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Technology

Big tech companies are running headlong into a great wall of Chinese resistance

SHANGHAI — Facebook is the world’s largest social network, with more than two billion users. LinkedIn was sold to Microsoft for $26 billion last year. And Apple is Apple, the most valuable company in the world.

In most local markets, it would be a surprise if any one of these companies were floundering. But in China, the real shock is that their troubles no longer surprise anyone.

Just in the past few weeks, Facebook had one of its most popular apps blocked by the Chinese government. LinkedIn, the globe-spanning social network of résumés, job recommendations and management essays, had its local boss step down amid tepid results in the country. And Apple announced a billion-dollar investment to comply with local law as it continued to watch Chinese demand for its iPhones fade.

This summer of challenge for the three companies offers a broad illustration of just how varied the obstacles have become for foreign companies in China. They also show in stark terms why this vast market has been frustratingly difficult for outsiders.

Tempted by the world’s largest smartphone market and an increasingly wealthy population deeply intrigued by new technologies, just about every American tech company from Amazon to Zynga has taken a shot at China. But outside of Apple and a group of older companies like IBM and Intel, few have a major presence in the country today.

”In general the China market is hard, even for Chinese companies,” said Andy Tian, co-founder of Asia Innovations Group in Beijing and former general manager of Zynga China. ”It’s the most competitive place around for consumer services and technology.”

Over the years, internet companies like Twitter, Google and Snapchat have been blocked by censors. EBay was outmaneuvered by the local internet giant Alibaba. Groupon failed to stay afloat in the flood of copycats it inspired. Uber cut its losses after establishing a foothold and sold its local business to a Chinese rival.

Even LinkedIn, which played ball with Chinese censors two years ago in order to get into the country, has had trouble getting traction with a local audience. ”The big internet companies just don’t have much of a hope here,” said James McGregor, chairman of the greater China region for the consulting firm APCO Worldwide.

American start-ups are still in the game, in particular those selling services to Chinese businesses, Mr. Tian said. But the number of big American internet firms trying to get into the country has slowed, though exact figures are hard to come by.

There are issues beyond offending censors. The Chinese internet culture is different, and at times quirky. And the technical requirements of China’s internet filters can make operating difficult. Engineers often have to find alternatives to the services technology companies rely on outside China.

For those that overcome all that, the market is rough in a way United States companies don’t normally experience, and is often tilted against outsiders.

”It’s basically like someone who has been training for Olympic taekwondo going up against a street fighter,” Mr. Tian said. ”The Olympic fighter is waiting for the whistle, and the street fighter already has him on the ground hitting him with elbows. There’s no rules.”

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More so than the others, Facebook’s problem in China is simple: Neither its website nor its app is accessible in the country. Both were blocked in 2009, shortly after ethnic rioting in western China. In the autumn of 2014, the umbrella protests in Hong Kong prompted the block of Instagram, which Facebook owns.

Around the same time Instagram went down, Facebook’s Mark Zuckerberg stepped up a charm campaign to try to get the social network back into China. He trotted out his Mandarin in a large public forum, invited the then head of China’s internet regulator to Facebook’s offices and even dined with president Xi Jinping during a state visit.

For all his efforts, just last week the company’s last major app in the country, WhatsApp, was blocked by the Chinese government. While experts say it’s not clear whether it will ultimately be fully blocked, in recent days users have been unable to send images, videos and voice messages.

At least partially responsible for the block, according to analysts, is a new cybersecurity law that went into effect on June 1. While vague, the new rules call for security checks on foreign companies and force firms to store key data in China.

While Apple’s position in China is about as different from Facebook’s as possible — it has built a hugely valuable retail business — it too has been affected by the law. Just the week before WhatsApp was hit by disruptions, Apple said that to ensure it complied with the law it would begin storing data from its iCloud service in China. It also said it would work with a local Chinese company to set up a data center in southwest China as part of a $1 billion investment.

An Apple spokeswoman referred to remarks by Apple’s chief executive, Timothy D. Cook, during the company’s most recent earnings call, in which he said Apple was ”very enthusiastic” about opportunities in China.

Yet keeping Beijing satisfied is only part of the challenge for Apple. With more and more Chinese smartphone makers selling high-quality smartphones cheaply, the company’s sales in the country have slid over the past two years. In the second quarter ending April 1, the company’s revenue in greater China fell 14 percent, even as the market remains critical. Greater China accounts for 21 percent of the company’s sales, making it Apple’s most important market after the United States.

In a new tack for Apple in China, just last week it created a new position, general manager for greater China, and appointed a longtime manager, Isabel Ge Mahe, to the position. Ms. Ge Mahe was born in China, speaks Mandarin and has deep engineering experience. The company is also in search of a greater China policy head after its former head, Jun Ge, recently resigned, according to two people familiar with the matter.

If Apple is trying something new, LinkedIn is showing that what had been an accepted model within China is no guarantee of success. Unlike Apple, which as a hardware company is considered less threatening by the Chinese government, LinkedIn had to go along with a bargain other internet companies have refused.

In 2014 the company agreed to start censoring — much as Google had done almost a decade before it eventually left China — and formed a partnership with two influential Chinese venture capital investment funds to create a separate China operation. While the self-censorship drew complaints from users, other technology companies looking to get into China came to see LinkedIn’s approach as a model.

