Many Chinese internet companies begin as copycat versions of their American counterparts. For instance, Sohu.com, a web portal based in China, was founded in 1996, two years behind Yahoo. Sohu went public in 2000, four years after Yahoo had its IPO in 1996.
Other such U.S.-China internet company pairings include Google & Baidu, Facebook & Renren, Amazon & Dangdang, Craigslist & Ganji, eBay & Taobao, Expedia & eLong, Yelp & Dianping, Groupon & Lashou, and on and on.
Usually after a great idea emerges in the U.S., some Chinese entrepreneurs will quickly adopt it and implement a Chinese version that aims at the Chinese market.
Sometimes more than one such company is launched almost simultaneously, crowding into the same competitive niche. There were thousands of Groupon wannabes in China when the idea was first introduced. Most of them failed due to lack of financial backing and fierce competition.
The Chinese internet companies monitor their American counterparts closely, borrowing heavily in website functions, content and style. Interestingly, even the stock performance of these Chinese internet companies tends to follow that of their American counterparts. After the internet bubble burst in the U.S in early 2000, the stock price of Yahoo lost more than 90% of its value within two years. Similarly, the stock price of Sohu went down more than 90% from its IPO price a few months after Yahoo stock peaked, and languished in the $1 range for most of 2001 and 2002.
For many years, Chinese internet companies went public after their American counterparts had their IPOs. Renren, the Chinese version of Facebook, broke that tradition by having its IPO in May 2011, one year before Facebook went public in May 2012. Renren stock has not done well since its IPO, currently more than 70% off from its price on the date of its IPO. Interestingly, Facebook stock has also done poorly since its IPO, down more than 30% from its peak.
Some of these Chinese internet companies have not gone public as of today. Both Dianping and Lashou are still privately held, even though their American counterparts Yelp and Groupon have already gone public. As the U.S. IPO market has cooled in recent months, it’s likely that these Chinese internet companies are waiting patiently for the right time to debut in the IPO market. It would be interesting to see how both Dianping and Lashou will fetch in the IPO market.
Of these internet companies, some like Baidu, have done fantastically well for their investors. Others are not so lucky. Stock prices for both Renren and Dangdang are down significantly from their IPO, languishing in the single digits for most of 2012.
It’s interesting to note that often the Chinese copycat companies beat their American counterparts in the Chinese market. For instance, Baidu has dominated the Chinese search market, while Google had to relocate its Chinese search business to Hong Kong after the company made the decision that it was no longer willing with comply with Chinese government’s censorship directives. Baidu, led by Chinese born and PKU educated Robin Li, has been more accommodating to the Chinese government’s demands, thus enjoying almost a monopolistic dominance in the Chinese search market.
Taobao’s triumph over eBay is another telling story of how a Chinese internet company managed to beat its more powerful American counterpart in China. From its inception, Taobao chose not to charge its users a listing fee, which eBay refused to do as it was not how its U.S business was run. The result was a widespread migration of Chinese-based accounts from eBay to Taobao.
Finding the next Baidu of the new crop of Chinese internet companies is not an easy task. But as Buffett has shown in his investing career, buying a great company with a proven track record and capable leadership at a reasonable price can lead to great investment returns.
Companies such as Baidu and Sohu have dipped significantly in the past, then rebounded to record highs. So instead of looking for the next Baidu, maybe an easier way to profit is simply to wait and buy the likes of Baidu and Sohu at reasonable prices.