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Why LinkedIn Can Succeed in China

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  LinkedIn  (NYSE: LNKD  )  is poised to enter China, rather than just sitting on the periphery with the English-only version of the site. LinkedIn needs a way to reaccelerate growth, and entering a country with a labor force of 800 million is a good way to do it. Will this venture result in a windfall of profits or headaches for the company?

To date, LinkedIn has been successful in threading the needle, where companies such as Facebook  (NASDAQ: FB  )  and Twitter  (NYSE: TWTR  )  were banned after riots in Xinjiang were believed to have been fueled by postings on the social media websites, according to the Register.  LinkedIn may fit in the gap between open social media that offers free speech, and government censorship of political viewpoints because the bulk of its content is business-focused rather than social. LinkedIn has also stated that it would be working with the government on content policies, according to the Wall Street Journal.

Local hire will build mainland business
Derek Shen, LinkedIn's new president of China's operations, announced the company's expanded presence and investment from Sequoia and CBC on a company blog site. LinkedIn is hoping to connect with 140 million Chinese professionals to add to its existing 277 million user base. According to an interview with the Wall Street Journal, LinkedIn only recently applied for its license to operate in China, so these are only the early stages of understanding how the business will perform and how much revenue can be expected. 

Mainland China opportunity is large
Today, LinkedIn has a healthy Asia Pacific business, which represented 18% of revenue in 2013, according to the company's most recent 10K filing. It's unclear exactly how much overlap there is between existing subscribers and incremental ones. According to Arvind Rajan, in a 2012 interview with the South China Morning Post, LinkedIn had 2 million users in mainland China using the company's English version. Considering the significant potential that exists in the country, there is plenty of room to grow, as the company's user base increased from 155 million at the time of the interview to today's 277 million.

At first glance, the key benefit seems to be in addressing local companies and people not employed by multinationals. However, a quick search on Foxconn shows that the company has 8,500 employees already on LinkedIn, but only two jobs posted, so there may be a recruiting opportunity for multinationals as well.

Need to get ahead of local competition
Front-running competition may be another reason for this venture, as companies like Weibo, the Chinese microblogging website, build established brands and user bases that could be extended to business networking in the future. Weibo is in the process of preparing for a listing on the NYSE, so by boasting 61.4 million average daily users, it is targeting a valuation of $8 billion. This would leave the company in a very well-capitalized position to extend its offering.

Censorship could derail the effort
The biggest question for the company, though, is whether government censorship will be a large enough impediment that it proves to be more trouble than it's worth. A year ago, Google's former China chief, Lee Kai-fu, resigned over the censorship issue and has since been the subject of a propaganda attack questioning the validity of everything from his personal family history to a cancer diagnosis that caused him to seek treatment in Taiwan.

There is no doubting that China represents a large opportunity for many technology companies that establish a role for themselves as successful pioneers. The one thing to remember about pioneers, though, is that many end up dead in a river with arrows in their backs.

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  • Report this Comment On February 28, 2014, at 11:14 AM, Pkylie wrote:

    LinkedIN will Only make money in China if she cooks her books.

    This 15 year old company has operated in the most profitable markets of western economies and have little profit to show for it, So somehow China is more profitable where the average worker makes less than $1000 US a month ? Just what are you smoking ?

  • Report this Comment On March 05, 2014, at 12:39 AM, mbeckford wrote:

    The biggest issue facing LinkedIn is cultural in nature and has little to do with local hiring, censorship, or competition.

    Local hiring of a China executive can be a mixed blessing and is impossible to comment on without looking at LinkedIn's executive culture at their headquarters or actually assessing who they actually hired. On Censorship is really a "red herring" and should be a non-issue for LinkedIn. , the article correctly states that censorship should be less of a issue for Linkedin, but in reality it really is a non-issue. And Weibo isn't a true competitor just as LinkedIn doesn't really compete with Twitter (and Weibo is getting killed anyway by Tencent's WeChat).

    The biggest issues facing LinkedIn are cultural. The three areas LinkedIn will struggle culturally are:

    1. Business and professional networking in China is still primarily done face-to-face or at a minimum on the phone. While China has embraced social media for personal interaction, that has yet to happen professionally. Chinese LinkedIn "knock-offs" have been around for years and have failed to take off.

    2. It is VERY difficult to monetize anything "intangible" in China (software, web services, apps, DVD's, streaming, etc.). So even if LinkedIn is wildly successful and grows to 10's of millions of users, it needs to find the secret formula for an alternative monetization business model than the one they use in the US.

    3. There is really no real local competition ... YET. The reason why Baidu, Alibaba, Sina, Tencent and other Chinese internet giants are so successful vs. their US/Global rivals is that they understand how to do it "the Chinese way." They are not encumbered by an existing Western/international mindset, business model, brand etc. and can build a similar business from scratch in a way that talks directly to their Chinese brethren.

    Unless Linkedin China looks to build value-added services "offline" (events, perks, etc.), thinks out-of-the-box on how to make money, and acquires a local Chinese brand and/or allows the local team a wide swath of creative independence, they will soon join their fellow US-based companies as roadkill on the great internet superhighway of China.

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David Eller

I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.

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