By bringing in well-connected investors, it was able to ensure its communications with the Chinese government were in capable hands. It also focused on the particulars of the local market. It hired Derek Shen, a successful Chinese entrepreneur and Google veteran, to run its China operations separately. Mr. Shen, in turn, created a stand-alone app to bring LinkedIn, a service built around email and computers, to China’s smartphone-dependent population.

Three years on, the results have been mixed. Troubles have included missing sales targets and failing to attract enough users, according to four former and current employees who declined to be named because they were not authorized to speak officially. LinkedIn’s local app, Chitu, also failed to attract the hundreds of millions of would-be users who have less exposure to the international work force and live in China’s smaller cities.

While in most countries LinkedIn simply runs its network as it does in the United States, in China that proved difficult. In China, many of the people the company wants to attract use only smartphones, and communicate on messaging apps instead of email. Mr. Shen decided to try a specialized app catering to those patterns. Yet it had to compete with entrenched social networks, like WeChat, and gained little traction.

In June, the company also announced the departure of Mr. Shen and is still in the process of looking for his permanent replacement. A LinkedIn spokesman said the decision that Mr. Shen would leave was mutual, and his decision was motivated by a desire to join a more entrepreneurial effort.

Holding LinkedIn back wasn’t so much the ferocious local competition or the regulatory hurdles, but Chinese internet culture itself. Many are simply not in the habit of publicly sharing their professional connections, and it has been hard to convince them, said analysts and those who worked at LinkedIn China.

A business person in China may blush at making a Rolodex public because it is so personal, and also incredibly valuable. And publicly updating a résumé can be misconstrued by an employer as a signal that an employee is looking for a new job.

Also, with a corruption crackdown ongoing in China, showing the relationships that allow business leaders to get things done can be a liability.

As a result, professional relationships are often managed on a more conventional social network that allows for greater privacy: WeChat. Though at its heart a messaging app, it has a function like Facebook’s newsfeed where people can post. Also widely used are group chats, where school alumni, embittered ex-employees or parents of a local school can keep up with the latest gossip or get a few potential candidates for a new position they have to fill.

With the social side of business life on WeChat, many local services have focused more on the posting of job openings.

”It may not be so much that LinkedIn is having trouble in China because they’re a foreign company,” said Mark Natkin, founder of tech research firm Marbridge Consulting. ”It’s more that they’re having trouble in China because this is not the model people want to use here.” Most use Tencent messaging services like WeChat or QQ — another Tencent messaging service originally built for desktop computers — to connect for business instead, he added.

That cultural difference has kept a broader swath of the Chinese from joining LinkedIn. Two former employees said that they had quotas of posts they had to write on LinkedIn China’s website each week to help boost activity. One of them, who said she used to write five to 10 posts a week, said it often seemed futile because most people used WeChat for professional discussions. Along with group chats, articles and even long messages easily go viral with people sharing them between groups, or on their moments, roughly the equivalent of a Facebook wall.

A spokesman said the program encouraging employees to post was voluntary.

Selling to customers without experience in international business was often an exercise in explaining why people would want to post their résumé online, one former employee said. As a result most of LinkedIn’s best Chinese consumers were companies with major international operations like Huawei and the drone company DJI.

Xu Mengya, a former marketing employee at LinkedIn China, said that although there were far fewer LinkedIn users in Australia than China, the network there was much more active. She attributed the difference to a more distinct work-life divide, where people use Facebook to communicate with friends and family, and LinkedIn with work connections. In China, she said, everyone uses WeChat for both.

As LinkedIn continues to press ahead, its new legacy may be less its model for going into China, and instead a willingness to accept a more modest type of success — underscoring the reality that for the world beaters of Silicon Valley, getting into China is only a first step in what can become a long slog.

Although it failed to attract the huge number of users that companies like Alibaba and Tencent have, LinkedIn has attracted a large number of China’s international professional class.

In his departure note, Mr. Shen noted as a sign of its success the fact that the company had 32 million users in China. While that may be less than 5 percent of China’s total internet-using population, a spokesman for the company said it showed the venture was living up to expectations. The company has also attracted more than 1,000 clients since coming to China less than four years ago, he said.

”So they haven’t achieved nothing, they can congratulate themselves on making a start and not having been lapped by any local competitor,” Mr. Natkin said.

Still, the current and former employees said there were other problems. LinkedIn’s ad and recruiting rates are far more expensive than local competitors, making it hard to sell, according to two former employees.

Simply to get in, LinkedIn needed to create a new operation partially owned by well-connected local investors. Yet the logic also followed that an independent China business would indeed be more independent, allowing it to respond more quickly to local challenges without the myriad phone calls at odd hours required to coordinate with headquarters. But the structure also had a negative side. Benefits and quotas at LinkedIn China were also different from the rest of the company, sometimes damaging morale, the two people also said.

Ultimately however, Ms. Xu said LinkedIn’s original sin was simply being too late and not necessary enough. ”The root of the problem is that Chinese do not need a social platform for work. It is a fact in China that all social activities related to work are on WeChat,” she said.

”In China, LinkedIn has turned into a hiring website — a high-end version of domestic hiring sites,” she said, referring to the many local sites that specialize in listing job opportunities.

”This has led to a lack of activity because it has lost its social side.”

Source: Tech CNBC
Big tech companies are running headlong into a great wall of Chinese resistance

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