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Baidu's Li says investors don't get China's coming Internet boom

For more than a decade, Baidu's Robin Li has been the top provider of search services for China's Internet population. Now he wants to help them get laundry delivered, book a doctor's appointment or hire a chef to cook in their homes.

[TAIPEI] For more than a decade, Baidu's Robin Li has been the top provider of search services for China's Internet population. Now he wants to help them get laundry delivered, book a doctor's appointment or hire a chef to cook in their homes.

The future, as Mr Li sees it, is not in search but in services, connecting people through the web to thousands of entrepreneurs and businesses in the real world. He's betting billions of dollars on the untested vision, risking revolt among investors as he sacrifices profit today for future growth.

The significance of the effort was made clear last week when Mr Li took the stage at Baidu's annual conference in Beijing. Internet search, which generates virtually all company profit, barely rated a mention. Instead, the Baidu founder declared his top priority is the online-to-offline push, known in geek-speak as O2O.

"We are actually transforming the company from connecting people with information to connecting people with services," said Mr Li, 46, in an hour-long interview after the presentation.

To Mr Li, the math is simple. While search advertising is big, the services and retail market is much bigger. The initiative will "definitely" eclipse search revenue over time, he said.

In cities like Beijing, the vision is already taking shape. Click an application on your smartphone and someone will stop by your home to wash and walk your dog. A few more taps and someone will deliver groceries or medicine. One fashionable new service is the chef app, where you pick a specialist in home style Chinese or spicy Sichuanese. They'll even bring the ingredients and wash the dishes when you're done.

Xie Yufeng, a 30-year-old who works at an entertainment company, likes the convenience of ordering meals on Baidu.

"I can check the location of the delivery man in the online map, then estimate when he will arrive," she said.

Investors are skeptical all this will pay off. Baidu's US shares have tumbled 37 per cent this year as Mr Li has poured money into the initiative and driven operating margins down to 21 per cent in the second quarter from 52 per cent three years earlier. The drop has been compounded by broader weakness in the Chinese economy.

"Baidu's weak outlook couldn't have come at a worse time," said Brendan Ahern, managing director of Krane Fund Advisors LLC whose KraneShares CSI China Internet ETF has shares in Baidu and competitor Alibaba Group Holding Ltd. "China sentiment among US investors is poor."

Mr Li, Baidu's chief executive officer, says many US investors just don't appreciate the changes in China, where O2O services are taking off fast because of new smartphone technology, cheap labor and terrible traffic. He's concerned Baidu, which trades on Nasdaq, is being penalised because shareholders don't see the opportunity.

"It's kind of difficult for a typical US public market investor to really understand why Baidu is losing so much money on those unproven businesses," Mr Li said. "We have a better understanding of this market. We think this kind of investment will pay off. So there's a little bit of education needed." Mr Li has plenty of competition in China. Dozens of startups swarm into each niche as it takes off, and Baidu is playing catchup in several. Alibaba and Tencent Holdings, the other two giants of China's Internet, also are investing aggressively.

Still, Mr Li is determined to grab the lead in what he calls "high-frequency" services like food delivery, movie tickets and car rides. Though profits are minimal or nonexistent now, he argues these services will train consumers for more profitable activities in the future.

"We need to win the high-frequency war," he said. "It's really important for Baidu to grab the opportunity."

To get there, Baidu is tapping its US$12 billion in cash and capitalising on its dominant share of search users in China. It also has a 20,000-strong sales force and a team of scientists in Beijing and Silicon Valley developing voice, image, deep learning and high-performance computing technologies.

At the Baidu World conference last week, Mr Li showed off the latest product from this search-meets-science development, a voice-prompted digital assistant called Duer. Akin to Apple's Siri, Duer goes a step further, letting users start by searching movie information and finish by booking theater seats.

Another plank in Baidu's strategy is its equity stake in Uber Technologies. Uber CEO Travis Kalanick was the second speaker on stage at Baidu World after Mr Li and explained the China expansion of the ride-hailing service. From 20 cities now, Uber plans to add another 100 during the next year, he told the crowd.

Baidu has made more than a dozen such investments in the past two years, including the US$169 million stake in a startup called Nuomi Holdings. That's become the platform for on-site services such as dining, movie tickets and karaoke. Baidu pledged 20 billion yuan (S$4.42 billion) of investments in Nuomi over three years.

Almost 60 per cent of movie tickets in China are sold online, more than the US. Trouble is, the business bleeds cash for Baidu and everyone else.

"Movies will always lose money," Zeng Liang, general manager of Nuomi, said in an interview. Still, "this is a very good category for building up your users' loyalty." Nuomi is trying to get beyond bargain hunters to cultivate frequent users. Instead of just offering discounts, Nuomi is building a system that will reward loyalty with such member benefits as priority seating, Zeng said.

A separate platform called Baidu Takeout operates a fleet of contracted electric-bike riders delivering anything from sushi and spaghetti to milk or tea. Mr Li claims Baidu has an edge in these services because its expertise in data, analytics and maps allows it to optimize routing and logistics. Tencent didn't respond to requests for comment. Its shares were little changed in Hong Kong trading Monday.

Alibaba is approaching the O2O market with the advantages it holds as China's dominant e-commerce company, with more than 350 million active buyers and 10 million sellers on its sites. It also set up a venture called Koubei this year to focus on local services in China, initially focusing on food and beverages.

"Alibaba intends to build upon our strength in mobile to develop a broad spectrum of consumer offerings, such as location-based services, offline commerce and entertainment," the Hangzhou-based company said in an e-mail.

It's easy to see where the money is going in the O2O market, but harder to see where profits will come from. In addition to Alibaba's investments, Tencent has taken minority stakes in startups and

Normally intense rivals, Alibaba and Tencent teamed up to merge their car-hailing apps this year into Didi Kuaidi to hold off Uber. Didi's president this month vowed to "burn cash" to keep its dominant position in the market.

"Although Baidu has gained significant market share in China's O2O market, especially in food delivery, converting that to actual revenue is difficult for all players because of stiff competition and little differentiation," said Michelle Ma, a Hong Kong-based analyst at Bloomberg Intelligence.

Mr Li has the patience to make investments now and wait for the payoff. He's not sure his investors do. He has said publicly he would like to list Baidu shares in China, in addition to those traded on Nasdaq. Now, he says it's possible he would delist from the US entirely in favor of his home market.

"If one day I find that the US market has no hope of recognizing our value, and the domestic market truly understands our business, I may do that," he said. "First of all, we need to be patient and give our US investors some time. I hope they will be able to appreciate us more."


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