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Article / 06 February 2015 at 4:26 GMT

Lenovo brand takes Baidu's fancy as an e-commerce play

China Watcher / Shanghai
China
  • Baidu's investment in Lenovo is another attempt to enter the e-commerce field
  • It will help the firm diversify revenue contribution away from search
  • It has had little success with its existing e-commerce ventures 

By Neil Flynn

Baidu has reportedly invested $100 million in a new Lenovo smartphone brand called Fancy Maker, in a move that will see it enter the e-commerce and hardware business. The purpose of the investment will be to take a Lenovo smartphone and install Baidu’s apps and services as default, so that new users will become accustomed to Baidu’s services and won’t need to download apps from rival firms.

Lenovo established the Fancy Maker brand in order to compete directly with Xiaomi. Worldwide, Lenovo is the fourth-largest smartphone manufacturer; it has a 5.2% market share, as its existing phones are focused on carrier deals and open market sales. 

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Baidu's investment in a new smartphone brand is designed to get its apps
and services installed as a default. Photo: iStock

However, the Fancy Maker brand will use a direct-to-customer business model, where phones will be purchased by customers online directly from Lenovo, either via its website or through official stores on B2C online retail platforms. This is an effective way to minimise costs, which is integral for China’s domestic Android smartphone manufacturers, because as smartphones continue to penetrate the less wealthy central and western provinces of China, they need to be affordable, otherwise they won’t gain market share. 

This is similar to Xiaomi’s business model, which has seen the firm catapulted to the forefront of China’s tech industry. Its global market share was 5.3% by the end of the third quarter, which represented 211% year-on-year growth.

This move is another attempt by Baidu to enter the e-commerce business, which will help the firm to diversify revenue contribution away from search. It has previously had little success with its partnership with Japanese e-commerce site Rakuten, and has since taken the role of passive investor in a variety of e-commerce firms. 

One of the problems with Baidu is that its two rivals in the BAT trio, Alibaba and Tencent, both make a significant amount of revenue from their respective e-commerce platforms, and Baidu’s attempts to break into this market have not been fruitful. However, with its recent investment in the huge real estate firm Wanda’s e-commerce project, and now this Lenovo investment, Baidu will be looking once again to break into e-commerce.

Growing the user base through default services

Baidu isn’t the first tech firm in China to invest in a domestic mobile phone brand. Qihoo recently established a joint venture with Coolpad and Meizu has adopted Alibaba’s mobile operating system YunOS on its smartphones. 

This is set to be a key strategy for tech firms in order to expand their mobile ecosystem, because instead of the current business model of attracting users through advertisements, having a smartphone that is preloaded with mobile applications as default would see users become accustomed to the ecosystem, and they wouldn’t need to download rival apps. 

For example, on the Coolpad Dazen phone, which has Qihoo’s applications preloaded onto it, a user would have the Qihoo search and browsing apps, so there should be no reason to download the Baidu equivalents. 

I have previously discussed the concept of the mobile ecosystem, and it is becoming ever more important to build a large and loyal user base. China’s tech firms all tend to offer the same services, most of which are viable alternatives for each other, which means that users will likely care more about the user experience of the mobile ecosystem.

Online advertising revenues maintain strong growth

China’s online advertising revenues reached RMB 154 billion ($24.7 billion) in 2014, which represented a 40% growth year-on-year. This growth is being fuelled by mobile, which has become the core revenue driver of China’s tech industry, Baidu included. 

During the third quarter, Baidu announced that search traffic from mobile exceeded PC search traffic for the first time in the company’s history, and this will only increase in the coming quarters, as mobile traffic is growing at a much higher rate. However, PC revenues are still higher than those from mobile, because mobile monetisation began a lot later. This year, 2015, will see continued mobile monetisation, and this will drive online advertising revenues in the coming years.

China Online Advertising Revenues
Source: iResearch China

Baidu’s move into smartphone hardware is an attempt to capitalise on this advertising revenue growth. By installing its apps as default settings on Lenovo phones, Baidu hopes to keep more users within its mobile ecosystem, which will be monetised through advertisements.

– Edited by Gayle Bryant

Neil Flynn is head equity analyst at Chinese Investors. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

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