Doug Pierce is co-founder and Director of Research at Digital Due Diligence, a boutique research firm focusing on in-depth analysis of Internet properties.

Not even a year after newegg.com went live in California did newegg.com.cn launch in China. A decade each of online retail later, the outcomes couldn’t be more different: newegg.com became the second largest online-only retailer in the US, while their counterpart in China has incurred operating losses since inception.

It should have been a cakewalk: “Many of our senior managers and executives are Chinese, know the language, and have a deep understanding of the culture and business climate,” management confidently wrote in their 2009 IPO prospectus, which has since been shelved. Despite entering the country in 2001, when China only had 23 million Internet users, Newegg China today trails 360buy.com, established in 2004, and finds itself fending off numerous domestic startups who all want to be the go-to online retailer for gearheads.

The reasons why Newegg has not yet been able to establish a market-leading position in China are multifaceted and complex.

Underdeveloped parcel delivery infrastructure

Unlike in the US where Newegg delivers nationwide via FedEx, UPS, and USPS, Newegg China relies on a network of local couriers (often on scooter) and third-party express delivery service providers. Prices are rising says The Global Times while productivity remains subpar reports China Daily, denouncing express delivery providers’ “poor management, a lack of standardized operating methods and the low professional standards among staff members, with increasing complaints from customers.” Newegg recently opened a new storage and logistics center in Jiading, an industrial zone outside of Shanghai, and has eight warehouses across China.

 

Lack of widely available or widely utilized electronic payment systems

Online payment systems in China have changed dramatically over the last decade. Although newegg.com.cn still accepts cash on delivery from customers, the rise in disposable income, popularity of credit cards, and availability of other forms of personal consumer credit have increased exponentially. Furthermore, the demographic Newegg targets are urban middle class tech enthusiasts. China may still be a cash society, but this group is ahead of the curve. Trust issues may have been a problem in the beginning, but shouldn’t be anymore.

 

Non-ownership, yet still reporting to Newegg US

Newegg doesn’t actually own its China operations; rather they control it through a Variable Interest Entity (VIE), where control is obtained through legal agreements rather than share ownership. Chinese law prevents non-Chinese citizens and companies from holding more than half a stake in Internet companies. Additionally, businesses require an ICP (Internet Content Provider) license to operate a website in the country. Newegg’s founder Fred Chang, who emigrated from Taiwan to America, got around this potential snafu by setting up Shanghai Newegg E-Business Co., Ltd., whose capital stock is wholly owned by two citizens of China that are relatives of Chang.

Management’s aim was to replicate its US market success in China, according to its shelved S-1, by  “utilizing a technology platform and operational practices which we have successfully employed in the United States.” Alas, plans didn’t go exactly according to expectations. In April 2011 the 21st Century Business Herald reported Gu Jianxing, CEO of Newegg Inc.’s China unit, told web portal giant NetEase that they “had met the same localization problems that have beset other foreign internet companies in China” in addition to disclosing “Newegg China copied its U.S. parent’s mature operating models, which included setting up assorted procedures each with a separate supervisor, but achieved the opposite results.”

 

Marketing

Newegg has historically only spent a few percentage points of revenue on marketing. “Our philosophy is if you have a good product, it will spread,” explained Howard Tong, co-founder and mastermind behind Newegg’s marketing and customer experience, in an Internet Retailer article. “Once people find out they have a great experience, they’ll go out and tell other people about it.” This also happens to be the tenet behind search engine algorithms. The more links a site has and the greater authority those links represent, the greater potential that site has to be ranked, even moreso in the early noughties when Newegg launched. Today newegg.com ranks well for hundreds of thousands of keywords, from generics like “hard drive” and “video card” to more obscure components like “SATA adaptor”.

Newegg China, conversely, has struggled to dominate natural search rankings. Although they’ve inherited the design, architecture, and on-site SEO best practices of the US website, their off-site optimization is a pastiche of “friendly links” and directory listings using the site name as anchor text. Moreover, newegg.com and newegg.ca link to newegg.com.cn with the anchor text “China” from nearly every page. A more thoughtful cross-linking strategy should be put in place. A CNBC Managing China episode last year even showed that when typing Newegg’s Chinese name into Google, their competitor 360buy.com came up as the first result. Though they’ve since rightfully reclaimed top spot for their brand name, there are only about 45,000 domains on the net that link to newegg.com.cn, compared to 150,000 to newegg.com.

PPC costs have also skyrocketed out of control. Advertising spend on Baidu jumped from RMB 60,000 to RMB 290,000 per month over the last year, prompting Newegg to stop advertising on China’s most popular search engine altogether.

 

Other considerations

  • Some consumers prefer to buy in person at IT malls where you can negotiate price.
  • Competition from big box retailers like Gome or Suning where you can touch and learn about the product then buy and take it home right away.
  • Spread themselves too thin by expanding to non IT/3C.
  • Churn of upper management. Co-founder and VP of Marketing Howard Tong left in 2007. Tally Liu, appointed CEO in 2008, departed in 2010. Zou Guoqing, CEO of Newegg China, was replaced by Gu Jianxing.

Newegg may have had the foresight to arrive in China early, but now, a decade on, they face the strongest headwinds yet. With a recent $70 million infusion in its China operations, brand new Shanghai offices, more employees working in China than the US, and enticed by 180% annual growth in the online Chinese B2C market, how long can Newegg China keep incubating before they fail to hatch?

 

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  • http://twitter.com/lucase Lucas Englehardt

    What has 360buy done differently?

    • http://twitter.com/dougunplugged Doug Pierce

      I’ll save it for another post, Lucas. Stay tuned.

  • http://twitter.com/21tigermike Michael A. Robson

    “Our philosophy is if you have a good product, it will spread”  that’s your marketing strategy? Lazy.

  • http://twitter.com/VirgilArcher Buzz A.

    Great analysis Doug, looking forward to the next post.

  • http://www.facebook.com/sebastien.armand Sebastien Armand

    It’s hard to understand “which failure” you are talking about here. Is it failure to perform as well as the US counterpart of the company or is it failure to perform well compared to the market leaders in China?

    Some arguments here don’t stand if we talk about performing well in regard of market leaders (which seems to be the point outlined by the pie chart). Issues of parcel delivery and lack of widespread electronic payment methods affect Taobao and 360 the exact same way.

    • http://twitter.com/dougunplugged Doug Pierce

      My intent was to highlight the opposite outcomes in Newegg’s US and China operations. The pie chart comparing the market leaders was actually added by Techrice’s editorial team.

      I don’t know enough about the market leaders to make valid comparisons, but I’m researching and writing up a post on 360buy next.

      And sure, issues of parcel delivery and lack of widespread electronic payment methods affect the co’s the same way, but they respond differently. 360buy spent 70% of its capital from first- and second-round investments on logistics development, for example.

  • Dan Brody

    Why would you call it a failure? Market share is almost the same as Dangdang, which is a $900m listco based on $400m in revenue, and Vancl, which will soon get listed at similar levels. Based on purely their China revenue (prob ~$300m?)  they can probably get a close to $1b valuation, add on their overseas revenue ($2.2b in 2009) and you’ve got a pretty successful listing whenever they decide to go to market.

    I’ve got no special insight to Newegg China, just think it’s unfair to slag off on them for “failing” when they’re one of the top 5 in their category in a hugely competitive space…

  • http://www.etoolciti.com/WebDevelopment/index.html Web Development Firm

    Some of the arguments which are highlighted over here doesn’t seems that promising. It doesn’t specify to what they are arguing.