Rick also reminded investors to look out for a new search portal this year by which Baidu will target the Japanese market. In this edition of Fool on Call, we will take a closer look at this very important initiative.
Tailor-made for Japan
When news broke that Baidu planned to unveil a search-engine platform in Japan similar to the one it has in China, Rick rightly cautioned investors from getting too enthusiastic in light of the difficult competitive environment there. Here, Baidu will be pitted against entrenched competition from Yahoo!
In the question-and-answer session of Baidu's call, CEO Robin Li admitted that Japan presents a more formidable environment for the company: "Japan is the more mature market, and we need some time to do preparation, and we need to have patience for the right time to monetize it."
Nonetheless, Baidu continues to iron out its plans for a soon-to-be-launched search-engine invasion of the Japanese market. Over the past few quarters, the company has been developing the product, and that process will continue into 2007. It is worth noting a comment that was made during the Q&A: These initial stages of development in 2006 came at minimal expense to the company. That will change in 2007, when the real expenses associated with the launch kick in.
After some prodding from one analyst, management revealed that the company expects to incur approximately $15 million in capital expenditures associated with the Japanese search engine. Much of this expense will be for building the network in Japan and for hiring staff on the ground. Another analyst queried whether the hiring and database buildout is planned for both China and Japan. Li indicated that there will be hiring in both countries but that eventually "all of the [Japanese] operation will be localized" in Japan. Li also added that the network servers are to be situated in Japan. As far as when shareholders can expect to see this $15 million incurred, no clarity was forthcoming; management was unwilling to state whether the expenses will be felt in the first half of the year or the latter part.
Interestingly, the company decided to keep the same domain name for the Japanese market. It, too, will operate under Baidu, albeit with a localized domain address. I find this choice curious because the word baidu has greater significance in the Chinese culture. The word comes from a Chinese poem that was written more than 800 years ago, with a literal meaning of "hundreds of times." I have to wonder whether the company would have been better served finding another name of equal significance to Japanese heritage.
Obviously, the strength of its name identity and branding were enough to persuade management to stick with the company's namesake. But there is another reason why it ultimately makes sense to stick with the Baidu name in the Japanese market, and it gets to the heart of why I believe this company could be set to take Japan by storm.
I studied the Japanese language for two years and learned that the written form has three distinct writing systems: kanji, hiragana, and katakana. Of these, by far the most complex is kanji.
The literal meaning for kanji is "Han characters," referring to the Chinese Han Dynasty. And whereas a typical alphabet might have 30 or so letters, kanji has thousands of symbols! One example of the enormousness of this writing system comes from Baidu's own website, where it states, "We believe there are at least 38 ways of saying 'I' in Chinese." We believe? It seems hard to fathom, but it's true -- no one really knows just how many kanji characters there are. So ginormous is the Chinese-based language system that it is actually a measure of dignity and honor in the Japanese culture for those who have some degree of mastery over it.
This is why Baidu's assertion makes sense that doing a search query in this language is an "art rather than a science." Baidu has proved to be extremely successful in China because of its mastery of this art, and that gives me hope that the same skill will prove to be equally lucrative in Japan.
Up to the challenge
During the call, an analyst asked management how it planned to differentiate from the competition in Japan. The analyst noted that Baidu didn't face similar challengers in China because the company was the market leader from day one and didn't have to play catch-up. CEO Li immediately squashed that myth: "Baidu was not No. 1 in China from day one. We actually started quite late, later than probably most of the Chinese search players you hear on the market right now. So we are familiar with how you play [the] catch-up game."
Li didn't elaborate further on what ways it will distinguish itself from the competition in Japan, but one thing we can be sure of is that its artistic search system that has allowed it to enjoy immense success in China will likely be what sets it apart in Japan as well.
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