 2008 alone, BTG has realized business revenue of RMB2.22 billion and a total profit of RMB1.24 billion, which enables it to rank the fourth among enterprises supervised and administered by the State-owned Assets Supervision and Administration Commission of the People’s Government of Beijing.

BTG has nearly one thousand member enterprises, with investment and management expanding as far as to Rizhao of Shandong in the east, Korla of Xinjiang in the west, Sanya of Hainan in the south, and Harbin of Heilongjiang in the north; also, it has several enterprises in America, France, and Hong Kong under its control or in which it has shares; it’s a nationwide strategic controlling and investment group focusing on investment, operation, and management in tourism and modern service industry, with business covering industries of hotel, tourism, catering, tourism service, auto service, tourist spot service, and tourism land property etc.

Despite the Chinglish, its clear that these guys are big and powerful.  They got juice.  And in China, you need juice.

BTG is an investor in Home Inns.  Ctrip is an investor in Home Inns.  Now Ctrip is an investor in BTG-Jianguo Hotels.  I sense a lot of juice flow in this whole arrangement…and juice flow means unfair advantage.  And if you don’t have the unfair advantage, someone else will.  Did I mention that a lot of times this juice comes from the government or an SOE?  I don’t know the specifics, but the pattern seems clear.

Did Google have any juice?

In China, you need an ‘uncle’

Tony, will you be my uncle?

I was sharing my insights about China entrepreneurship with a VC friend, and he crystallized what I was saying in a very concise way: “In China, you need an ‘uncle’.”

I confess I don’t even fully understand what this means, but it totally seems on target.  First, it highlights to me the difference between high-tech entrepreneurship in the United States and in China.  In the US, you need business relationships, reputation, and connections.  But all of these connections and relationships are generally private sector.  In China, the reality is that the government is simply more involved in everything.  And you have to think about the motivations and incentives of your ‘uncle’…even if he is actually your real, biological uncle!

As always, its impossible to generalize about anything in China.  Many businesses don’t need an ‘uncle’ especially if it doesn’t involve real estate or local licenses.  But this fact forces both investors and entrepreneurs to think differently about the sources of advantage for a company in China, and many of these advantages have nothing to do with the technology talents, the innovation capability, or the management expertise of the team.  You need to have all these things AND…have an uncle.

Agree?  Disagree?

Set from Flickr user Junyu Wang (王俊煜):

Flowers on the sign:

Candlelight vigil:

Photographers and people gathering around:

Google headquarters at night:

Aeriel view from the building earlier in the day:

From Twitter user bonnae come some photos (source on img.ly):

Some more photos at Tinypic user foku:

As China’s arguably most famous philosopher, thinker, and sporter of long wispy white beards, Confucius’ influence throughout Asia is well-known and well-documented. A minor bit of silly controversy even revolves around Koreans allegedly claiming Confucius was Korean, with multitudes of Chinese scoffing. Xinhua, the PRC state news organ, even claims that Confucius’ descendants number around 3 million. Nowhere near Genghis Khan territory — that stud — but kinda nifty nonetheless.

So far, the custom Confucius Google logo has been sighted on Google’s China, Japan, Australia, and New Zealand websites, but strangely not on their Korean website. The main Google.com page doesn’t show it yet either and if it well, it may take a few more hours before September 28 hits Mountain View, California.

Hat tip to Japan Probe.

At the Clinton Global Initiative, Duke Energy (NYSE: DUK) and ENN Group announced a partnership to collaborate on clean energy development.  At this point, the deal appears to be an agreement to share information and a statement of intent to partner in various areas, including:

• joint tech development in coal-based clean energy
• biofuels
• natural gas
• smart grid
• energy efficiency
• carbon-capturing algae

China and the US: largest greenhouse gas emitters are also coal addicted

China and the US together generate 40% of the world’s greenhouse gases (source: SFGate).  Both countries are also net energy importers but have high reserves of coal.  According to the IEA (via CleanerGreenerChina), 64% of China’s primary energy supply and 80% of electricity generation is via coal.  Twenty-three percent of the United States’ primary energy supply and 49% is via coal.  But the jury is out whether or not coal is an energy source that can be made to support global goals to reduce greenhouse gas emissions.  “Clean coal” is considered by some to be a hoax and a mirage.

Chart:  Coal in China today – International Energy Agency

Counter to conventional wisdom, China is making progress in coal technology

According to Julian Wong of Green Leap Forward (see tag Clean Coal), the conventional wisdom of environmentalists is that China’s coal is burning dirty low-quality coal in inefficient coal plants without any real policy-making/regulatory direction away from the current status quo.  He quotes an MIT report that characterized this conventional wisdom as “China builds crap, it burns crap, and it doesn’t give a crap.”

