yahoochina.jpgYahoo! offers a text-book example of how not to engage with China. The US search engine trails a distant third in China with a 5% share. It also is fighting an increasingly bitter legal battle against Qihoo, a rival portal set up by Zhou Hongyi, former president of Yahoo's China operation, who it accuses of having a “personal vendetta” against his former firm.

Yahoo recently filed a suite against Qihoo claiming its poor showing in China is partly due to Qihoo's anti-spyware product, which tells users who install it that Yahoo's toolbar is malware and prompts them to deinstall it.

Now, however, the battle has turned personal and ugly. Yahoo China has filed a second suit that claims Zhou has embezzled from Yahoo China and defrauded it, according to VentureBeat.

Yahoo bought Zhou's former company, 3721, for $120m in 2003. He took over the Yahoo China operation but rapidly fell out with his US masters. Then last year, Yahoo changed direction and teamed up with Alibaba, China's leading B2B marketplace.

Frictions between Jack Ma, Alibaba's famous boss, and Zhou were inevitable and the latter was rapidly forced out.

Let's put to one side the lawsuits and see what lessons can be learned from China's search market — even for those who aren't in the internet business.

Baidu continues to be the market leader in China and the reasons are pretty obvious: it's a local Chinese brand and it has more experience in optimising searches made in Chinese. Most experts say Baidu has no real technological advantage, but simply it has been in the market longer than the rivals.

The frequently-quoted idea that Chinese users “prefer” Baidu becomes self-fulfilling after a while, so making it more difficult for the challengers.

Nevertheless, Google sees China as a long-term bet and could still triumph if it manages to come up with a truly strategic deal with a local firm or finds some “killer application” to woo Chinese surfers.

Its worth remembering that Google has been the underdog before — when it got started in the US, Altavista was the dominant search engine. Read this EngagingChina for more on Google's China strategy.

Yahoo's China strategy is quite frankly a mess. I've never understood the synergies between a B2B site like Alibaba and a consumer-oriented portal like Yahoo. The current lawsuits simply add to the distractions.

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