Who Will Win China's Mobile War?

In the U.S., it's easy to spot the leading brands in technology. Google (GOOGL 10.16%) owns search, Microsoft dominates desktop operating systems, while Yahoo! is great for content. In China, it's not as easy. Over the next few weeks, I'll be reviewing a few key tech markets to see which Chinese companies dominate them -- and which companies you might want to invest in.

This week, I want to highlight China's mobile market. Of the 500 million Chinese that have Internet access, more than 390 million of them are connecting through mobile devices. Though Google seems to dominate the space, Qihoo and Baidu are investing billions to make war. Here's what you need to know to profit from this growing industry.

Google seems to be winning
Right now, Android is crushing China's smartphone market. Google's mobile operating system runs on 90% of Chinese handsets. (For comparison, Apple (AAPL 0.08%) represents only 5%.) This is great news for Google. The company's decision to offer Android for free to hardware makers has clearly helped it dominate market share, even as it has had troubles operating search, email, and several other services in China.

Because the government blocks Google's services, the company can't count on its service's network effects to attract and retain users. That is, Google can't drive its search users to use its email, or its email users to use Google Docs or YouTube like the company does in the U.S. This leaves Google open to domestic competition.

Looking at the leading smartphone manufacturers in China, Google doesn't even register. While many of the manufacturers will continue to build for Android, Google may soon find itself replaced if they decide to switch to other mobile operating systems.

Source: Sohu IT via Marbridge Consulting; does not add to 100%, source does not include Google.

At the moment, these manufacturers aren't interested in developing their own software. But they have partnered with two big-name Chinese companies.

Qihoo has a fighting chance...
One up-and-coming competitor is Qihoo 360 (QIHU.DL). Over the past year, Qihoo has evolved itself from an antivirus-software maker into a purveyor of almost everything tech -- from popular web and mobile browsers to a competitive new search engine.

Recently, Qihoo moved into the low-end smartphone market. The company launched its first smartphone -- dismally named the AK-47 -- in May, and announced a second in October that was touted as "China's cheapest quad-core smartphone."

When they were first available, each phone was priced at an attractive 1,000 yuan (about $237). In a country that buys its phones outright, where an iPhone costs more than $700, Qihoo's Android phones may help it gain market share.

To make the deal sweeter, Qihoo will soon release its own mobile OS to further combine hardware and software.

Despite investors' high expectations, the company doesn't seem like much of a threat right now. First, investors should note that the company doesn't have endless resources, and can't devote itself to the utmost quality across all its products. Second, Qihoo seems to face stiff competition from one of China's hottest homegrown smartphone companies, Xiaomi. Though reasonably priced at 1,999 yuan (or $316), Xiaomi's Mi2 promises the superior experience of a Samsung Galaxy S III. And third... Baidu's moving in.

Here comes Baidu
Like Qihoo, Baidu (BIDU 0.81%) unveiled one of its first smartphones in May. But the "Google of China" seems to have beaten Qihoo on price and features.

At 1,000 yuan (or $160), Baidu shipped its Changhong H5018 phone along with its own OS, the "Cloud Terminal Platform." Although it was a customized version of Android, Baidu combined the platform with 100 GB of cloud storage. Similar to Apple's iCloud, it lets users store and access data online. All together, the Changhong phone showed Baidu's focus on creating a powerful mobile ecosystem.

Over the past three months, Baidu has continued its push into mobile and the cloud. In early September, Baidu announced a $1.6 billion investment into a cloud computing center. And on Dec. 10, Baidu began selling its sleek, new phone -- the Lenovo A586 -- for 999 yuan (or $160) with 15 GB of cloud storage. Meanwhile, comparable phones like Nokia's (NOK 0.69%) Lumia 920T sells for 4,599 yuan (a big $739).

Source: The Next Web.

Baidu's mobile ecosystem kills in China
While the Google's Android and Samsung may lead China's mobile OS and hardware wars, those battles are just beginning. Of the 1.3 billion people in China, only 390 million currently access the Internet through their phones.

Recently, investors have been clamoring over Qihoo's ability to enter and dominate a market. Over the past three months, Baidu has seen its share price tumble 25%, while Qihoo has enjoyed a 24% run-up. These gains and losses mainly resulted from Qihoo's perceived success in search. However, rapid success in search doesn't translate directly to rapid success in mobile. As Qihoo enters new markets and spreads itself thin, I think Baidu may be the better mobile company.

Baidu still owns over 70% of the search market and can use its market share to drive users to its mobile products. From creating its own smartphone and mobile OS, to investing heavily into cloud services, Baidu is doing anything and everything needed to keep Chinese users interested in the company. As China's mobile market matures, I think that strategy will pay off.