Against conventional wisdom, the MIT findings are that:

• new larger scale, more efficient plants are coming on line.
• there is major adoption of new, expensive technologies, such as Fluidized bed combustion (FBC) in smaller plants and pulverized coal combustion (PCC) in large scale facilities. (I have no idea what any of this is: go to the original post for more info!)
• adoption of post-combustion “scrubbing” has picked up
• price reform has moved away from subsidized coal to market-driven pricing
• plants are buying higher quality coal, which suggests that regulatory bodies have some teeth
• a substantial amount of coal is burned locally instead of being transported long distances

ENN Group: from natural gas transmission to diversified energy technology company

ENN Group is one of the largest privately held vertically integrated supplier of energy, includes generation,transmission and distribution.  While the business started with natural gas distribution, which continues at its subsidiary XinAo Gas (listed 2688.HK), the ENN Group is focusing on what they call “zero emission coal-based power” and new carbon capture technologies.  The company also looks to develop “carbon bio-absorption technology” which uses algae with high photosynthetic efficiency to absorb CO2 and even create bio-diesel in the process.

In a July 2008 interview with McKinsey Quarterly, Wang Yusuo shared his three-pronged approach toward developing clean-energy business in China:

We have focused on three areas. First, through our subsidiary XinAo Gas, we distribute the clean energy produced by others. Second, we are involved in producing clean energy ourselves by building production bases for methanol in various parts of the country, usually close to coal-mining regions, and by rolling out dimethyl ether plants, which use methanol as the raw material. In addition, ENN established the world’s first commercial dimethyl ether filling station for buses, in Shanghai, in 2007. We’re also increasing our investment in solar energy. We imported a photovoltaic-module production line from the United States and expect to launch a new-generation product within two to three years.
Finally, we are aggressively pushing for the greater use of clean energy. In response to the Chinese government’s environmental policies, we’ve proposed an energy-saving and emission-reduction plan in an attempt to be the nation’s clean-energy service provider. This plan integrates biomass, solar, geothermal, and methane into a package for a given city’s households and businesses. The idea is that the city could benefit environmentally through the use of multiple energy sources.

Partnership based on enlightened self-interest, and high hopes

The partnership between Duke Energy and ENN Group is between two energy companies heavily dependent on making coal work in the post-Copenhagen world, and from countries that are largely coal-addicted.  Perhaps private partnerships between US and China energy companies can help diffuse best practices and technology so that companies are ready as the regulatory and policy frameworks are still evolving.

At Clinton Global Initiative, President Clinton spoke passionately about the need for Senate support for the Obama Administration prior to the Copenhagen conference on greenhouse gas emissions.  Clinton highlighted China’s efforts at setting targets for reduced greenhouse gas emissions and stated that “the road to Copenhagen goes through the U.S. Senate.”

We all know the track record of Western-Chinese partnerships and joint-ventures.  But the best partnerships are based on enlightened self interest.  ENN’s stated goal of becoming a Fortune 500 company by 2020 with global operations can only be served by partnering with a leading US company like Duke Energy.  Not sure what Duke Energy is getting out of the deal.  Please add comments as this is not a subject that I usually cover.

Resources:

• McKinsey Quarterly interview with Wang Yusuo
• Press Release on Duke Energy and ENN Group Agreement
• Orville Schell at e360 – Different Perspectives going into Copenhagen
• EastAsia Forum: Making China’s Coal Clean
• Greenpeace Report on China’s “True Cost of Coal” via Cleaner Greener China
• ENN Group corporate site
• Duke Energy corporate site
• Green Leap Forward (tag: Clean Coal)
• Cleaner Greener China
• China Dialogue
• New Energy & Environment Digest
• TreeHugger interview with  Bill Clinton at Clinton Global Initiative

Alibaba breaks preconceptions about China and Small/Medium Businesses

Jack confronted many Western misperceptions about China and Small & Medium Sized Businesses/Enterprises (SMB/SME) in his remarks.  First, Alibaba’s vision of being a world innovator goes counter to China’s overall reputation for being a country whose businesses compete on price. Second, innovation will come from large (mostly Western) multinationals and trickle down to SMB/SME.  But in fact, according to Jack, “70% of innovation in the world is being created by small businesses” despite the fact that they are not being aided by government or policymakers.  Finally, “many people think it is impossible to make money on small businesses,” said Jack.  Perhaps the saying “not impossible,  but difficult” is more accurate.  Coming from Alibaba’s “Alifest”conference attended by over 27,000 Alibaba customers (see Web2Asia’s excellent trip report), Jack shared with the CGI audience Alibaba’s accomplishments: 17,000 employees serving 30 million SMBs worldwide and 250 million consumers.  “By helping people make money, we are making money,” said Jack.

Jack Ma: “We are half-crazy, but not stupid”

Watching from the press risers at the back, I’m almost certain that the CGI crowd–composed of over 60 current/former heads of state, Nobel prizewinners, and leading CEOs and NGO leaders–failed to fully comprehend the scope and scale of Alibaba’s corporate strategy and Jack Ma’s personal ambitions.  I almost feel that Jack wanted to be intentionally underestimated: on a panel stocked with gravitas from Grameen Trust, World Bank, Rockefeller Foundation, the one word Jack kept repeating was: “crazy”.  Of the 33+ Plenary session speakers of the  4 day conference, Jack Ma is the only speaker that is from China.  I’ll share my opinions on this fact later.

Blogger and US-China consultant Aimee Barnes captured the flavor of the crowd reaction well in her excellent post on the speech:

“What [does Alibaba] want to do? Create more crazy,” he exclaimed, looking intensely ahead as if to add an unspoken guarantee. A few chuckles rippled through the crowd, but it was difficult to discern whether they were born from amusement or provoked by nervousness. Perhaps another remark from Ma hints toward the latter. “Many people in the rich world here [are watching] what is happening in China; many people here don’t want to see it succeed.” He certainly has a point; the US has been tensely monitoring China’s rise as its businesses simultaneously seek opportunities in the East while taking advanced measures to protect their own brands and patents.

