It’s an open secret that Groupon’s China JV, Gaopeng (高朋), is on its way to becoming the next failure of foreign internet companies entering China.
Rumors, supported by employee weibos, say the company is laying off as much as 30% of its work force in what should be the most commercially lucrative city in China: Shanghai. Looking at the number of purchases on Gaopeng’s daily deals, it’s not rocket science to conclude that business is bad.
Why is Groupon failing in China when its business model and expansion strategy worked well in other countries?
1. Tencent is the Wrong Partner
The Chinese e-Commerce market is fractured (beyond Taobao) and fierce in competition. Foreign companies entering China often look for a trustworthy local partner for a joint venture.
Every internet giant in China excels in an area that defines their business. Groupon’s partner Tencent (each hold 40% in Gaopeng) is a company known for cloning existing products and refining them for local Chinese users.
So sounds good for Groupon, right? Wrong. Tencent seems to be hedging its bets with Gaopeng–it’s stupefying that Groupon neglected to include a non-compete in the deal, writes China watcher Bill Bishop.
Tencent also operates its own group-buying site: QQ Group Buy (QQ团购). Adding insult to injury, Tencent has also invested Ftuan, yet another group-buying site. This is surely not the kind of ‘close partnership’ Groupon had in mind when it jumped in bed with Tencent.
Dataotuan‘s data shows QQ Tuangou ranked #1 in group-buying market share (June 2011)
Tencent’s core advantage is its massive user base derived from its dominant Chinese instant messaging service QQ. But the norm on QQ is to use nicknames and often post false or inaccurate personal information, which can present problems when trying to convince users to submit real information for billing. Moreover, competitors can all use QQ Connect, which diminishes the advantage for Gaopeng.
2. Expand Too Fast, Lose Your Integrity
Gaopeng’s competitors, such as Meituan (founded by Wang Xing, who also previously cloned Facebook and Twitter), have run wildly successful raffle promotions. Meituan did one raffle “deal” for a full set of Apple products–26 winners won a package valued at RMB 184,686 (USD 28,897). This single “deal” attracted over 290,000 registered users (until 28th August), many of who posted their involvement to Sina Weibo.
Gaopeng’s raffle was a public embarrassment. Gaopeng shared to Sina and Tencent Weibo, offering users the opportunity to win an iPhone 4 for signing up on Gaopeng and retweeting the message. It went well, until users found out the supposed “winners‘ were in fact Gaopeng employees. You can imagine the catastrophic consequences of this scandal.
To be fair, Gaopeng certainly attracts an added level of scrutiny from domestic media (perhaps even seeded by competitors). But it should be prepared–welcome to China.
3. Have a PR Strategy
95+% of Chinese users could care less that you dominate the rest of the world. In case of Groupon China, adopting a Chinese brand Gaopeng (高朋) was perhaps one of the only things they did right. But that slightest strategic advantage has been wasted by one PR crisis after another.
The next crisis came from within Gaopeng, when rumors surfaced on Sina Weibo about lay-offs and the “horrors” at Gaopeng’s regional offices.
Colleague called told me [he/she] has been fired, for the last couple days it’s chaos at work, people were crying all over the place! Right now there are reporters outside of office, but we can’t go out, not when there are guards at the door. There weren’t any signs of the lay-off, the HR came requesting the re-formatting of work computers, to sign an agreement and leave the premises within the hour! No negotiation were offered, in our department [alone] over 20 people were layed-off. Not sure [if this happens to me] how I will cope with it.
Original Sina Weibo post here
This does not inspire confidence, not to its consumers and especially not to its own employees. Even Groupon CEO Andrew Mason’s visit to China in June was perceived by local Chinese media as a road show for Groupon’s IPO which now faces doubts of its own.
How can foreign internet companies succeed in China?
Foreign internet companies have an abysmal track record in China. It’s an uphill fight. But using Groupon China as a case study, here are a few of my thoughts on how foreign firms might succeed in China:
1). Stay Low
A Chinese proverb says, “Birds with their head stuck out gets shot (枪打出头鸟).” When Groupon entered China, it was very high-profile “go, go, go” with recruiters offering potential employees almost double the salary of local competitors (and hiring a ton of foreign employees to start). This landed Gaopeng in serious hostile territory before it even made a cent in China.
Chinese are wary of foreign companies, and when their profitability is threatened competition is not only intense but also dirty.
In January, an informal embargo alliance was issued by Groupon’s Chinese competitors on all of Gaopeng employees. It’s questionable whether those sites will have any loyalty to this decree, but the fired Gaopeng employees should find out soon.
2). Find An Exclusive Partner
Copy2China is common practice in China, so if your business model is proven profitable it will be cloned. Entering China can be a matter of finding the right partner who is willing to share the market with you. And that includes sharing of their existing networks and resources. QQ Tuangou is fully integrated into Tencent’s other e-Commerce services, whereas Gaopeng did not share the same privilege.
3). Follow Local Trends
Tencent is the largest internet company in China in terms of registered users, but it’s reputation isn’t on the top list. The company is notorious for muscling out competitors by openly cloning them.
In the last two years, Sina Weibo has been by far the biggest trend for China’s white-collar internet users. Perhaps if Groupon could have had Sina as its partner, it could’ve had a more exclusive partner and a demographic of its slightly upmarket target consumers.
4). Always Localize
Localization is perhaps where most foreign companies lose out. Localizing in China can even mean discarding a business practice model that has been successful in other Asian countries like Singapore and Japan. Top executives from homebase (or the German one) are not going to win a local fight.
Finally, a strong recommendation: check out The Story of W&L: China’s Great Internet Divide to understand the importance of localization on the Chinese internet.
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