US Companies Want to Play China's Game. They Just Can't Win It.

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US Companies Want to Play China's Game. They Just Can't Win It.
  • Netflix shelved launching its streaming service in China
  • No way to overtake established Chinese companies
  • US companies considering China move often talk about the "LinkedIn model"

In January 2016, the video-streaming service announced an ambitious global expansion. The goal was to beam American hits such as "House of Cards" around the world including, eventually, in China.

"Today you are witnessing the birth of a new global Internet TV network," said chief executive Reed Hastings at a large tech conference.

Sending racy American content into a country that censors almost everything may have seemed like a leap, but Netflix was confident. The China plan, Hastings said, was on a "slow and steady path."

Less than a year later, having launched just about everywhere else, Netflix shelved the streaming project. It opted instead to license some content to Chinese providers for "modest" revenues, according to a quarterly letter. (Representatives of the company declined to comment.)

For some high-flying US Internet businesses, the China dream is fading; for others, it looks radically different from what they had hoped. California's Internet companies once dreamed of liberating China with technology, thinking that the system of censorship known as the Great Firewallwould inevitably crumble like the Berlin Wall, paving the way for their advance in the world's most populous nation.

But President Xi Jinping has tightened, rather than loosened, control of the Internet and increased restrictions on foreign companies. Six years after Google retreated from China's search-engine business over censorship and hacking concerns, US firms seem more willing than ever to play the Communist Party's game - they just can't win it.

Even if they can gain a foothold, which is hard enough, there is practically no way they will be able to overtake the Chinese companies that have comfortably established themselves.

Facebook's China charm offensive, which included Mark Zuckerberg studying Mandarin, has yielded little. Google's search business and Twitter remain blocked. LinkedIn and Microsoft censor - and still, neither is a major player in China's online space. is sputtering along against the Chinese e-commerce giant Alibaba. After great initial success, Apple is being overtaken by local upstarts.

Still, tech companies are pushing, and they are looking to the incoming Trump administration for help breaking in. When executives from the major US technology companies met with President-elect Donald Trump on December 14 at Trump Tower, they complained about a Chinese proposal that would require foreign technology companies to deposit the source code for their software with the government, according to a person who was familiar with the discussions.

Bill Bishop, a tech consultant who writes Sinocism, an influential China newsletter, said he has seen waves of confident California firms humbled by efforts to crack the China market.

"Each generation believes they can find a way, but the Chinese Communist Party has upped their game in terms of censorship, and these companies that nobody has heard about 10 years ago - now they are the biggest companies in the world," he said, referring to corporate behemoths such as Alibaba, Tencent, Xiaomi and Baidu, sometimes called the Amazon, Facebook, Apple and Google of China.

"US companies are going to make a Chinese play, but not the way they imagined."

If you were looking for a symbol of downsized China dreams, it would be hard to do better than Wuzhen, the luxe but isolated resort that plays host to China's "World Internet Conference" each fall.

The summit, in its third year, brings together an oddball cast which this year included Chinese Internet regulators, pro-censorship academics, the prime minister of Cambodia and emissaries from US companies such as Amazon and Facebook.

One of the most high-profile speakers was Reid Hoffman, the executive chairman of LinkedIn, who praised Xi'ssignature infrastructure plan, a spending bonanza known as "One Belt, One Road."

US companies considering a China move often talk about the "LinkedIn model" - a model that means close local ties and full cooperation with the government.

Acting local - or, indeed, operating at all - means playing by local rules, even when those rules run counter to the idea of free expression and association. LinkedIn's Chinese site censors content and puts limits on forming groups. LinkedIn chief executive Jeff Weiner has described the company's introduction of a Chinese-language version as involving "compromises that are far from ideal and can be very painful."

LinkedIn did not agree to an interview for this article.

Unlike when Google and Yahoo were hauled in to testify before Congress for censoring content a decade ago, LinkedIn's censorship has earned the company a small amount of bad press, but has not been treated as a major story. LinkedIn's bigger challenge is competing in the Chinese market. Its Chinese site has more than 20 million users - fair by US standards, but diminutive for a Chinese social network, analysts said.