Jack shared his dreams for the next 10 years for Alibaba–to help create more small “garage” companies and to “create more crazy companies like Alibaba.” Jack shared, “I have another crazy idea, that we will create another 100 million jobs for small business in the world.”  This vision is a clear example of turning constraints into opportunity — in China, state owned companies get all the support, but SMEs have driven a significant part of the growth.

The Three Crazies of Jack’s 10 year Dream

In deference to the Chinese tradition of formulating policies or goals in numbers (see Three Represents), perhaps Jack’s vision can be best characterized as The Three Crazies.  This vision was shared at Alifest and reported by Web2Asia.

First Crazy: 10 mm people “working at” Alibaba

Jack envisions an ecosystem of “netrepreneurs” using Alibaba’s platform to make money.  Western companies that have successfully mobilized a network of small businesses include Ebay’s Sellers and Google’s Adwords/Adsense advertisers.

Second Crazy: 100 million jobs created worldwide

Jack highlighted this goal in his speech to CGI.  A key component of this vision is revolutionizing financial markets.  In 2007, Alibaba entered the SMB financial services business with its Ali-loan program.  In September 2009, Alibaba just announced its $5 mm investment and partnership with Grameen Trust to form a microlending institution called Grameen China focusing initially on making approx. $400 loans to people in Sichuan and Inner Mongolia.  Here’s a quote from their press release:  “We are at the beginning of an Internet-driven revolution where small businesses around the world will be able to compete with larger companies for customers like never before…Micro-credit is the oxygen to make entrepreneurial dreams come alive.”
Funny Jack didn’t mention this even though Grameen Trust founder and Nobel prize winner Muhammad Yunas was on stage with him.

[picture]

Third Crazy: 1 billion people using Alibaba’s trading platforms.

Finally, Jack envisions Alibaba platform to become one of the largest consumer e-commerce platforms in the world.  See Web2Asia’s Alifest post for a flavor of their plans.

“In the 21st century, small is beautiful”

Jack also shared his belief that the 21st century, with its advances in technology, will empower small businesses, not big ones, to be more successful in the future.  He remarked that there are plenty of conferences for the “Fortune 500″ type companies, but claimed that there are none for Small Businesses.  With his partnership with Grameen Trust, initially targeting $400 loans to 8,000 people in Sichuan and Inner Mongolia, its clear that Jack has a plan to become a globally dominant player in providing enabling technology and finance to small entrepreneurs of all sizes and in all countries.

Google China President Kaifu Lee resigned from Google on Saturday and rumors immediately began circulating about the reasons why and his next steps.  In Kaifu Lee’s latest blog post entitled “Goodbye, Google,” (zh)  he ends his post with a quote from Steve Jobs exhorting people to “follow their hearts and intuition.”  It increasing appears his heart is with young Chinese entrepreneurs and fostering innovation.  PEHub’s Alastair Goldfisher highlighted some tantalizing rumors about an “Idealab” type incubator but didn’t go further because the news was embargoed until Sunday.

UPDATE 9/7: all the details of this story have largely been confirmed at this point (see peHub, VentureBeat).  The $115 fund is led by WI Harper and includes wealthy individuals like Steve Chen (co-founder of YouTube), Terry Gou (chairman of Foxconn), Liu Chuanzhi (chairman of Legend Group) and Yu Minhong (chairman of New Oriental)  – (source peHub)

This post also contains some interesting commentary by Chinese tech blogger keso, who met with Kaifu Lee days before the announcement.  See his comments as an UPDATE below, and also a link to a ChinaHush translation of his post.

With prominent (and often humorous) Chinese blogger hecaitou as a source (these tweets: 1,2,3,4), we believe that the name of this new incubator is Innovation Works (创新工场), with an incomplete website launched (Chinese version, English version).  Here is a screenshot of the new site:

Innovation Works

Further confirmation of the linkage between Innovation Works and Kaifu Lee can be found on this Sina article about Kaifu Lee’s upcoming autobiography.  The description at the bottom states:  “Founded in 2009, the Innovation Workshop is a comprehensive business platform designed to nurture a new generation of innovators and high-tech enterprises.” (“2009年创立创新工场，一个全方位的创业平台，旨在培育创新人才和新一代高科技企业”).

Photo courtesy Sina

The site is still pretty minimal but highlights a few interesting aspects:

The incubator appears to be hiring staff.  There are recruiting descriptions for the following jobs:

• Software Engineer
• Product Manager
• User Experience Designer
• Software Engineer Intern

See this page (English version) for more information.  This is a more aggressive approach at new venture incubation than most Western venture funds take.  Most venture capital firms provide capital, and perhaps space, but almost never hire staff on behalf of their portfolio companies.  The approach Lee is taking appears to be a hybrid operating company and venture fund.

The incubator already appears to have some physical space near Qinghua University in Beijing, where many other high tech companies are located, including Google.

