Groupon China is Crumbling. Why Do Foreign Internet Companies Fail in China?

By On 09/02/2011 · 11 Comments

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

    Are these ‘Group buying’ companies doing well anywhere? Facebook just backed out of their Groupon Service. I mean, I’ve seen tons of ads for these kinds of things, but it just sounds like a weird thing to ‘catch on’.

    If Costco and HomeDepot disintermediated the retail store (allowing customers to walk into a ‘warehouse’ basically, and buy for dirt cheap), then Groupon is attempting to make Restaurant/Food purchasing a wholesale activity as well? WTF.

    I mean, is this a really innovative business? At any rate, I’ve seen lots of ads for these kinds of companies where they claim you can pay 10% of retail for dinners, etc. Sounds weird. Moreover, if you’re on a hot date, where is the 面子  in getting a ‘sweet deal’ with a coupon. George Kostanza, anyone?

    • http://twitter.com/DonSunny46664 Sunny Ye

      Nuomi is actually doing surprisingly well, and I’ve also seen cut throat deals from some of the local group sites that’s pretty attractive. For Groupon China their business practice is simply wrong. One deal I came across when shopping for iPad 2 was a Gaopeng deal that only slashed RMB 22 off, not very attractive.

      And their recruitment lacked qualification, people went on-board the same day they passed interview, now that’s a WTF.

      And I totally agree with you on the 面子 problem, that is one problem these sites have to overcome in top tier cities in China, but lower tier cities people are just happy to have a sweet deal.

  • YM

    These are some great insights. Do you have any thoughts on whether these same lessons could be extrapolated when looking at other internet e-commerce co’s that have faced trouble in China, like Amazon (early on) or eBay?

    • http://twitter.com/DonSunny46664 Sunny Ye

      To some degree eBay and Amazon made the same mistakes because they didn’t understand China enough, but Groupon was too high profile that it became a public enemy. 

      eCommerce is changing in China, it was dominated by Taobao with it’s C2C model, consumer-2-consumer, but now independent B2C sites are emerging with their localized supply chains designed for minimizing cost and aggressive marketing campaigns that covered both online and offline channels which I believe neither eBay or Amazon had. So perhaps they weren’t ready to take on China when they entered.Anyone thinking of entering Chinese eCommerce market and wanting to dominate or at least be profitable enough to boost about is be ready to invest heavy and engage in price wars.

  • David Kennan

    I like the question posed by Mike.  Where’s the 面子 in getting a sweet deal?  Maybe a new feature of deal services should be buy close to wholesale price WITHOUT observers knowing.  To do so, you would need the coupon redemption reliably enter the point of sale even though you don’t present the coupon at purchase time.  Any credit card providers interested in offering this kind of service?

  • Riley

    You made this list but you possibly missed the most important two factors.  For starters, groupon.cn bascially stole groupon’s Chinese address advertised themselves as the real groupon and even copied their website.  If you are an average Chinese consumer you’re not going to know that it’s a fraud. 

    Second, it’s not necessarily about understanding the Chinese market it’s more about being late to the game.  Group buying sites were already well entrenched in China when Groupon decided to launch their venture.If facebook and twitter had been quicker to translate their interface to Chinese, I would say that neither renren or weibo would be as big.  In fact, I know it.

    There is this huge temptation, dare I say arrogance, to say that the Chinese internet is somehow different, and that foreign companies always fail in China, Google for instance.  They didn’t fail, when they left they had more than 1/3 of the market, they just didn’t want to play by China’s draconian rules anymore.  All one needs to do is look at Apple to see how poorly foreign tech companies do here. If it wasn’t for the censorship and blatant protectionism shown by those censors half of these local firms wouldn’t exist.  Show me innovation and not imitation, then I will respect Chinese tech companies.

    • http://twitter.com/leoalmighty Leo Chen

      Unfortunately Groupon’s struggles in China largely comes down to a lack of understanding of the Chinese market. Particularly in this business, operations is extremely critical and foreign companies have trouble navigating the waters here. The fact that groupon.cn “stole” the domain name has no meaningful impact on Groupon since your average Chinese has no concept of the “real Groupon”. 

