The Chinese puzzle for Facebook

When it comes to China, Facebook should consider itself forewarned. Cracking the world's biggest internet population might seem an obvious ambition for the social networking giant as it trumpets its global growth before a $US5 billion initial public offering, but the chances it will succeed look slim.

Facebook said last week it was contemplating re-entering China, the world's second-biggest economy, after being blocked nearly three years ago.

But its offering would likely face intense competition, political meddling and little commercial success.

Few foreign internet companies have succeeded in China. EBay Inc, Google Inc, Amazon.com Inc, Yahoo Inc and most recently Groupon Inc form the list of notable online players who have failed to gain traction in the fast-growing nation of 1.3 billion people.

"It's actually a bit late for Facebook," said Hong Kong-based CLSA analyst Elinor Leung, who added that the market was already quite saturated with local players such as Sina Corp, Renren Inc, Kaixinwang001 and Tencent Holdings.

Facebook first launched its Chinese interface in 2008 but was blocked by Beijing in mid-2009 following deadly riots in the western province of Xinjiang that authorities say were abetted by the social networking site.

"It will be very difficult for Facebook to introduce something that will allow them to differentiate themselves," CLSA's Leung said.

Almost half of China's 500 million internet users use social networking sites, government data showed in January.

The dominant players among China's social networking sites (SNS) are Renren and Sina Corp, which is attempting to turn its highly popular microblogging service, Weibo, into a full-fledged social network.

Will China “like” Facebook?

Domestic sites have flourished into self-contained ecosystems with their own suite of apps, news portals, micro-currencies and e-commerce options, making it hard for Facebook, if it gained entry, to compete, industry players say.

"China's SNS space is more crowded and competitive than the US with multiple large and established players all investing for long-term growth," said Joe Chen, chief executive of Renren, which would become a direct competitor with Facebook should the US giant enter the market.

"Facebook will enter a much more competitive market with a significantly different culture, business environment and other characteristics than what it has previously experienced in the global market," Chen added.

Analysts agree.

"The Chinese have been social for years, and Facebook would be just one more option among many," said Sam Flemming, founder of Shanghai-based social media consultancy, CIC.

"It certainly would have a certain amount of cache, especially among the more internationalised Chinese and foreigners living in China, but it would need a big push in awareness beyond this small group," Flemming said.

Foreigners and Chinese citizens who want to access Facebook and other blocked sites must use special VPN software to get around China's firewall to do so, meaning a very limited number of Chinese currently use it.

China relationship: It's complicated

Facebook would face the same factors that have led to the failure of many foreign Internet companies in China: nimble local competition, murky government regulation and bureaucracy, and difficulty in adapting to local tastes.

Complying with Beijing's regulations can also carry a cost in Facebook's established Western markets -- companies such as Google and Cisco Systems Inc have faced criticism at home over accusations of cooperating with the Chinese authorities' efforts to control online content.

Google, considered the most successful foreign internet company to make a foray into China, managed to secure only 30 per cent of the Chinese search market before pulling out in early 2010, after a serious hacking episode and a reluctance to censor further in China.

It still maintains a presence in the country through a site hosted in Hong Kong.

"The way for Facebook to be in China would be for them to build or buy a local team and allow them to craft a product to suit the local market over the long run. Then they may have a decent chance to compete, not guaranteeing that they will win," said Dominic Penaloza, chief executive of Chinese professional social-networking site, Ushi.cn.

Penaloza said many foreign internet firms had failed in China because they were unwilling to give such autonomy to their local partners.

Early last year, Facebook was reportedly in exploratory talks with potential Chinese partners. Analysts said Facebook would have to manage and censor content heavily in order to gain Beijing's blessing for entry.

Twitter and YouTube are also blocked in China, while domestic social networks have to heavily censor and weed out content that Beijing deems undesirable.

Facebook said in its IPO prospectus that the firm was evaluating entering China, but notes that the market has "substantial legal and regulatory complexities."

A walled-off Facebook, or a heavily censored Facebook for China, may not be appealing to users as Facebook's selling point is its sprawling international reach and open nature.

"Chinese consumers don't ever want to have some second class offering or some dumbed-down offering," said Duncan Clark, chairman of Beijing-based consultancy BDA China.