查看大图

I’ll be sifting through the news (see Baidu search results, Google search results) to see what else I can find.  Please drop a comment if you have any further news.  More to come.  I’ve emailed the Innovation Works press contact to see if I can get some information.

UPDATE: Hecaitou also pointed me to this forum post that he found where a Chinese netizen was sleuthing around the Domain registration records and found that the domains were established September 1.  The Chinese netizen human flesh search engine is at work!

Dear Innovation Works people, I am but a humble China-related English-language niche blogger, but I have met Kaifu before on the China 2.0 blogger tour and enjoyed his presentation greatly.  Can I request an interview?  Hope to learn more about your new venture Kaifu!

Kaifu Lee at China 2.0 Tour

UPDATE: 8:00 am BJ time Sunday 9/5

I asked IT blogger Keso (blog, Twitter) to react to my post.  Yesterday, he wrote a post entitled “Ramblings: Google China during the era of Kai-Fu Lee” (zh) that captures the difficulty of providing leadership of a high-profile technology company in China that also requires “shuttle diplomacy” with its American headquarters.  Four years is a long time to carry the weight of leadership, and is a relatively long tenure for multinational companies in China who experience a tremendous amount of management churn.   In summary, Keso states that the biggest accomplishment of the last four years is that Google has become a company that cannot be easily defeated by its competitors.

I followed up with Keso and asked him for feedback (and ideally confirmation) on this post.  I can’t translate the answers and we’ll do so after Min, Ying or Kai wake up and get around to it.  For now, I’ll just quote the answers in Chinese:

尽管我还不知道开复的新公司是否就叫“创新工场”，

不过看上去跟他要做的事情非常吻合。

在北京时间前天早晨和开复的通话中，他向我描述了他的新公司，我问他，是不是类似IdeaLab那样的一家公司。他回答说，差不多，但不会像IdeaLab那么独裁，所有创新的想法全部来自Bill Gross一个人。开复的新公司将鼓励年轻人通过技术创新来实现商业价值，也就是说，在他的平台上，未来将会孵化出一批基于技术创新的企业。钱不是问题，开复已经基本解决了资金来源的问题。另外，开复的新公司还会有一批世界知名人士加盟，作为青年创业者的导师，其中包括YouTube的创始人Steve Chen。

我所知道的大约就是这些。

Although I don’t know if Kaifu’s new company named “Innovation Works” yet, but it looks like matching what he wants to do.

In the phone call with Kaifu two days’ ago in the morning, Kaifu described me his new company. I asked him if the concept of his new company is very similar to IdeaLab.  He answered “pretty much, but much less ‘dictatorial’ than IdeaLab which almost all innovation ideas are from Bill Gross himself. Kaifu’s new venture is going to encourage young  people to realize their value in business through innovation. That is to say, his platform will incubate some innovation-based entrepreneurship. Funding is not an issue and Kaifu has basically settled it. Besides, he’s also invited  a lists of world-known people to be the advisers of young entrepreneurs, including YouTube’s founder Steve Chen. – Translated by Min

对了，我和开复的那次长谈，是在2008年初，

当时谷歌中国在流量方面花了不少钱，包括收购265.com，投资迅雷，与天涯合作等。此外，谷歌中国还开发了谷歌导航、谷歌热榜等产品。我当时对这些做法都表示了质疑，我认为谷歌中国没有开发出任何一种超越现有市场的产品，它做的所有的事情，都是在做一个别人已经做过，并且做得不错的产品。使用Hao123.com的用户，没有理由改用265.com，用搜狗输入法的用户，也没有理由改用谷歌输入法，因为后者并不比前者更好。开复对此都做了解释，比如谷歌中国的工程师比较年轻，创新经验不足，谷歌中国的品牌在用户当中的认知不够，必须设法让用户能够接触到谷歌的产品，等等。开复还说，他正在推动谷歌中国的20%自由时间创新文化。

不过，前天早晨，开复对Google的20%自由时间也已经有了一些疑问，他说，20%自由时间创新，基本上都是自发的、缺乏规划的产品，其中大多数根本没法拿到市场上去。他说这种方式并不非常可。

Right, the long conversation with Kaifu was in early 2008.

Back then Google has spent a lot of money on traffic, including buying 265.com, investing in Xunlei, partnering with Tianya, etc.  In addition, Google China has also developed products like Google Navigation and Google  Hotlist. I was very suspected on all these actions, I didn’t think Google had developed a single product that are superior than those in the market. The products Google developed were following what had been pretty well developed in China by other players.  (For example), users of Hao123.com has no reason to switch to 265.com; users of Sougu Chinese typewriting application has no reason to switch to Google’s. Because the later is not better than the former. Kaifu responded and explained that engineers in Google China are very young and less experienced in innovation; Google China brand is not widely recognized in China so they had to develop products that would enable users interaction, etc.  Kaifu also said he was introducing the “20% free innovation time” culture in China.

But, two days’ ago when we talked, Kaifu was doubt about the Google “20% free innovation time” idea. He said in the 20% free hours, most of the engineerers are developing products without much strategic planning so that most of these products are not marketable. So this is very undesirable. – Translated by Min

Keso’s comments are worthy of its own post!  I’ll wait for Min or Kai to translate this comment.   It hints at the difficulty of truly building innovative new products for China when you are focused on the biggest, most strategic battlegrounds with powerful competitors:  search, mobile, etc.   I shared with Keso that I think the “innovator’s dilemma” that Google faces is not just in China but globally.  Thank you Keso!

