How LinkedIn Plans to Conquer China

With more than 277 million users worldwide, LinkedIn (NYSE: LNKD  ) is not only the largest professional social network, it is also one of the best-monetized websites ever created. Unlike Facebook (NASDAQ: FB  ) or Google, which mainly rely on advertisements to generate revenue, LinkedIn obtains revenue from its users through advertising, premium memberships, and human resources solutions.

However, despite being one of the best-monetized websites, it is becoming increasingly difficult for LinkedIn to continue growing. In the fourth quarter of 2013, revenue came in at $447 million, up 47%. That being said, management predicted revenue of $455 million-$460 million for this quarter, well below the Street consensus. The company's projections raised worries that it may be starting to have trouble mining its audience for more revenue. At the same time, the company added only 18 million accounts in the fourth quarter, which barely matched the average of additional accounts that LinkedIn has gained in the previous quarters. To improve revenue and user metrics, the company recently announced the introduction of a Chinese-language website. Can LinkedIn succeed in China?

Source: LinkedIn

A great opportunity
LinkedIn will be offering a localized version of its website, after more than a decade of having an English-language site there. The company will also be establishing a joint venture with top private equity firms China Broadband Capital and Sequoia China, to attempt to connect more than 140 million Chinese professionals.

Without any doubt, China represents a huge business opportunity for LinkedIn, which already has more than 4 million members in the world's second-largest economy. With a labor force of more than 800 million people, China also has a huge population of active Internet users. Most companies in China still do not use LinkedIn or similar alternatives as recruiting tools, but this could change if LinkedIn succeeds in registering enough users.

Note that LinkedIn will become one of the few U.S. social networks with direct exposure to China. Facebook, the largest social network, recently reported revenue of $2.59 billion for the fourth quarter of 2013, an increase of 55%, year over year. However, it has no official presence in China. Eventually, this will become a big problem for the company, which already has more than 1 billion registered users.

Several challenges ahead
LinkedIn will have to compete against several social networks that are already present in the Chinese market. Tianji, a networking site owned by Viadeo, has more than 15 million users in China, where it has been in the market since 2005. Tianji is popular due to some highly social features, like the ability to invite friends and colleagues to evaluate themselves using a Myers-Briggs-type online personality test.

Ushi is an important competitor that released an invitation-only platform in 2010. The company raised $1.5 million in a first round of funding, and has several chief executives registered in its user base. Ushi, which monetizes its site by charging for some premium features, has a deep understanding of Chinese business customs. Before the release, the team spent months in face-to-face meetings with several top executives and business leaders in order to convince them to become early members. This allowed Ushi to become an exclusive hub for elite professionals at an early stage.

On top of competition, LinkedIn will have to comply with several local rules in order to remain online. Complex regulations in China are a reason for the absence of U.S. social media companies in the world's second-largest economy. Facebook has been blocked by firewalls since mid-2009.

Final Foolish takeaway
LinkedIn, the largest social network oriented to professionals, will release a localized version of its website for the Chinese market. This is a privilege, and LinkedIn will become one of the few U.S. social media companies with direct exposure to China. However, there are several challenges ahead, including fierce competition from local competitors like Tianji and Ushi. To succeed in this market, LinkedIn will need to adopt a growth strategy based on a deep understanding of Chinese business customs.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2014, at 10:53 AM, Pkylie wrote:

    Yet another amazing BS Pump article from MF on LNKD.

    So what happened to the INDIA market, which LNKD pumped and hyped for over a year , 650 Million English speaking white collar professionals in INDIA ?

    It was supposed to boost LNKD's rev and profit by 35% .

    So now the SPIN is CHINA ?

    Did you use to work Bernie Madoff ?

    Keep up with the BS. How much did LNKD pay MF to hype and pump LNKD non-stop ?

  • Report this Comment On March 04, 2014, at 10:27 PM, mbeckford wrote:

    Motley Fool already addressed this last week. This article is a bit more perceptive and understanding of the China social media market a more appropriate focus on the challenge of local competition.

    Yes, Tianji and Ushi are existing local competitors today. Others include Wealink, Hengzhi, and Jingwei. But these networks are generally considered a failure within China mainly due to an inability to monetize their user-base. And 15 million users is frankly puny for China. Ushi recently announced layoffs.

    The biggest challenges facing LinkedIn are more cultural in nature.

    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 other than the one they use in the US.

    It would be foolish to think that the Chinese will never get accustomed to professional social networking, and when it does and a profitable business model has been established, expect the local competition to really heat up.

    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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