Smart move?

Why Baidu is launching a cheap smartphone

Smart move?

Baidu’s first phone

Remember Xiaomi? The Chinese start-up raised eyebrows last year when it promised to deliver a smartphone rivalling the processing power of Apple’s iPhone but at a fraction of the cost (see WiC124).

Almost a year on, and Xiaomi‘s business is taking off impressively. Its flagship device, the Mi 1, costs Rmb1,999 ($315) and has generated more than $158 million in sales. The company told Sina Tech that it is now shipping half a million handsets a month. Xiaomi, which counts Temasek as an investor, expects to deliver Rmb5 billion ($793.9 million) in revenue this year.

But Xiaomi will soon have to face competition from China’s search giant. Baidu announced last week that it is partnering with Changhong, an electronics manufacturer, to launch its own low-cost smartphone. The Changhong H5018 – priced at Rmb899 – will run on a modified Android platform that integrates with Baidu Cloud, the company’s new cloud computing product. Through the device, users can enjoy 100 gigabytes of cloud storage and access Baidu services like the search engine, maps, music and an application store.

So why is Baidu selling hardware? As more people gravitate to smartphones and tablets, they are forgoing their desktops when accessing the internet. And even though Baidu controls more than 80% of China’s web searches, its market share of searches on mobile devices is much lower than on PCs, reports the China Daily.

According to research firm Analysys International, Baidu had a 34.9% share of China’s wireless search engine market (a proxy for mobile search) last year, while Shenzhen-based had 21%., a mobile search subsidiary under Tencent, wasn’t that far behind with 19.7% share.

“Mobile internet usage is booming. If Baidu doesn’t have a significant presence, they risk challenges to their business and they [could] miss out on a new frontier,” says Beijing-based analyst Bill Bishop.

This is not Baidu’s first mobile-phone initiative. The company launched a smartphone with Dell last September but the device never caught on. Analysts say the biggest problem is that Dell’s brand recognition among China’s handsets is almost nonexistent. The high price – Rmb 2,999 ($465) – also put people off.

But will making a more affordable phone help Baidu find a broader market? Industry observers are sceptical. China’s smartphone market is already crowded with brands in various sizes and price ranges.

Doug Young, author of China Business Blog, also questions why the search giant has chosen to partner with Changhong, a relatively inexperienced company in the mobile space. “I’m a bit surprised that Baidu is partnering with such inexperienced companies, first with Dell and now Changhong, [which] is known almost exclusively for its TVs,” says Young. “I applaud Baidu for putting big resources into this important new area, but I honestly believe its smartphone initiative is set for failure.”

NetEase, a portal, recently announced the release of its own smartphone and other internet firms like Qihoo 360 and Shanda are also talking about entering the Rmb1,000 smartphone market.

Having a more affordable option is never a bad thing for consumers, but the internet companies might do well to heed the warnings of Lee Kai-fu, former head of Google China, on why other internet firms have failed to make inroads into the handset market. Lee reckons that most internet companies, including his former employer Google, are not adding anything to the customer experience in mobile phones. If anything, they are often making the experience worse, perhaps because the primary goal is often to insert their existing services into the mobile world without regard for what users might actually want.

Fundamentally, the mobile and internet industries are different markets requiring “different genes ”, Lee concludes.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.