UPDATE 9/6 12:00 noon BJ time

I just read Gang Lu’s post at Mobinode that also highlights a tweet from Kaifu Lee that says that “the site for my new company is now live, but the information on it is not accurate. More to come after the official press release”.

UPDATE 9/6 1:00 pm BJ time

This morning, Kaifu Lee posted on his blog a new post entitled “Let’s clarify some media misperceptions.”    Lee is an active blogger and Twitter user and is an excellent example of an executive engaging with audiences using social media.  Here’s a quick summary of his post:

• First, government condemnation of Google for allowing porn was not a factor in his departure.  The issue had already been resolved to the satisfaction of the Chinese government, and Google HQ was similarly pleased with the outcome.
• Second, some have criticized Lee as not having entrepreneurial experience and having too much money to work hard.  He highlights his startup experience launching Google China and Microsoft Research China.
• Finally, he debunks a number of other misperceptions, such as the “IdeaLab” rumor, or that Google is considering withdrawing from China, or because Mountain View HQ did not sufficiently delegate power.  Lee claims that Google is by far the most decentralized of all multinational companies.

In summary, Lee is successfully using his online platform to engage with Netizens in a conversation, and continue to win their hearts as he has so successfully done in the past.

UPDATE 9/6 8:05 pm BJ time

Reuters’ correspondent George Chen also reports that, according to  Hong Kong’s South China Morning Post (who cites an unnamed source familiar with Lee’s plans), the fund will launch with about RMB 800 million (about USD $117.1 million).  He also reports on comments Lee made in response to questions from China Computer World:

“I firmly agreed with the head offices of Google that we needed great patience to make the best products (in China) from the very beginning,” the influential industry media China Computer World (CCW) reported on its Chinese-language website, citing a letter from Taiwan-born Lee. (www.ccw.com.cn)

“(We) should not attempt to hasten the pace or have a speculative attitude on the hope that we can make a quick success by offering products that can immediately earn money,” CCW reported, quoting Lee’s letter in response to his resignation from Google.

UPDATE 9/7 10:00 pm BJ time

ChinaHush just translated Keso’s post reflecting on the Kaifu Lee era of Google.  Go read it!

Keso points out that 4 years ago, many people felt that Google didn’t have a chance at staying in the market:

4 years ago, almost everyone in the industry were pessimistic, Google China may find difficult to survive in China. Li Yanhong (李彦宏) also said, 5 years later, the relationship between Google and Baidu will be Baidu thriving alone, from the point view of market shares, we will probably not going to see Google anymore. There are still more than a year left on the time given by Li, it looks like Google China not only can survive, but should live in a not so bad life.

Also, Keso hints at the difficulty of operating as a multinational company in China:

Another common trouble of a multinational corporation is the communication barrier between the respective headquarters. In the most failure cases, China’s regional headquarters often blame the headquarter being not supporting, not delegating power to the lower levels, rigid and slow. Google CEO Eric Schmidt goes to China almost every year, I think it represents the Google headquarter is behind Kai-fu Lee. In order to gain support and understanding of Google headquarter, Kai-fu Lee constantly shuttling between China and U.S., in addition to persuade Google executives, he also very patiently analyzed and explained Google China’s strategy to the Engineers. This kind of communication gained more understanding, reduced friction, improved efficiency and played the role of “lubricant” on Google China’s daily work. Considering Google is a company with such distinct characteristics and the Sino-US cultural, market and policy environment differences, Kai-fu Lee’s communication was very valuable.

In his life, Kaifu Lee has personal experience with research, and with leading researchers.  But as President of Google China, he was first and foremost an ambassador, a politician, and a communicator.  Perhaps in his new role, he will have a chance to be more directly involved in fostering innovation.

Thanks ChinaHush for the translation!

UPDATE:  Chinese portal Netease creates a whole dedicated Kaifu Lee site section.  (source: @rmack).  Netease reports that sources say Kai-Fu Lee will set up a new venture fund to help young Chinese  entrepreneurs. More updates below.

Kai-Fu Lee - photo CC CNReviews.

Illustrious career

Kaifu Lee had a illustrious career at top US software companies before founding Microsoft Research China in 1998, which is widely considered a success.  He joined Google in 2005 and a widely reported legal squabble ensued between Microsoft and Google over his ability to work for Google without disclosing proprietary information and trade secrets.   The case was settled in Google’s favor but with some restrictions.

Google China seemed to be gaining ground

The resignation is puzzling because it appears that Google China was slowing breaking into the market dominated by Baidu.  Kaifu Lee has famously spoken of a 1000 year perspective, characterizing Google’s approach toward China as patient and committed to the long-term.  Its clear that this attitude is a key factor for success in China.  Most recently, Google China had been picking up share in China’s growing search engine market.  From Business Week on June 8:

Google boosted its share of the fast-expanding China search business by three percentage points in the first quarter as the market boomed. Google took 32.8% of search revenues, up from 29.8% in Q4 and 25.8% a year ago, according to iResearch. However, its share of total searches fell to 20.9% from with 23.0% in Q4. Its share was 18.7% in Q1 2008.

