US firms want to play China’s game
NETFLIX has a nifty new China strategy: Skip it. In January 2016, the video-streaming service announced an ambitious global expansion. The goal was to beam US hits such as House of Cards around the world including, eventually, in China.
“Today you are witnessing the birth of a new global Internet TV network,” said chief executive Reed Hastings at a large tech conference.
Sending racy American content into a country that censors almost everything may have seemed like a leap, but Netflix was confident. The China plan, Hastings said, was on a “slow and steady path”.
Less than a year later, having launched just about everywhere else, Netflix shelved the streaming project. It opted instead to licence some content to Chinese providers for “modest” revenues, according to a quarterly letter.
For some highflying US Internet businesses, the China dream is fading; for others, it looks radically different from what they had hoped. California’s internet companies once dreamed of liberating China with technology, thinking that the system of censorship known as the Great Firewall would inevitably crumble, paving the way for their advance in the world’s most populous nation.
But President Xi Jinping has tightened, rather than loosened, control and increased restrictions on foreign companies. Six years after Google retreated from China’s searchengine business, US firms seem more willing than ever to play the Communist Party’s game – they just can’t win it.
Even if they can gain a foothold, there is practically no way they will be able to overtake the Chinese companies that have comfortably established themselves.
Facebook’s China charm offensive, which included Mark Zuckerberg studying Mandarin, has yielded little. Google’s search business and Twitter remain blocked. LinkedIn and Microsoft censor – and still, neither is a major player in China. Amazon is sputtering along against the Chinese ecommerce giant Alibaba. After great initial success, Apple is being overtaken.
Still, tech companies are pushing, and they are looking to the Trump administration for help breaking in. When executives from the major US tech companies met with president-elect Donald Trump on December 14, they complained about a Chinese proposal that would require foreign technology companies to deposit the source code for their software with the government.
Bill Bishop, a consultant who writes Sinocism, an influential China newsletter, said he has seen waves of confident California firms humbled by efforts to crack the China market.
“Each generation believes they can find a way, but the Chinese Communist Party has upped their game in terms of censorship, and these companies that nobody has heard about 10 years ago – now they are the biggest companies in the world,” he said, referring to corporate behemoths such as Alibaba, Tencent, Xiaomi and Baidu, sometimes called the Amazon, Facebook, Apple and Google of China.
“US companies are going to make a Chinese play, but not the way they imagined.”
If you were looking for a symbol of downsized China dreams, it would be hard to do better than Wuzhen, the luxe but isolated resort that plays host to China’s “World Internet Conference” each fall.
Acting local – or, indeed, operating at all – means playing by local rules, even when those rules run counter to the idea of free expression and association. LinkedIn’s Chinese site censors content and puts limits on forming groups. LinkedIn CEO Jeff Weiner has described the company’s introduction of a Chinese-language version as involving “compromises that are far from ideal”.
LinkedIn did not agree to an interview for this article.
Unlike when Google and Yahoo were hauled in to testify before Congress for censoring content a decade ago, LinkedIn’s censorship has earned the company a small amount of bad press, but has not been treated as a major story. LinkedIn’s bigger challenge is competing in China. Its Chinese site has more than 20 million users – fair by US standards, but diminutive for a Chinese social network, analysts said.
To better connect with young workers, it launched an app called Chitu which promises to be “real and fun”. The app sounds millennial-friendly – it hosts livestreams with celebrities, for instance – but faces fierce competition from home-grown challengers.
Staying relatively small, saying the right things and complying with authorities seems to be the only option.
Evernote, an organisational app, launched a China-specific version in 2012. In 2014, the app shelved a feature that Hong Kong protesters had used to share information in China. Like many US companies doing business in China, Evernote has agreed to store Chinese citizens’ data on Chinese servers, where authorities can access it. It runs its China operation in a bright, foosballequipped office in Beijing’s tech district. The business is chugging along but employs just a couple of dozen people.
That fact that both firms are cited as China success stories shows just how tough it is.
Jeremy Goldkorn, director of the media and consulting firm Danwei, summed up the bestcase scenario for US start-ups as “not getting kicked out, but not making a lot of money”.
Many large US tech giants, from semiconductor com- panies to Apple, have made impressive profits in China, but it’s getting harder, said Scott Kennedy, who directs a project on Chinese business at the Center for Strategic and International Studies in Washington. “This is a market that makes or breaks companies.”
The titans of US technology are facing some of the toughest challenges yet. Google and Facebook remain at the periphery, reduced to selling ads while they angle for a Communist Party-brokered compromise that could get them in.
Over the past few years, Facebook has made a highprofile push to win over China’s leaders.
When China’s former web czar, Lu Wei, toured its office in 2014, a copy of Xi’s book, The Governance of China, was visible on Zuckerberg’sdesk. Last March, Zuckerberg braved Beiing’s toxic air to take a notorious “smog jog” through Tiananmen Square.
Despite reports that Facebook is building a “censorship tool” to help secure access to the Chinese market, the social network remains blocked, with little chance of that changing anytime soon. To comply with Chinese law and regulations, Facebook would need to drastically change its product, experts said.
In the years that Zuckerberg has been studying Mandarin, China’s government has ramped up its focus on innovation and helped build an alternate universe where local technology rules.
Facebook would need to compete, for instance, with Tencent’s WeChat, a chat service with more than 800 million active users.
“When I think about Facebook in China, I think, ‘What’s their advantage?’” said William Bao Bean, the managing director of Chinaccelerator, which invests in start-ups. “Their product is so outpaced by the local companies.”
Carmen Chang, a partner at the Silicon Valley firm New Enterprise Associates and a longtime China dealmaker, said that ambitious companies such as Facebook will take the long view – strengthening ties and waiting for opportunities. “China is too important a market for these companies to settle for a Plan B,” she said. “They will take what they can get and keep probing.”
Others wonder why Silicon Valley stays optimistic.
“The people at the top are used to moving forward at cyber-speed, not to being pushed aside, blocked, for reasons that are not based on the technology or based on somebody having a better idea – it’s just foreign to their way of thinking,” said Lester Ross, a managing partner at Wilmer Hale in Beijing, who advises US and Chinese companies.
“If you can afford it, it’s patience and hope that things change. I don’t see signs of that in front of us in the near term,” he said. “It is very hard to be optimistic.”