Why LinkedIn Can Succeed in China

LinkedIn can succeed in China, but there is unlikely to be a huge profit acceleration near term.

Feb 27, 2014 at 7:00PM

  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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David Eller has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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