Additionally, Google was growing share in a growing market.  Research firm iResearch estimated that the search engine (revenue) market grew by 35.7% in Q2 of 2009, vs Q2 2008:

Source: iResearch (More research on the search engine market can be found on the iResearch website.)

Could the recent attack from Chinese regulators have been a cause?

We have absolutely no evidence or source linking the resignation with the recent dispute over porn in Google’s search results. However, it is the most recent public, negative incident affecting Google in China.  On June 18, Chinese regulators Chine Internet Illegal Information Reporting Center (CIIRC)  issued a condemnation on Google for allowing porn to be found.  Global Voices Online’s Oiwan Lam summarized and translated this condemnation.

On June 18th, China Internet Illegal Information Reporting Centre (CIIRC) published a report in its frontage condemning Google.cn for spreading obscene contents. The report, titled as “Strongly condem google for spreading indecent and obscene information”, said:

互联网违法和不良信息举报中心近日根据公众举报并经核查，“谷歌中国”网站(google.cn)大量传播淫秽色情和低俗信息，严重违反国家有关法律法规，违背社会公德，损害公众利益。

(Recently the CIIRC had received and verified public complaint against google.cn for spreading obscene and vulgar information in massive scale. Such act has seriously violated the government’s relevant regulations. Moreover, it is against the society’s public morale and interest.)

The timing of this attack may have been motivated by the controversy around the government’s intent to force PC manufacturers to install the Green Dam Youth Escort software to filter pornographic sites.  (If you forgot about this whole controversy already, CNReviews’ Kai Pan provides an easy 12 point review of the entire situation including the embarrassing CCTV journalism where they are outed for using a summer intern as a “man on the street” interview.  More on the Green Dam incident at Rebecca MacKinnon’s RConversation. )

Time reports on the Google porn matter and highlights Rebecca MacKinnon’s theory that the timing of this criticism is related to the efforts to roll out the Green Dam filtering software:

The attack on Google is seen by some as an attempt to divert criticism from the controversy over filtering software. “It doesn’t seem like a coincidence that [the attack on Google] comes amid mounting criticism of Green Dam, whose ostensible purpose is to block porn,” says Rebecca MacKinnon, a former Beijing bureau chief for CNN who is writing a book about the Internet in China. “Now they’re trying to show what a bad job Google does in protecting China’s children.” MacKinnon also notes that there’s plenty of evidence that searches conducted on Baidu — Google’s main rival in China and the company with by far the biggest share of the search-engine market — produce just as many or more links to pornographic sites.

Could strained relations between Google China and various agencies regulating the internet (such as the Ministry of Information Industry and the Ministry of Public Security) have caused Google to set up Kaifu Lee as the fall guy?

Why Google and not Baidu? Life isn’t fair (and Netizens will find porn, some way, some how)

An interesting side point that many people on Twitter made during this period was that Baidu was just as guilty as Google in allowing for porn access.  Danwei highlights a post (zh) by Chinese blogger Wang Xiaofeng who compared searches on Baidu and Google for “Japan, Navigation” (日本 导航) and “Korea, Navigation” (韩国 导航) with “interesting results.”  The interesting thing is that Google had filtered much more porn than Baidu on these terms.  Wang shares some other conspiracy theories related to Robin Li’s appearance on state-run television, and suggests that he holds “home court advantage” in some way.   Danwei also highlighted some interesting stats from Keso on Baidu’s Japanese search engine:

Keso, king of China’s IT bloggers, recently posted the following information:

Baidu.jp users come from these countries:China 55.9% Japan 38.4% Hong Kong 1.4% United States 1.4% United Kingdom 0.7%

The reason Baidu Japan has so many Chinese users can only be that they’re looking for stuff they can’t find on Baidu’s Chinese site.

What could all those Chinese netizens be looking for on the Baidu Japan site?  Hmmm…  Asia Sentinel concludes that Online China Goes to Japan for Porn.

BloggerInsight survey of Chinese Bloggers: Google Needs to Behave to Succeed

CNReviews and partner BloggerInsight surveyed Chinese bloggers to see what they thought.  We published the results here.  BloggerInsight asked the following questions:

1. Why was Google singled out?
2. How do you see this incident affecting Google China’s strategic palnning and user trust
3. How will this effect the way other international companies operate in China

The full results of the mini case were blogged over here.  If you want more information beyond what is in the post, please contact us and we’ll introduce you to BloggerInsight.

Five reasons why Google was singled out

BloggerInsight crowdsourced five key insights into why Google was singled out.  Here are some excerpts from the surveys: First, it was Google’s fault for linking to a huge amount of inappropriate content. When Google was launched in China, they knowingly entered into an agreement with the Chinese government in which they would do their utmost to make pornographic and indecent material inaccessible to the public. Clearly, Google had broken this agreement by linking to a great deal of pornographic material.

In the pursuit of profit and visitor maximization, Google’s system automatically associates and links certain keywords with pornographic content so that more visitors will use it as their preferred search engine. Based on visitors’ popular searches, it must come as no surprise that search results yield large amounts of inappropriate material.

Teenagers can easily find a lot of pornography through Google, and this kind of content is not allowed in China.

