Is Search Now A Strategic Industry in China?

After not too much time observing China’s economy it becomes clear that the government likes to arrange organised competition in industries it considers strategic. Thus the country gets three major airlines – China Eastern, China Southern and Air China, as well as three major mobile phone networks in China Mobile, China Unicom and China Telecom.

Now, with the announcement last week of two major new search engine companies, it appears that search is joining transportation, phone networks and Internet service providers as a strategic industry to be managed more directly by the government. And maybe China will soon have three search giants to match up with its telephone and airline triplets.

The first search engine deal announced last week was an alliance between ecommerce giant Alibaba and online portal Sohu to upgrade Sohu’s existing search product, Sogou.com. In a statement on Monday the 9^th, Sohu announced that Alibaba and Yunfeng, an investment fund cofounded by Alibaba’s chairman, Jack Ma would be buying 16 percent of Sogou.

Another 16 percent of the company would be invested by a fund affiliated with Sohu chaiman Charles Zhang. And Sogou could use the help. In a search market dominated by Baidu with 70% share, and Google with 24.2%, Sogou currently ranks third, but has only 0.8% market share according to recent market research by third party analysts.

The second, and more surprising deal was a link up announced on Friday between Xinhua and China Mobile to start yet another search engine. Xinhua, a news agency belonging to the central government which also acts as a propaganda organ and sometimes intelligence gathering body and China largest cellular carrier seem like unusual partners for an Internet venture, and the exact terms of the transaction have yet to be announced. The New York Times on Friday described the deal as follows, “In an apparent bid to extend its control over the Internet and cash in on the rapid growth of mobile devices, China plans to create a government-controlled search engine.”

While these two new search engine ventures being announced in a single week, particularly so closely following the recent Google controversy, could be a coincidence, very few major transactions in an economy that is still largely government controlled happen in such a random way.

Although Baidu, Sohu and Alibaba are all private companies, and thus very different creatures from state-owned enterprises such as China Mobile or the airlines, in practice China’s government requires any large media enterprise to be closely aligned with the bureaucracy and these major firms often serve as unofficial market champions for the nation, particularly once they have gone public and become internationally recognisable symbols of the country’s media markets.

At the same time, the government is careful not to have any market dominated too much by a single company and it actively works to encourage (and organise) some competition among industry heavyweights. Thus the airline industry was split into three companies from a single parent, and part of the 3G market was set aside for the lesser cell phone players, China Unicom and China Telecom.

Now a similar scenario seems to be appearing in search and it most likely means that the government is taking search engines seriously as strategic national interest. (Bad news if you are Google). In a story that Xinhua published regarding its new joint venture with China Mobile, the news agency portrayed its search engine enterprise in a directly political manner. According to the report, the new search engine is intended to “better serve the work of the Party and the nation and to practically protect national interests…and to expand the reach and the ability in and outside China of the country’s mainstream media to guide public opinion.”

While that mission statement would seem to doom the new search product with consumers, the massive market penetration of China Mobile could give the new project a significant advantage with mobile users.

While it is too early to tell what will happen in China’s search market, if the moves last week were officially sanctioned measures to “harmonise” the market, there could be some moves in the pipeline to curb Baidu’s dominance and provide a boost to the new players. This could take the form of reserving parts of newly developing markets for the newcomers or through other measures designed to keep a what would be perceived to competitive balance in the market.

The other side of this equation is that if this recognition of search as a strategic industry is happening as speculated here, then opportunities for Google or other international companies to achieve gains in the market are likely to all but disappear.

While China welcomes foreign investment in most industries, it is still ambivalent about international involvement in the media sector, particularly with regard to consumer-facing products. Anything which smacks of mass media is likely to be all but closed off to foreign involvement, and search, with its ability to lead users to new information may be seen as too strategic to be left to the open market.