To better connect with young workers, it launched an app called Chitu which promises to be "real and fun." The app sounds millennial-friendly - it hosts livestreams with celebrities, for instance - but faces fierce competition from home-grown challengers with a head start.

Staying relatively small, saying the right things and complying with authorities seems to be the only option.

Evernote, an organizational app, launched a China-specific version in 2012. In 2014, the app shelved a feature that Hong Kong protesters had used to share information in China. Like many US companies doing business in China, Evernote has agreed to store Chinese citizens' data on Chinese servers, where authorities can access it. It runs its China operation in a bright, foosball-equipped office in Beijing's tech district. The business is chugging along but remains small, employing a couple of dozen people.

That fact that both firms are cited as China success stories shows just how tough it is for US businesses.

Jeremy Goldkorn, director of the media and consulting firm Danwei, summed up the best-case scenario for US Internet start-ups as "not getting kicked out, but not making a lot of money."

Many large US tech giants, from semiconductor companies to Apple, have made impressive profits in China, but it's getting harder now, said Scott Kennedy, who directs a project on Chinese business at the Center for Strategic and International Studies in Washington. "This is a market that makes or breaks companies."

The titans of US technology are facing some of the toughest challenges yet. Google and Facebook remain at the periphery, reduced to selling ads while they angle for a Communist Party-brokered compromise that could get them in.

Over the past few years, Facebook has made a high-profile push to win over China's leaders.

When China's former web czar, Lu Wei, toured Facebook's office in 2014, a copy of Xi's book, "The Governance of China," was visible on Zuckerberg's desk. Last March, Zuckerberg braved Beiing's toxic air to take a notorious "smog jog" through Tiananmen Square.

Despite recent reports that Facebook is building a "censorship tool" to help secure access to the Chinese market, the social network remains blocked, with little chance of that changing anytime soon, according to a person familiar with the matter who declined to be identified because of its sensitivity. To comply with Chinese law and regulations, Facebook would need to drastically change its product, experts said.

If the company were to secure the requisite permits to operate - and that's a big if - it's not clear that it would succeed.

In the years that Zuckerberg has been studying Mandarin, China's government has ramped up its focus on innovation and helped build an alternate universe where local technology rules.

Facebook would need to compete, for instance, with Tencent's WeChat, a chat service with more than 800 million active users that has morphed into one-stop shopping for socializing, news and e-commerce.

"When I think about Facebook in China, I think, 'What's their advantage?' " said William Bao Bean, a Shanghai-based partner at SOSV Ventures and the managing director of Chinaccelerator, which invests in start-ups. "Their product is so outpaced by the local companies."

That does not mean Facebook won't try. Tim Sparapani, who was Facebook's first director of public policy and is now principal at SPQR strategies, said entering China was part of Zuckerberg's vision and he "wouldn't bet against Mark."

"If Mark says he is going to connect the world, he is going to connect the world. It's about fulfilling that vision of ubiquitous worldwide connectivity."

Facebook declined a request for comment.

Carmen Chang, a partner at the Silicon Valley firm New Enterprise Associates and a longtime China dealmaker, said that ambitious companies such as Facebook will take the long view in China - strengthening their ties and waiting for new opportunities. "China is too important a market for these companies to settle for a Plan B," she said. "They will take what they can get and keep probing. Some companies will never give up."

Others wonder why Silicon Valley stays optimistic.

"The people at the top are used to moving forward at cyber-speed, not to being pushed aside, blocked, for reasons that are not based on the technology or based on somebody having a better idea - it's just foreign to their way of thinking," said Lester Ross, a managing partner at Wilmer Hale in Beijing, who advises US and Chinese companies.

"If you can afford it, it's patience and hope that things change. I don't see signs of that in front of us in the near term," he said.

"It is very hard to be optimistic."

© 2016 The Washington Post


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