Secondly, Google is a big, international company.

There is a pretty good reason for Google to be singled out in this situation. As a well-known foreign company, Google represents a significant share of the market in China. After a series of campaigns forcing local sites to overhaul their webpages to eliminate inappropriate material, this campaign can be viewed as the Chinese government exerting pressure on international sites. Here, Google is a symbol by which the Chinese government proclaims a job well-done on cleaning up things on the home front and sends a clear message to international sites that they can’t get away with indecency.

The attack on Google may have arisen at this point because the government wanted to take some of the spotlight off the controversial Green Dam order. At the same time, by taking on a company with as much clout as Google, the Chinese government sends a clear message to corporations about their resolve and intentions for the Green Dam.

Thirdly, Google was not fully complying with the Chinese government’s internet control policy, and hasn’t been fully cooperating with government when disputes and controversies arose.

Google has always been unwilling to be investigated and blocked by the government when it comes to many issues such as Gmail.

Applications such as Google Reader and Google Documents are useful platforms for users to easily share information that the government does not approve of.  Google is adamant about providing comprehensive https services to ensure the security of SSL encryption, which makes it more difficult to be blocked by the GFW.

Fourth, Google does not run advertisements on CCTV. Google is not obligated to buy airtime on media outlets such as CCTV. Exposing that fact to the public will not influence medias’ revenues and cooperation with other advertising partners.

CCTV has no need to promote Google, because CCTV doesn’t get any ad revenue from Google, so CCTV has nothing to lose in reporting that Google’s not a “socially responsible” company. In the past, CCTV featured a story on the fake ads on Baidu. After Baidu spent over 40 million RMB on ads with the network, all the bad press went away.

What’s more, a couple of negative news stories about CCTV were revealed on the internet, including the one about CCTV terminating contracts with over 1,600 of part-time or temporary workers after the New Labor Law took effect in 2007 . CCTV’s negative news can’t hide on the internet.

Fifth, Google is an advanced search engine and is the only search engine that provides comprehensive international content to Chinese netizens.

As the largest search engine website, Google controls enormous amounts of information and data. Compared to other domestic search engines, which mainly focus on Chinese results, Google provides information from beyond China. Consequently, as long as the government wants to supervise the internet, Google will definitely be the first targeted one.

If not Google, who else? Only Google meets the conditions for this kind of assault. Additionally, there is a rumor that Google.cn’s market share has been growing, so Baidu was one of “black hands” behind this incident.

Best wishes to Kaifu Lee

Could Chinese government persecution of Google over porn access have caused Kaifu Lee to resign?  We’ll update this post with more news as we get it.  In the meantime, we offer best wishes to Kaifu Lee and expect him to surface in another important role bridging international technology companies with the Chinese market.

UPDATE:  Wall Street Journal just confirmed the news.

UPDATE: China Internet Watch (Rocky Fu) highlights news from Tencent that Liu Yun, a vice president at Google, steps in as interim president of Google China:

Liu Yun, vice president of Google worldwide will temporarily take the post of president of Google Greater China, in charge of the Chinese market.

Dr. Liu Yun joined Google last January, as a global vice president in charge of Greater China sales. Based in Beijing, he is responsible for Google sales and channel business in mainland China, Hong Kong and Taiwan.

Prior to joining Google, he served as CEO of SK Telecom and President for China market. He also used to work in FreeMarkets (US) and SingTel (Singapore) in senior management positions.

UPDATE: from the New York Times via China Internet Watch:

Google said in a news release early Friday in Beijing that Mr. Lee, who was president of Google Greater China and vice president for engineering, would leave the company in mid-September. Two current executives will take over Mr. Lee’s engineering and sales roles. Boon-Lock Yeo, currently director of Google’s Shanghai engineering office, will take over engineering responsibilities for Google China, and John Liu, vice president of sales and operations, will assume business and operational responsibilities.

UPDATE:  On Twitter, Kai Fu Lee tells people to back off and give him a week before he announces anything further:

kaifulee: 请大家不要乱猜测我要做什么。下星期宣布。不是卖关子，是有些细节还没有搞定。给我一点时间和耐心。保证是很酷的。谢谢大家的支持

He also debunks the rumor about starting Idealab China:

kaifulee: 请不要乱说我加入IdeaLab。我不加入任何公司，我会自己做一个青年创业平台。下星期会给大家更多信息

He also posts about his departure, quoting Steve Jobs, on his popular blog on Sina (zh). The post is entitled “Goodbye, Google”

UPDATE: CNReviews makes it onto TechMeme!  First time ever.

Part of new CEO Carol Bartz’ response in the June 25th annual Yahoo! shareholders meeting to the following two questions presented to her by Amnesty International USA’s Tony Cruz:

1. Since 2006, what concrete steps has Yahoo taken to address the problem of Internet censorship in China?

2. Will you publicly support the Global Online Freedom Act; legislation that would give you the power to fight the Chinese government?

The full reply by Carol Bartz is below:

Okay, I’m going to go real simple here. Yahoo is not incorporated to fix China. I’m sorry. It wasn’t incorporated to fix China. It was incorporated to give people a free flow of information. Ten years ago the company made a mistake but you can’t hold us up as the bad boy forever. We have worked better, harder, faster than most companies to respect human rights and to try and make a difference. But it is not our job to fix the Chinese government. It’s that simple. We will respect human rights, we will do what’s right, but we’re not going to take on every government in the world as our mandate. That’s not the mandate that the shareholders gave us.

