China tech giants look to Japan for expansion

BEIJING, April 9 -- Tokyo-based Japanese reporter Shinya Enomoto doesn't read Chinese, but has been frequently using Chinese website Baidu.com to download his favorite songs.

That's music to Baidu's ears as the company prepares to launch a Japanese website this year, an event eagerly awaited by Enomoto.

Robin Li, chairman and CEO of NASDAQ-listed Baidu.com Inc, said in February that his company has developed the necessary technology to start a Japanese website and will spend $15 million to log into the Japanese market.

Meanwhile, Alibaba.com, China's largest business-to-business (B2B) e-commerce company, will also reportedly start offering Japanese services in the second half of 2007.

Baidu and Alibaba aren't exactly blazing a trail. Chinese technology companies like Lenovo Group, Neusoft Group and Kingsoft have already made significant inroads into Japan.

As Chinese tech companies get bigger and look for more room to grow in overseas markets, Japan has become a must-tap.

A suitable market

Lu Bowang, a senior Internet industry analyst in Beijing, says an enhanced capability and a competitive domestic market along with a similar language and culture are the main reasons for Chinese dotcoms' yen for Japan.

Since the Internet bubble burst in 2000, many Chinese companies have given up business models aping United States counterparts, and have developed their own, which have helped them beat global giants like Google, MSN, Yahoo! and eBay in the Chinese market.

Companies like Baidu and Alibaba, with hundreds of millions of dollars in hand and pushed by investors to find new growth engines, are thus turning to Japan.

Japan is the world's second-largest economy and also the second-largest technology market More importantly, it's blissfully devoid of strong local players, dominated as it is by US conglomerates like Yahoo! and Microsoft. The growth of local leaders has also been hindered by the practice of outsourcing that many Japanese companies resort to.

The fact that both Chinese and Japanese are two-byte languages, which means high similarities in computerspeak, is seen by Chinese firms as an added advantage.

Beijing-based Kingsoft, which competes with Microsoft in China's office automation software market, established a Japanese venture in 2005. "We started probing the Japanese market, whose office software segment is 20 times that of China. But we have been waiting for an internationally competitive product," says Lei Jun, CEO of Kingsoft.

In September, the company started to charge on its anti-virus software Duba, after a year of free service. In four months, Kingsoft broke even. Buoyed, in February, it released office software WPS in the Japanese market.

In January, Japanese venture capital heavyweight JAFCO invested 2.5 billion yen ($21.02 million) in Kingsoft's Japanese arm eight times Kingsoft's original investment. Neusoft Group, the largest Chinese technology service outsourcing firm, last year generated 60 percent of its offshore revenue from Japanese customers and every week, hundreds of its Chinese and Japanese employees shuttle between its Shenyang headquarters and Tokyo.

Its chairman and CEO Liu Jiren, who started the company with a contract from Japanese firm Alpine, flies to Japan every month to meet customers and oversee the operations there.

Go local

Many US dotcoms in China are criticized for being slow in localizing. As Chinese companies swarm into Japan, they are also facing similar issues.

Internet analyst Lu warns the Chinese and Japanese markets are vastly different.

The business community in Japan is highly interconnected and it is difficult for a foreign company to integrate into it. The legal environment is also very different from that in China.

In addition to good products and services, the key to the success for companies like Neusoft and Kingsoft largely lies in local partnerships.

When Neusoft was founded in 1991, it sailed through with the help of Alpine, with which formed a joint venture. Later, Neusoft also has Toshiba as a strategic investor.

Neusoft's Liu says his company will seek more investment from Japanese partners this year to expand its business lines.

Neusoft has more than 100 employees in Japan and most of them are Japanese. The CEO of Neusoft Japan and managers of finance and technology wings are all Japanese.

"The key for us is to build trust in the local market and grow with the local people and in the framework of local rules," says Liu.

Compared with Liu, Kingsoft's Lei does not visit Japan that often, relying more on conference calls with executives of the Japanese venture. But he, too, believes trust and partnership are pivotal.

Lei spent almost two years to find the right people for his Japanese business and finally found a Japanese executive, who used to run his own gaming software firm and had rich experience in Japan's software distribution network. Kingsoft also offered local managers stakes in the Japanese firm as additional incentives.

Innovate and win

As latecomers, Chinese companies have to work extra hard to enter foreign markets, but their innovative business models in the domestic market could help.

When Kingsoft opened its Japanese business in 2005, it faced challenges on several fronts: Microsoft had an overwhelming dominance in the office automation software market and companies like Symantec and Trend Micro led in the anti-virus segment.

What Lei did was that he took advantage of the Internet to cut distribution and sales costs. In the first year, Kingsoft offered free downloads and upgrades on the Web, which attracted thousands of customers. By the time it began to charge users from September 2006, Kingsoft had already clocked up a huge user base. While Microsoft Office suite sells at around 50,000 yen ($421), Kingsoft's WPS is priced at just 10 percent of that.

"As a latecomer, we must have a business model different from established rivals, and the online platform was our solution," says Lei.

Experience in developing products for the local market is also something Chinese Internet companies want to use when venturing into Japan.

In the first stage of Baidu's development in China, attracting young users with its music search service was the key, while in the later stage, it developed a distribution model that allowed the company to take its services to thousands of small and medium-sized companies and beat Google's online sales platform.

"With our proven strength in Chinese search services and our focus on delivering the best user experience, we will be able to provide Japanese users a quality alternative to existing search engines," says Baidu's Li.

(Source: China Daily)