      You’re right that protectionism and censorship does create an unfair environment for foreign companies, but cultural and social economic factors require the gov’t to make tough choices. I’m not saying it’s right or wrong, but I don’t doubt the US gov’t (or any gov’t for that matter) would do things drastically differently if they were in China’s position. It’s easy for us Americans to sit high-n-mighty and criticize China, but those standards aren’t always reasonable, at least not immediately. Entrepreneurs in China are still hard working and ambitious and deserves respect for the companies they’ve built. Having spent time here working at local startups, I’ve corrected many of the biases I used to hold. It is a different ball game, a different culture and a different internet.

      • Riley

        Leo, I respectfully disagree.

        You seem to have ignored the biggest issue, that they were late to the game.  The group buying market was well saturated in when they arrived in China.  Considering that the business model isn’t all that sophisticated, nothing groupon could do short of buying up these other companies could have changed that fact.

        If having Groupon.cn wasn’t important then why did that company decide
        to take the URL in the first place? They couldn’t leverage their brand name
        and we all know how Chinese love foreign brands, and any bad PR can be
        attributed falsely to you. Misrepresenting yourself as a foreign
        company, their site said “worldwide leader in group buying”, is stealing
        not “stealing”. 

        • http://twitter.com/DonSunny46664 Sunny Ye

          Hi Riley, you have to look at Chinese internet as two main markets, one represented by the top tier cities where the general population have relative high spending power, these people are the most well educated Chinese and two the rural China, where most of the population are from villages with little education, their involvement with eCommerce is very limited due their low income.

          Now, the top tier city users, they are Groupon China (Gaopeng)’s main target consumers, these people are no tech laggards, especially in cities like Beijing and Shanghai where you see just about everyone in CBD carries either an iPhone 4 or a top end Android, these people are fully capable to differentiate which are good quality services. In case of Groupon China with their ill positioned coupons and PR embarrassment really costed them heavy losses of market share, which other services like Meituan and Nuomi gobbled up.

          Like you said group buy is not a sophisticated internet service where users are required heavy personal inputs like SNS, it’s actually more impulse consumerism and Groupon China’s products weren’t attractive enough to stimulate that impulse and their lack of PR took away the little credit they had in the first place.

          I can probably write another long post on how the local group buy sites engaged consumers, which has as much offline promotions as online ads and often in some cases like Meituan it’s founder was constantly in the spot lights garnering full attention of millions of users. (probably the right PR approach in China)

          Like Leo said Chinese internet is whole another internet, and on Google’s part they did reach around 1/3 of market share according to In The Plex by Levy, but some of the cases that resulted it’s exist from China were actually very cultural sensitive, things I assume both of it’s founders and CEO weren’t aware of, though some of those things were immoral but it’s the Chinese way.

          And personally I doubt Facebook would do better than Renren even if they are allowed to operate in China, not when Renren was giving away real gifts for each new account, competition is tough in this country and low blows happens all the time, that’s another point foreign internet companies have to be prepared for when they enter China.

          What we can wish for in this country is a proper enforceable patent law for entrepreneurs to protect their innovations from the larger internet giants who can and will copy once proven successful.

          • Riley

            If the Chinese internet is a “whole nother internet” as you say, then why do Chinese companies that repurposed/localized/stole whatever you want to call it”the other internet’s” ideas seem to be doing so well?

  • http://pulse.yahoo.com/_XJO7JAIZCTZUGOTBS4LOQBOGTQ Shibu B

    i think we are missing another crucial point. QQ tuan was launched just few weeks before Gaopeng offical launch.  Still QQ tuan manage to be in the top slot.  So timing of the launch is not the key issue. I was under the impression that QQ tuan and Gaopeng would be merged when they formed the JV/  But that didn’t happen. How do you expect a JV (Gaopeng) to be a winner when the collaborator has its own QQ tuan and co-invested FTuan in the race. I think tthe main reason for failure was this.