Yahoo!’s exit from China closes chapter on a difficult business partnership

By Peter Moody on March 29, 2015
Yahoo!'s headquarters. (CC. Image by: Niall Kennedy)

At a first glance, the decision by Yahoo!'s CEO, Marissa Mayer, to close shop in China is not exactly newsworthy. The internet search engine company has not even offered any products to the Chinese since 2013 when it shut down its email servers there. According to an official statement from the company, the office remaining in China was simply extant for “research and development purposes” and its cessation is simply part of the process of “constantly making changes to align resources.” Moreover, the move to either layoff or transfer the 200-300 employees in its Chinese office is consistent with the downsizing that took place last year in Southeast Asia and the Middle East, as part of an overall strategy to rebuild Yahoo!'s brand in the United States and to trim expenses due to mounting pressure from investors given scarce profits.

At the same time, considering that Twitter, Instagram and Facebook have all faced hostile regulations in China, and Google voluntarily pulled out of the country in 2010 over censorship concerns, there are greater implications to the news of the exit of the last remaining vestige of Yahoo! from China. Namely, it confirms the dire reality of what many already suspected: China has total control over its internet market, and any foreign online tech-giant's attempt to flourish there is more or less futile.

From the Great Wall to the Great Firewall

In China, it appears as though the overarching reaction to Yahoo!’s flight is an indifferent shrug of the shoulders.

One Weibo user (the Chinese equivalent to Twitter) took Yahoo!'s exit from China as an opportunity to complain about how the so-called Great Firewall restricts internet development. For the most part, however, the Chinese do not see much reason to care.

Since 2013, Yahoo! has had little relevance to Chinese people: not only were the search results no better than Baidu's (the Chinese equivalent to Google) due to the country's stringent website censorship, but that same year, users had their email accounts transferred from Yahoo!'s mail service to Alimail of the Chinese e-commerce site Alibaba.

As one anonymous insider put it curtly, “If they are closing the office, it's because they no longer have user interest and the business is falling apart.”

Interestingly, Yahoo!’s debut in the Chinese internet scene was somewhat a success story, perhaps due to the fact that its co-founder and CEO from 2007 to 2009, Jerry Yang, is a Stanford-educated Taiwanese and a Mandarin speaker. His contributions to business relationships with the Chinese government early on enabled Yahoo! to become one of the first internet companies to enter the Chinese online market. It is no surprise, then, that many Chinese people at one time had a Yahoo! China e-mail account.

Of the business relationships that Jerry Yang developed in China, one of the most important ones was with Jack Ma, whom he first met in 1997 and took hikes together with along the Great Wall of China.

Ma, who previously worked for the Chinese Ministry of Commerce, had been working on an idea for an e-commerce site, which eventually blossomed into the Alibaba Group firm. Yahoo! became one of their biggest investors, providing the company with $1 billion. At one time, Yahoo! had a 40% stake in Alibaba, and Jerry Yang served as a prominent board member for the company from 2005 until 2012, when Yahoo! sold its last Alibaba shares.

Jerry and Jack's walks along the Great Wall may have foreshadowed Yahoo! and Alibaba's complicated relationship, which was underpinned by the Chinese Communist Party's internet regulation system – the Great Firewall.

Feelings of betrayal?

While the consensus among Chinese people is strong that Yahoo!’s poor marketability was the primary reason for its decline, it is worth considering whether there were any other factors that caused Yahoo! to leave the Middle Kingdom, ceding its territory to Alibaba.

While Google initially cooperated reluctantly with government censorship policies, only to pull out from China refusing to do so any longer, Yahoo! contributed to suppression of free speech in China in a way that it could not walk back from. Specifically, in 2005 it was revealed that at the request of the government, Yahoo! provided key information that led to the arrest of several Chinese citizens including journalist Shi Tao, sentenced to 10 years for “divulging state secrets”, and activist Wang Xiaoning for “incitement to subvert state power.” Both individuals were victims of government censorship policies, and Yahoo! was partially to blame.

Yahoo! officially claimed it knew nothing regarding the cases against said individuals, and argued it had no choice but to follow the local laws under which it operated. Yet the laws of a government do not always match the sentiments of a people. In this case, Yahoo! may have tarnished its brand among a significant segment of the Chinese population who feared a similar fate to Shi Tao and Wang Xiaoning. While there is no evidence that Yahoo!’s complicity in the suppression of free speech triggered the widespread indifference to Yahoo!’s departure from China, there are some who have related gripes with the company. One commenter, for instance, affirmed that in 2004 one of Yahoo!'s staff members stole users' private data, causing broad private message leakage. Inevitably, a portion of the Chinese population felt a very real sense of betrayal.

But Yahoo! may have felt the same way about its host country.

The process of allowing Alibaba to buy back the shares Yahoo! had purchased was a rather contentious issue, lasting several years – from 2010 to 2012. What's more, as a result of an agreement to let Alibaba run portions of Yahoo!, the Chinese company was progressively exerting influence over its U.S. competitor. This firstly culminated in the abandonment of the Yahoo!'s Chinese mail service, and more recently, in Yahoo!'s complete withdrawal from China.

Yahoo! claimed its decision to leave was unrelated to governmental pressure or censorship issues. Nevertheless, we must bear in mind that during the September 2014 “Umbrella Revolution” in Hong Kong, Yahoo! China's datacenter was a victim of sophisticated cyber-attacks believed to have originated from the mainland. Google's flight was also preceded by cyber-attacks and censorship. It is no far stretch to assume Yahoo!'s frustrations may be analogous to those experienced by other foreign tech-companies – or that it more simply felt betrayed by China and by the Chinese clients it was conducting business with.

Business as usual

In 2012, Yahoo! shuttered its Chinese Internet music service. The following year, it closed its China-based email service. By this time, many had already surmised that Yahoo! would leave China to focus on its U.S. operations.

Yet major strategic shifts such as this one, which cause an entire branch to shut down as well as the loss of hundreds of jobs, are not to be taken lightly. Rather, they shed light on a company's ethics and philosophy.

An article released on January 27th this year by Bloomberg, explains that Yahoo! decided to spin-off its 384 million Alibaba shares (worth $40 billion) into a separate company called SpinCo, to reap profits while avoiding heavy taxes. Those shares were then distributed to Yahoo!'s investors, and SpinCo will own a 15.4% stake in Alibaba. This is a win-win situation: Yahoo! can continue to profit even after it leaves China, and Beijing will no longer be bothered by pesky foreign tech-companies that draw international attention whenever people's rights are trampled.

As Motoko Hunt, president and search marketing consultant at AJPR said,

Yahoo was one of the first well-organized portal sites with a search function for people to get to know the World Wide Web until Baidu and other locally grown search engines and portal sites came out. While the operation may have been passed onto Alibaba, the office closure symbolizes the end of an era, and shows how difficult it is for Western businesses to be successful in the Chinese market.

When Alibaba opened on the New York Stock Exchange last year, it had an estimated value of $168 billion; a net worth of about 7 times that of its former shareholder, Yahoo!. With the American internet tech-giants either heavily censored or driven out due to agonizing restrictions, Chinese technology firms are protected domestically and in a strong position to dominate the international scene as well.

Contributing researcher: Boyi Chen. Edited by the East Asia Gazette.