Jimdo started as a group of three friends selling basic site creation tools for businesses. The site’s innovative array of creation tools has since developed into a consumer version available in seven different languages (English, Chinese, Japanese, German, French, Italian, Spanish and Russian). Jimdo hosts JimdoFree sites with “dot Jimdo” URL addresses, limited storage and integrated ads. JimdoPro, the premium version, allows users to host their own pages with more storage and no ads.

Almost immediately after launching, Jimdo brought it’s Pages to China by way of George Godula, who attended university with one of the company’s founders. Seeing the huge potential of the site for China’s small companies–most of which do not have a Web presence–George and Web2Asia, a market entry consultancy firm he runs out of Shanghai, jumped at the opportunity to fill the gap in the market. There were over 31.5 million small companies in Mainland China in 2006. Reports indicate that the total number of small to medium sized enterprises will reach 50 million by 2012. Currently, around 70-80% of these small companies do not have a corporate website, with high costs being the main inhibitor for them to be online: fees range from 2,000 – 10,000 RMB. Small companies also lack the resources to have professional technicians for the maintenance of their sites. Clearly there was a great demand for easy, inexpensive, DIY site creators in China.

In just two years, Jimdo has been used to create over 100,000 personal and business sites in China. Jimdo was instrumental in expanding the reach of businesses and in providing a means by which people in China can connect with more people. Check out the site of this 70-year-old retired teacher, who despite not being able to pronounce Jimdo is one of its biggest fans.

JimdoPro landing page

Coming to China was not without difficulties and setbacks. Jimdo competes with large Chinese players like Sina and Sohu in the personal space/blogging market. Stiff competition also comes from other DIY site creators, with the biggest being state-owned and backed NET.cn. According to George, a key lesson in localization for Jimdo was to “prepare for a much longer timeframe than for other countries.” As such, it was imperative to manage the expectations of headquarters in Germany: ROI will take time. Taking the local situation and preferences into account, the China team found that scaling Jimdo required targeting the business community. Unlike Europe, where private users tend to spend more money for their personal websites, it is much different in China where free options for websites are plentiful. People were not interested in paying for JimdoPro pages. For small businesses, however, there was great appeal in affordable professional-looking websites that were easy to set up and maintain.

The company is now undergoing a total shift in strategy, targeting businesses more because Jimdo offers a low priced solution for this market. Jimdo gets businesses on board with its new landing page which includes video on the features and benefits of the product. It also beefed up its marketing efforts in three key channels: 1) paid keywords on search engines, 2) affiliate and resesller program and 3) BBS marketing and online PR.

“Content management was one of the hardest lessons learned,” says Sam Fan, Jimdo Country Manager in China. The Chinese government’s censors blocked the site for three weeks in its first few weeks of operation because content deemed inappropriate and vulgar was found on Jimdo-hosted sites. Jimdo is now vigilant about user content control, putting filters in place to swap out controversial words.

The team at Jimdo China continues to localize and tweak the product for the Chinese market. With the help of BloggerInsight and its network of expert techies, Jimdo was able to pinpoint exactly what needed to be changed for local users.  For example, while the current design templates were positively received, Chinese users did not like the fact that they were pre‐populated with content that they had to delete before personalizing it themselves. This problem will be remedied soon.

Jimdo user interface

Jimdo China’s still got much to do. In the pipeline are plans to implement more features to make the site more business-focused, encouraging even more of China’s small enterprises to build their web presence through Jimdo. There will also be improvements to user experience such as web-based restore points for backing up content. Expansion in Asia continued with a successful launch in Japan through KDDI Web Communications, a subsidiary of Japan’s second largest telecommunication corporation KDDI. The Japan deal is Jimdo’s first with a publicly traded company. More Asian countries are in the works.

Even new start ups can go global and bring their product to China. If you have the right technology and the right niche, making the move to China might be a good idea. Of course, you need to have have your eyes and ears on the ground to get a good idea of the market realities; Jimdo’s got the right idea with support from headquarters in Germany and its team in Shanghai.

Contributions by @MikeFung and Ying Xue

Observations shared by John and the audience:

• Online gaming revenues are heavily skewed, going beyond the 80/20 notion where 80% of your revenue comes from 20% of your users. The numbers he’s seeing through his own app is described, half-jokingly, as 90/2.
• There’s a lot of good talent in Taiwan, but even if they are not all at Yahoo, the environment is dominated by Yahoo.
• With regards to making inroads into the mainland China market, John feels that Taiwanese online gaming companies really need to be in China and not try operating remotely from abroad in Taiwan.
• Another major issue for Taiwanese companies is suddenly finding their website and service completely blocked by China’s GFW simply due to some content on their websites. The ensuing outage would naturally severely impact the company’s service and growth.
• An audience member also astutely pointed out that apps or games hosted abroad tend to be much slower than those hosted domestically in China. The speed of an internet application or game has a big influence on whether Chinese netizens or gamers will use or not use, play or not play.

More CNR Barcamp Shanghai 2009 coverage here.